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Oracular returns

3 October 2011 By Robert Cyran, Richard Beales

Investors unimpressed by Hewlett-Packard’s dysfunctional governance have sold off its shares, leaving the tech company vulnerable to a bid. And Larry Ellison’s acquisitive Oracle is a credible potential suitor. At least financially, a deal would stack up. A Breakingviews analysis suggests that even paying a 40 percent premium, Oracle could reap a hefty return.

Despite its expensive deal to buy UK-based Autonomy, HP’s stock is cheap. It trades at less than five times estimated earnings for the company’s next fiscal year. If Oracle paid a 40 percent premium to gain control, the total outlay, including assumed debt, would be a bit over $80 billion. That’s chunky – it’s more than half Oracle’s enterprise value. But Oracle already has $32 billion of cash and short-term investments on its balance sheet. For a compelling deal, the company could always issue stock as well.

And the numbers are persuasive. Analysts reckon HP will pull in $13 billion of operating profit in the 2012 fiscal year. Add in a fraction more from Autonomy, and that would bring Oracle a 16 percent annual return on its total investment off the bat. Oracle might be able to squeeze out some costs. If it cut 10 percent of HP’s selling, general and administrative expenses and its research and development costs, that would bring $1.6 billion in annual savings. Throw those in, and pro forma for the 2012 fiscal year Oracle’s return on investment would be 18 percent.

Along the way, it’s possible that HP could slightly ease the burden for an acquirer by selling off businesses it bought last year in its $1.2 billion purchase of Palm. The mobile operating system may be in limbo, but the related patents are a hot commodity.

Yet there’s more than one fly in this ointment. The presence at Oracle of Mark Hurd, chief executive of HP until just over a year ago, may delay any possible move by Ellison. Moreover, Hurd might not be the ideal boss for an Oracle-owned HP. As CEO, he cut costs too deeply, contributing to HP’s current troubles. There’s also the important broader strategic question of whether it makes sense for Oracle to increase its commitment to hardware. Purely on the numbers, though, at current prices it’s hard to argue. HP would make a lucrative target.


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