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Few things can be as welcome a surprise in difficult markets as a takeover bid at a substantial premium
Few things can be as welcome a surprise in difficult markets as a takeover bid at a substantial premium. This is what has befallen the UK’s leading software group Autonomy Corporation (LON:AU) with computing giant Hewlett Packard (NYSE:HPQ) recently making a £25.50 per share bid.
Our initial recommendation for Autonomy late last year was after the stock price had weakened following volatile customer demand. We reiterated our stance just weeks later - recommending buying as low as £12.91 - as the decline continued following the announcement of a delayed acquisition. While this was not without risk we viewed the underlying business as sound and the growth prospects as solid.
In the event customer demand has broadly held up and Autonomy managed to make its delayed purchase eventually. The group bought the digital assets of Iron Mountain earlier this year which gives it access to a new client base.
Whilst a move towards “cloud computing” may have investors fearing a temporary dip in near term revenue growth, during the first half of 2010 the group still saw total revenues improve from US$415m to US$476m last year.
Clearly now Autonomy has become the subject of a bid itself and one that is likely to be successful. Hewlett Packard is proposing to pay cash and is also offering a substantial premium to the stock price before the announcement.
This is as Hewlett Packard is seeking to move more towards software and away from hardware. A notable retreat is that the group has said it is looking to step back from making tablets to compete with the iPad - the group took a US$100m charge with its quarterly results as it failed to shift as many of its touchpad’s as hoped.
Shares in Hewlett Packard have fallen significantly on the group’s latest quarterly update, which lowered guidance for the fourth quarter, and carried news of the Autonomy deal. Part of the fall appears to be attributable to the company effectively admitting that its strategy has not been successful for much of its business.
This also increases investor angst for Hewlett Packard shareholders and raises the prospect that the Autonomy takeover may not go through. The deal is recommended by Autonomy’s board who have pledged their 9% stake but Hewlett Packard shareholders may be less keen.
Hewlett Packard’s bid is 10 times prospective revenues and a 79% premium to the closing price of Autonomy’s shares on Thursday. This came despite Autonomy’s tepid first half revenue growth of 6%.
There may also potentially be a backlash in the UK where there is a perceived need for local tech champions. In a different industry the takeover of Cadbury still rankles as Kraft is perceived not to have kept the promises it made on the bid. The jury is out on whether takeovers make money for the acquirers in the long-run and Hewlett Packard is certainly paying a full price.
This article was produced by Senior Research Analyst, Andrew Latto.
