HP is “[discontinuing] operations for webOS devices, specifically the TouchPad and webOS phones.” The company slid this into its press announcement regarding possible purchase of Autonomy Corp (AU.L); with a market cap of $7 billion, it is the second largest pure software company in Europe.
The HP TouchPad tablet went on sale on July 1, 2011 and the Veer smartphone earlier in the year. Both run on HP’s webOS, which it acquired with Palm in April 2010 for $1.2 billion. HP has discontinued the TouchPad at 49 days.
Compare that with Microsoft, which spent several years developing at an estimated cost of $1 billion, which included the February 2008 purchase of Danger Inc., which had developed the Danger Hiptop/T-Mobile Sidekick, for $500 million. Microsoft announced the two Kin phone models on April 12, 2010; they were available for purchase in May; Microsoft discontinued the phones on June 30, 2010, after 48 days.
- Both products had lifespans of about 1.5 months.
- Both products had development costs that exceeded $1 billion.
There’s something wrong in the market when failures of this magnitude — let’s call them diseconomies of scale — are shrugged off by investors. (Yes, I know that HP’s stock is down, but that’s because it’s 1% growth rate failed to meet expectations.)
Bloomberg reports that HP is offering $10.3 billion in cash to buy Autonomy, “a 64 percent premium over Autonomy’s closing share price yesterday.” Last year, HP had $13.6 billion in cash and assets of $114 billion. Today, Google reports cash of $12.7 billon and total assets of $125 billion. From Bloomberg:
In the past five years, there have been more than 970 takeovers of European software companies, amounting to over $31 billion in deals, according to data compiled by Bloomberg. The largest was SAP AG’s 2008 takeover of Business Objects SA. Buyers have paid a median multiple of 10.8 times the targets’ earnings before interest, taxes, depreciation and amortization, based on 70 deals.
Companies would not grow to be this giganormous (HP market cap is $61 billion; CSCO, $83 billion, recently shuttered Flip, which it bought for $590 million in 2009; MSFT market cap is $207 billion) if there weren’t advantages in the tax code.
The “synergies” of such mergers and acquisitions bring to mind The Mythical Man-Month, the first book to argue that throwing more people at a struggling software project will cause it to take longer to finish. Is throwing money around any different in its ultimate impact? Who truly benefits from such M&As, other than the principals of the acquired businesses, who own significant chunks of stock?