CRN FLASHBACK: How HP's software empire collapsed
HP once held ambitions to become a software giant. Here's how one sour deal led to the collapse of a software empire
HPE today completed its $8.8bn (£6.7bn) spin-merger of non-core software assets with UK-based firm Micro Focus.
The deal allows HPE to finally lower the curtain on its poorly executed ambition of becoming a dominating force in the software market, and shake off past traumas stemming from its disastrous $11.7bn buyout of UK software company Autonomy in 2011.
In September 2016, HPE announced its long overdue plans to bundle up and sell off some of its software assets, including its application delivery management, big data, enterprise security, information management and governance and IT operations management businesses.
On the deal's announcement, HPE's share price tumbled by three per cent to $21.35 per share as a reflection of shareholders lacking confidence in HPE's software U-turn.
At the time, CEO Meg Whitman said HPE's software spin-off did not signal the firm's intention to get out of the software business altogether.
"I want to be crystal clear: HPE is not getting out of software," she said.
"Software is still a key enabler of our go-forward strategy, but we need the right assets to win in our target markets. Moving forward, we will double down on the software capabilities that power and differentiate our infrastructure solutions and are critical in a cloud environment."
We look back on the events that led to HPE's software sell-off, and how the IT giant's plans to become a formidable and mighty software behemoth were ultimately dashed by one major error in judgement: when HPE bought Autonomy.
Autonomy agony
HP made 13 software-related acquisitions between June 2010 and May 2015 in an attempt to become a software heavyweight. These included a $1.5bn buyout of computer security management firm ArcSight, a $350m deal for enterprise database vendor Vertica Systems, and the biggest of them all, $11.7bn for UK firm Autonomy.
Founded in Cambridge in 1996, Autonomy rose to fame throughout the 1990s and early 2000s and floated on the NASDAQ exchange in 1998 at an initial share price of £0.30 per share. After going public, the UK tech golden boy went on an acquisition spree between 2005 and 2010, which saw it buy up Verity for $500m, Zantaz in 2007 for $375m and enterprise content management firm Interwoven for $775m. Its M&A spree culminated in 2011 with the buyout of backup solutions provider Iron Mountain Digital for $380m.
Then, on 18 August 2011, HP announced its intention to acquire Autonomy for a hefty $11.7bn.
Heralded as the "British Bill Gates" by the then-new HP boss Meg Whitman, Autonomy's Mike Lynch was proudly paraded on stage at HP's 2012 partner conference as the firm's main attraction.
Yet it didn't take long for things to turn sour.
Lynch - who became the UK's first technology billionaire after selling up to HP - was sacked by Whitman in May 2012 due to disappointing licence sales.
November 2012 brought the most disastrous instalment in HPE's software nightmare, when HP recognised alleged "serious accounting improprieties" in Autonomy's finances which saw HP take on a $5bn fine.
Since the accusations - which Lynch vehemently denied - HPE has been embroiled in legal battles with Autonomy which are still being fought to this day.
Building a software empire
Leó Apotheker joined German software giant SAP in 1988 and rose to become the firm's CEO in 2008.
It wasn't until September 2010 that Apotheker was announced as HP's chief executive after the abrupt departure of former CEO Mark Hurd earlier that year.
With a firm background as head of a software-dominated company, Apotheker was instrumental in the rise - and fall - of HPE's software empire.
HP's stocks dropped by almost 25 per cent on 19 August 2011 under Apotheker's tenure, when the firm decided to discontinue its webOS mobile operating system, divest its personal computing division and revealed a possible buyout of the fateful Autonomy.
Apotheker lasted barely 10 months as the head of HP. Under his tenure, the firm lost more than $30bn in market capitalisation. On 22 September 2011, HP announced that former eBay chief Meg Whitman would take over from the ex-SAP chief, effective immediately.
Clive Longbottom, founder of analyst house Quocirca, said that Apotheker's decision to build its software business on a landmark acquisition like Autonomy was "a really weird step".
"Leó was not a hardware guy - he understood software," said Longbottom.
"He looked at HP and said 'great, this can provide us with a platform to build a software empire on'. Going for Autonomy straight off the bat was a really weird step, even for Leó. I think if he'd sat down properly and put due diligence into it, it would have been a case of 'how do we buy all the bits that are required to build this new empire'?
"Autonomy was an economic disaster for HP, when you look at how much they paid, how much they paid in ongoing costs when they were taking it to the courts, and then how much...
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CRN FLASHBACK: How HP's software empire collapsed
HP once held ambitions to become a software giant. Here's how one sour deal led to the collapse of a software empire
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...they sold it off for, this is a massive loss which even a company the size of HP will notice on its balance sheet. That, combined with various other things that were happening, meant that a decision had to be made on how they dealt with the company."
Alex Tatham, MD of UK-based distributor Westcoast, a major partner of both HP and HPE, said that although Autonomy's technology was world class and highly sought after, Apotheker was at fault for simply paying too much.
"Autonomy had a product that was clearly of value, but HP massively overpaid for it," he said.
"I'm not sure why they bought Autonomy other than Autonomy was an exciting product and HP didn't want anyone else to own it presumably, so I think it could have been a more defensive move. They were very aggressive at the time and they simply overpaid.
"I would have thought the due diligence done on the original purchase was where the issue really lay. I point the blame firmly at that."
The channel suffered
Even resellers were caught in the chaos that unfolded during the fallout of HP's buyout of Autonomy. Two US resellers were even reportedly implicated in the fraud HP alleged took place.
Longbottom said that while HP has always been a reliable hardware vendor, it has consistently let down resellers of its software portfolio.
"As you look through HP's history, the channel has suffered as HP brought software acquisitions through. HP has lost focus on that software and it hadn't invested in updates or even patches in a lot of cases. So the channel has been left wondering how to maintain this itself, and thinking 'do we write code to paper over all the cracks'? If they jump ship and go elsewhere, how do they migrate user bases across to whatever they are going to be selling?
"Whereas HP's hardware channel has been pretty loyal even through the thick and thin of it all, but the software channel has been really worried. If I were sitting there in the channel I would be breathing a massive great sigh of relief [after the spin-out], wanting to sit down with them and say 'right, what can we do together as we move forward'?"
Copying IBM
According to Longbottom, in the 90s and early 2000s HP was eager to follow the example set by IBM in becoming a one-stop shop for all customer IT needs. Yet HP failed to take heed of the warning signs presented in IBM's sell-off of its PC and laptop business to Lenovo in 2004.
"IBM were that company in the first place - the one-stop shop," said Longbottom.
"HP were trying to catch up with IBM, got the strategy a bit wrong, got through a hell of a lot of CEOs in a very short time and for each one who came in there was no proper handover. They all wanted to strike their own power base so they were not really focusing on what was going on before. Then we got to the point of HP splitting the company in half because otherwise it is just going to implode."
HP and software today
After HP's split into HP and HPE and the consequent spin-off of its non-core software business, HP's software portfolio today is considerably more modest than it was 10 years ago. Yet Westcoast's Tatham believes the spin-off has allowed HPE to play to its software strengths.
He said that HPE's recent software acquisitions of Nimble and SimpliVity are symbolic of the firm's freshly carved software strategy.
"I don't think they are in the software market; a lot of their storage products are storage-related software that can reside on hardware and make it run properly. SimpliVity is an example of, as far as I can see, a software product. It is a focused and sensible addition to their range because it will keep them focused. SimpliVity and Nimble and the like are effectively put onto hardware to create an appliance - essentially they are software products," he said.