(PC) Hewlett-Packard Buys Virtualization Software From Phoenix Technologies

Right after making headlines for a lawsuit against New Jersey-based Turbon International Inc., the largest personal computer (PC) manufacturer Hewlett-Packard Company (HPQ) has hit the headlines again for acquiring three virtualization software lines from software maker Phoenix Technologies Ltd.

The deal is valued at $12.0 million and will give Phoenix the opportunity to focus on the core systems software market. We believe that, in keeping with the revival in demand for software and IT products, the demand for virtualization software will increase in an attempt to improve the productivity of each server. The software lines that will be acquired by HP include HyperSpace, HyperCore and Phoenix Flip products.

HP has always grown through strategic acquisitions. During fiscal 2008, the company acquired nine companies, the largest of which was Electronic Data Systems (“EDS”) for approximately $13.9 billion. The company’s Technology Solutions Group (“TSG”) segment shifted its outsourcing services operations and a part of its consulting and integration activities to EDS. We believe the EDS acquisition will give the services portion of the TSG business a stronger foothold to compete against its largest rival, International Business Machines (IBM).

This apart, in November 2009, the company declared that it will be acquiring networking major 3Com. This $2.7 billion acquisition has put HP in open competition with networking leader Cisco Systems Inc. (CSCO). It also strengthened its position in the Chinese market, as 3Com has good exposure to China, both in terms of manufacturing and sales.

After overtaking all its competitors in the PC market, the tech major’s aggressive measures have now enabled it to capture the top slot in the server business. As per the recent report published by the technology research firm Gartner, HP generated $3.4 billion in server revenues during the first three months of the current year, up 16.0% compared with the year-ago period.

On the other hand, during the same period, the server revenues of IBM dipped 2.1% to $3.05 billion. The performances of the two companies in the last quarter put HP in the leadership position, with a 31.5% market share, exceeding IBM’s market share of 28.4%. The virtualization software acquired from Phoenix may further enhance the potential of HP’s server segment, as the company may strategically bundle these software with its servers, which may offer better value to end customers.

Although we remain positive about the company’s performance, given the improving demand and its leadership position in the PC segment, we are not very confident about a substantial improvement in the company’s printing business due to the availability of cheaper substitutes.

We maintain our Neutral rating on the stock.

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