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HP Lands on Mercury For $4.5B

UPDATED: HP  said today it inked a deal to purchase Mercury Interactive Corp.  for $4.5 billion cash in a deal that will turn the computer systems maker into a powerhouse management software company.

HP offered $52 per share in cash, a 33 percent premium over Mercury's closing price of $38.76, which will boost its software business to more than $2 billion in annual revenue.

Adding Mercury's broad host of products will enable it to better compete with rivals IBM , CA   and BMC  in the multi-billion-dollar management software market.

"The transaction brings together two of the market-leading businesses to create one of the most powerful management software companies in the world," said HP CEO and President Mark Hurd on a conference call.

HP officials said they expect very little overlap of products.

"The combination of HP's OpenView systems, network and IT service management software with Mercury's application management, application delivery and IT governance is compelling and enables us to be an end-to-end leader in enterprise IT management for the entire software IT lifecycle ..."

Since Hurd took over for the ousted Carly Fiorina in March 2005, HP has made a handful of small buys, including Peregrine Systems, AppIQ, RLX Technologies and OuterBay.

But Hurd acknowledged that HP hasn't made a deal this big since the Compaq purchase years ago.

Hurd noted that while HP is dedicated to organic growth, the company's strong cash balance provides HP the opportunity to make strategic acquisitions.

He also said he believed the merger can drive revenue growth of approximately 10 percent to 15 percent, and an operating margin of 20 percent of sales by 2008.

The deal comes as Mercury is consumed by a probe into possible securities fraud practices on the part of some of its managers.

Earlier this month, Mercury officials said that some of its directors may face civil charges from the Securities and Exchange Commission following the company's admission that its former managers backdated stock-option grants.

These illegal activities could cost Mercury $70 million in legal penalties and financial restatements.

But Hurd said that HP executed due diligence on these matters and is "comfortable" that HP will not assume any liabilities for Mercury.

"I am confident that this transaction demonstrates that HP is building a software business that needs to be reckoned with," Hurd said.

Should the deal close in the fourth quarter of 2006, Mercury will become part of HP's software business, according to Tom Hogan, senior vice president of HP's Technology Systems Group.

Mercury Interactive CEO Tony Zingale will join HP and help Hogan assimilate Mercury into HP's OpenView mix.

Both companies' sales forces will begin reference-selling each others' products.



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