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Will H-P Bet the Company on a Megamerger With SAP?

Will HP and SAP MergeOn Friday, Hewlett-Packard surprised everyone by announcing the appointment of Leo Apotheker as the company's new top executive. After all, Apotheker had just been ousted by German enterprise software maker SAP back in February.

Wall Street responded by making H-P the biggest loser of the day among Dow components. And Oracle chief Larry Ellison said he was "speechless," although I doubt that's ever been true. In an email to the Wall Street Journal, the verbose billionaire went on to say:

HP had several good internal candidates--but instead they pick a guy who was recently fired because he did such a bad job of running SAP. The HP board needs to resign en masse -- right away. The madness must stop.
I happen to share Ellison's view of H-P's board, which I think is chronically dysfunctional and screwed up royally when it forced out former CEO Mark Hurd. Nevertheless, the unexpected move does reveal a great deal about H-P's strategy, which seems to be leaning toward a bet-the-company megamerger with SAP.

Just look at the obvious facts:

  • The troika of IT is integrated or bundled hardware, software, and services.
  • H-P competitors IBM and Oracle are strong in software - H-P's Achilles heel.
  • Apotheker is a 20-year veteran of enterprise software maker SAP, which has had its struggles in recent years.
  • H-P also appointed Kleiner Perkins managing partner Ray Lane as non-executive chairman. It's no coincidence that Lane is a former COO of Oracle.
Ergo, H-P's board is making some big bets on software. And the fastest and perhaps only way to become competitive with Oracle and IBM is with an aggressive acquisition strategy. So a merger between H-P and SAP makes a lot of sense.

In fact, Peter Goldmacher, an analyst with Cowen and Company, said, "We would not be surprised to see HP and SAP get closer. The combo makes sense. Looking further out, we believe the most likely outcome is for HP to buy SAP, which gets the company Sybase and enterprise data street credentials." He did go on to say he didn't expect that to happen anytime soon.

Moreover, in a conference call on Friday, Apotheker was clear that software would be top-of-mind for H-P, going forward:

I believe H-P should be more valuable than the sum of its parts. And we believe that software is sort of the glue to make that happen. Software is how we can make sure that various parts of our technology actually fit well together.
So, looking at it this purely in terms of competitive positioning, it all makes sense. But if you look at it from a management standpoint, the picture changes rather dramatically for the following reasons:
  1. Apotheker has no successful CEO experience. His tenure as chief of SAP was, simply put, a disaster. On his watch, software license sales fell off a cliff, dropping a whopping 28 percent and forcing the company's first big layoff. SAP's board dumped him in February.
  2. Some say that Apotheker's roughly two-year tenure as SAP CEO or co-CEO doesn't tell the whole story of his career at the company. Okay, let's talk about that. In 2002, when Apotheker was promoted to SAP's executive board, SAP and Oracle were about the same size in terms of revenue. Today, Oracle is nearly twice SAP's size and profits are two and half times that of SAP. Numbers don't lie.
  3. Whether H-P buys SAP or not, the culture clash between a German software executive and a Silicon Valley IT giant are worlds apart. And, as Ellison correctly pointed out, H-P's board passed over several excellent internal candidates, more or less killing their chances to land the top job. That portends a potential mass exodus of executive talent. And, if the companies do merge, the culture clash and the challenges it presents are that much greater.
  4. With this appointment, H-P seems to have completely given up on having its own vision and carving its own path in the market. Instead, the board has chosen to follow IBM into services and both IBM and Oracle into software. It's telling that IBM considers Oracle it's primary threat and vice versa. That leaves visionless H-P the odd man out. It's sad, really.
Bottom Line: Philosophically, I think a board's function is to hire a competent and capable executive, not determine company strategy. For example, IBM's board had no idea what strategy Lou Gerstner would recommend for IBM when they picked him to fix their flailing company; they just had faith in his abilities. That seemed to work out pretty well.

Instead of choosing a competent CEO, it appears that H-P's board chose a strategy. So be it. Only time will tell if they screwed up yet again. But you know, the trouble with merging two distressed companies is that, ofentimes, they just end up becoming one really big distressed company. In any case, it'll be interesting to see how the H-P saga turns out in the end.

Image CC 2.0 courtesy Flickr user Ret0dd

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