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By Tom Krazit, 26 July 2006 11:20

NEWS

HP announced on Tuesday it will acquire management software company Mercury Interactive for $52 per share, or $4.5bn in cash.

Mark Hurd, HP's chief executive officer, said in a conference call following the announcement: "I am confident that this transaction means HP is building a software business that must be reckoned with."

The idea appears to blend HP's OpenView systems and network management software for data centres with Mercury's products for managing application development. HP has been focused on improving the quality and breadth of its software offerings over the past year, Hurd said.

IT managers are increasingly using virtualisation capabilities with their servers and storage devices, and they need sophisticated management software to keep track of such a complex operation, Hurd said. The Mercury deal is part of HP's discussions in the past about "building an ERP-like capability for the management software market," he said.

At the same time, IT departments need to try to save money at every turn, Ann Livermore, executive vice president in HP's Technology Solutions Group, said in an interview following the conference call. Combining HP and Mercury software will allow IT teams to get much more out of a single product than they could from purchasing two separate products, she said.

Mercury's software gives HP the capability to compete more effectively against software powerhouses such as CA and IBM, Chris Foster, an analyst at Technology Business Research, said in an email. "Mercury fits into one of HP's three major strategic objectives - manage/consolidate the next-generation data centre," he wrote.

Only IBM will have a broader portfolio of software resources than HP after it finalises the acquisition, said Stephen Elliot, an analyst at IDC. Other companies such as BMC Software and CA, which compete against HP in IT management software, don't yet have the variety of software products that HP would add with Mercury on board, he said. These include test and development, IT governance, service-oriented architecture (SOA) and application management products, he noted.

IBM's position among SOA developers was an especially key area that HP needed to address, said Charles King, an analyst at Pund-IT. Big Blue recently reported higher-than-expected profits based on strong growth of its SOA products. Mercury gives HP the SOA tools it lacked prior to the deal, he said.

The deal, when completed, will increase the size of HP's annual software business to $2bn in revenue, the companies said. Current Mercury CEO Tony Zingale will stay with HP throughout the rest of the year and through the "medium term", he said on the conference call. The Mercury business group will report to Thomas Hogan, senior vice president of software for HP.

Integrating the two product lines should be relatively easy because there is little overlap between Mercury's software and HP's products, HP's Livermore said.

Elliot agreed, saying the real hurdles in the deal will be managing the transition with Mercury's loyal customers and making sure it integrates the employees involved at the two different companies. "One of the challenges is keeping the staff motivated and keeping the staff around, and making sure they keep the right reporting structure in place when they do make changes," he said.

HP has not yet determined its plans for staffing levels following the completion of the acquisition, Livermore said. Mercury has about 3,000 employees as of Tuesday, she said.

Tom Krazit writes for CNET News.com