HP’s transition to inorganic growth

Now that the HP v. Dell acquisition fight over 3PAR seems to be settled, I began wondering why did HP pay – a lofty – 11x of the trailing 12 months of revenue for 3PAR (ie. $2.4b/$204m).  A typical technology acquisition warrants a 5-6 time revenue multiple.  What really made them chase this deal? After all, HP used to be an innovation story – a company rich in R&D initiatives. Recently however, as this chart from Business Insider demonstrates, HP’s research spending has been dwindling. In this case I believe this is actually a good thing. Don’t get me wrong I would love to see HP continue to innovate and create new revenue streams, however with $123b in revenue, could they really feed the machine based solely on internal brain power? Even a 2% YOY top line growth means that HP would have to create a $2.5b business EVERY year. Basically HP has a mathematical scaling problem not an innovation problem and I’m glad to see that the Board is aware enough to shift the strategy. Though 3PAR may only add a small amount to the top line growth, HP may see longer term strategic benefits which warranted the higher multiple. After the Palm purchase earlier this year, and now 3PAR, the CEO-less HP may pause to catch its breath, thought I doubt they will exit 2010 without another notable acquisition.

Leave a Reply

Your email address will not be published. Required fields are marked *