HP looking to patch its holes with Aruba Networks

Hewlett-Packard Company; Market Cap (as of 27/02/2015): US$63.86bn

Aruba Networks Inc.; Market Cap (as of 27/02/2015): US$2.72bn

Introduction

Hewlett-Packard (HP) CEO Meg Whitman has announced on Tuesday that the company is in the position to make acquisitions with media reporting on Wednesday that the company is exploring the possibility to acquire Aruba Networks. Although the deal is still in the talks, the final news may come as early as Monday afternoon before Aruba’s Atmosphere conference in Las Vegas. Shares of Aruba surged 22% on February 25 after the news reached the market.

About HP

Hewlett-Packard (HP) is a US based multinational information technology company based in Palo Alto, California. In 2014, HP was the world’s fourth largest information technology company by revenue and the second largest computer manufacturer worldwide by computer shipments after Lenovo. On October 6, 2014 HP announced plans to split the company into two separate businesses: one company will be comprised of HP’s personal system and printing business while the other company will offer HP’s enterprise technology infrastructure, service and software business (see our coverage of the split). HP expects to complete the split by the end of 2015 and the acquisition of Aruba would most probably enter its Networking segment as part of the Enterprise business.

About Aruba Networks

Aruba Networks is a US technology company founded in 2002 with headquarters based in Sunnyvale, California. The company provides enterprise mobility networking and communication solutions to clients worldwide. As of 2014, Aruba has the 2nd largest market share by global enterprise wireless LAN equipment segment. The company’s offerings include access point solutions that enable clients such as universities, malls, hospitals and hotels to have Wi-Fi access for their local network environments. Although Aruba has shown steady revenue growth in recent years, averaging at 28.8% in 2010-2014, it showed negative Income for the years mentioned except 2011, and Operating Income loss except for 2012. As of Q2 2015 Aruba showed a record yoy revenue growth of 21% generating US$213m as of Q2.

The  Rationale

The acquisition is a timely announcement as HP’s Networking division revenue slid by 11% yoy and 16% qoq to US$563m as of Q1. A combination with Aruba would result in a second by market size worldwide provider of networking technology at around 20% of market share, still far from the 52% of Cisco.

HP’s shortcomings in the current wireless technology, not to mentions the future trends, have been the major factor in the acquisition decision. Just to provide a general understanding, the new standard 802.11ac is, in principle, a faster and more scalable version of the previous one – 802.11n. It addresses, among others, two important issues in the wireless segment. Firstly, it meets the mobile applications’ growing demand of bandwidth demand offering wider channel support by allowing higher data rates than are achieved with 802.11n. Secondly, it addresses the problem of growing client congestion, faced by wireless networks, which is a result of people carrying multiple wireless devices at the same time. Considering this, Aruba will bring two benefits in this direction. Firstly, the acquisition fixes HP’s wireless R&D issue. The company has not been developing its wireless portfolio and it needs to set foot in the coming shift to 802.11ac and other next generation wireless technologies. Secondly, it will be a strategic move against competitors like Dell – which has most of its wireless offerings from Aruba and was also considering its acquisition – Juniper, Brocade and Alcatel Lucent (which also have partnerships with Aruba). This may results in giving the upper hand to HP in shaping the offering landscape.

However, there have been ups and downs in HP’s US$66bn acquisition history in the decade before Whitman became CEO. The most notorious acquisition has been the one of Autonomy Corp (search business) in 2011, worth US$10.3bn, which later resulted in an 85% write-off from the purchase price. With Aruba, HP will be back to boost it’s struggling networking division and poised to the technology upgrades coming in the sector.

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