Hewlett Packard Co. is paying $4.5 billion to buy Mercury Interactive Corp., a maker of business management software that has been entangled in a stock options scandal for the past nine months.
The Palo Alto, Calif.-based computer and printer maker said Tuesday it’s offering $52 per share in cash for Mountain View, Calif.-based Mercury. That represents a 33 percent above Mercury’s closing price of $39 in the over-the-counter market.
The deal, expected to close late this year, represents HP’s biggest acquisition since the Silicon Valley icon paid $19 billion for Compaq Computer Corp. in 2002.
That takeover incensed an heir of a company co-founder, who led an unsuccessful shareholder rebellion, and later contributed to a sales funk that culminated in last year’s ouster of HP’s flamboyant chief executive, Carly Fiorina.
Now, Fiorina’s replacement, Mark Hurd, is betting Mercury’s product line will justify the hefty price being paid for a company embroiled in legal turmoil.
Partly because of the uncertainty looming over the company, Mercury’s stock price hasn’t traded as high as $52 for more than two years.
‘We didn't do this lightly’
Hurd, who has boosted HP’s market value by $24 billion since his arrival 16 months ago, assured analysts he didn’t buy Mercury Interactive on a whim. “We didn’t do this lightly,” he said during a Tuesday conference call with analysts.
He also predicted Mercury Interactive will enable Hewlett Packard to double its annual software sales to about $2 billion. By buying Mercury, HP will have “one of the most powerful software portfolios in the industry,” Hurd said.
Investors seemed skeptical, a frequent response whenever a company is making a large acquisition. HP’s shares gained 26 cents to close at $31.33 on the New York Stock Exchange, then shed $1.23, or 3.9 percent, in extended trading.
Mercury has been more closely associated with scandal than software in recent months because it was among the first companies to acknowledge its top executives improperly manipulated the timing of stock option awards to increase their potential windfalls.
Longtime Mercury CEO ousted in November
In November, Mercury ousted its longtime CEO, Amnon Landon, as well as two other top executives after concluding that they looked back in time for a low point in the company’s stock price so the exercise, or “strike,” price of their options could be set at that ebb — a practice known as “backdating.”
More than 60 other companies, including many in Silicon Valley, also have disclosed internal or regulatory inquiries into a potential backdating of stock options.
Mercury’s shake-up left it in financial limbo as a new management team tried to figure out how much the stock option manipulation had caused the company to overstate its earnings through the years. While it investigated, Mercury wasn’t able to meet regulatory deadlines for reporting its financial results — a delay that caused its shares to be de-listed from the Nasdaq Stock Market.
Earlier this month, Mercury erased $525 million in profits dating back to 1992.
Company still faces lawsuits
The company still faces lawsuits from shareholders alleging management misled them. The Securities and Exchange Commission is conducting an investigation that could culminate in substantial penalties, as well.
“We think we have our arms around” Mercury’s potential legal liabilities,” Robert Wayman, HP’s chief financial officer, told analysts Tuesday.
Mercury’s legal headaches won’t matter to customers, said Ann Livermore, an HP executive vice president who oversees the company’s software operations. That division generated revenue of $1.08 billion for HP in its last fiscal year. Mercury posted sales of $843 million last year.
Hurd believes Mercury’s products will serve as an ideal complement to HP’s software, which primarily helps companies ensure their computers continue to run smoothly.
Mercury’s software helps companies manage the hodgepodge of business applications that administer payrolls, sales and supplies.
Although HP has been cutting its costs since Hurd’s arrival, most of Mercury’s 3,000 workers are expected to retain their jobs. Even so, the cost-conscious Hurd assured “there will be no stone unturned” as he searches for ways to ensure the Mercury acquisition pays off.
HP already is in the process of eliminating 15,300 jobs. The company ended its last fiscal year with 150,000 employees.