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It’s being rumored that Hewlett Packard Enterprise (HPE - Free Report) is on the verge of selling its software unit to Thoma Bravo LLC for $8-10 billion in a deal being managed by Goldman Sachs. Or, it can also sell to other interested parties like Vista Equity Partners Management, Carlyle Group and TPG Capital, all of which have reportedly expressed interest.
The software division generated 2015 revenue of $3.6 billion. It includes the highly controversial Autonomy acquisition that was mostly written down by the current CEO Meg Whitman. It also includes other acquisitions like Mercury Interactive and Vertica. But the segment hasn’t been doing too well of late as customers shift toward cloud-supported, as-a-service software purchasing.
The sale news doesn’t come as much of a surprise since Whitman has been focused on taking out costs and disposing off non-core assets. In May, she announced the spin-off and merger of the business-services division with Computer Sciences Corp. in a deal valued at $8.5 billion for HPE shareholders.
And this was just a continuation of restructuring actions that started last year when Hewlett-Packard Company split itself into the consumer facing HP Inc (HPQ - Free Report) and the enterprise facing Hewlett Packard Enterprise after a prior attempt to sell the computing business wasn’t well received by investors.
Just as Cisco (CSCO - Free Report) did recently when it announced a 7% cutback in its workforce, HPE too is trimming the fat so it can mobilize resources to the fast-growing areas of the cloud such as SDN and converged and hyper-converged infrastructure.
Understanding The Opportunity
As more companies move their workloads to the cloud, vendors have been trying to differentiate themselves by providing improved efficiency, lower operational complexity and rapid scaling. This in turn has led to various degrees of convergence of the IT building blocks (computing, storage and increasingly, networking resources).
Companies like EMC Corp (EMC - Free Report) may be able to supply fully integrated solutions where it also offers all the components or include components made by other technology vendors (depending on customer demand). Both these categories use discrete systems that are designed to work in combination.
The single-vendor market is dominated by EMC, Oracle and HPE. These three companies accounted for 25.5%, 24.0% and 22.5% of this $1.58 billion market in the first quarter according to IDC. EMC and HPE grew strong double-digits while Oracle declined. The Cisco/NetApp combine dominated the multivendor market with 55.2% market share (up low single-digits) in the first quarter, with EMC the only other major player with 35.6% share representing a high single digit decline.
EMC is in the process of being acquired by Dell, so the five major vendors will then be Dell, Oracle, HPE, Cisco and NetApp.
But that’s not the end of the story. There is a third and emerging category (hyper-converged solution) that offers storage and computing as a single unit using the same server resources. Gartner says that this market will grow 79% to reach almost $2 billion in 2016 growing steadily from those levels to $5 billion, or 24% of the converged infrastructure market by 2019. IDC says this market grew 148.0% in the first quarter to $371.88 million.
This last segment is dominated by smaller players like Nutanix and SimpliVity that pioneered the concept, as well as others like NimBoxx, Scale Computing and Pivot3. The only major player here is VMware , which is owned by EMC, which Dell is buying. Since most of the players are lesser-known and also have more limited resources, enterprise adoption is probably slower than it could be.
But with Cisco claiming strong demand for its HyperFlex (management mentioned 500 new customers in the first full quarter since launch) and VMware saying that its hyper-converged license bookings, including VSAN and VxRail grew over 200% from last year, things could be about to change. HPE has offerings including the Hyper Converged 380 and HPE Hyper Converged 250 but the company would clearly like to do more here.
To Conclude
Dell entering the picture strengthens HPE’s competitor and Cisco’s clout at customers and its UCS advantage makes for another very strong competitor, not to mention VMware, which is already moving ahead full steam. So HPE needs to raise its game.
Also, the hyper-converged segment is likely to be somewhat cannibalistic for existing vendors unless they cede share completely. So the company is taking the best course of action: freeing up some cash to innovate/buy its way into this opportunity.
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What's Behind The HPE Software Unit Sale?
It’s being rumored that Hewlett Packard Enterprise (HPE - Free Report) is on the verge of selling its software unit to Thoma Bravo LLC for $8-10 billion in a deal being managed by Goldman Sachs. Or, it can also sell to other interested parties like Vista Equity Partners Management, Carlyle Group and TPG Capital, all of which have reportedly expressed interest.
HEWLETT PKD ENT Price
HEWLETT PKD ENT Price | HEWLETT PKD ENT Quote
The software division generated 2015 revenue of $3.6 billion. It includes the highly controversial Autonomy acquisition that was mostly written down by the current CEO Meg Whitman. It also includes other acquisitions like Mercury Interactive and Vertica. But the segment hasn’t been doing too well of late as customers shift toward cloud-supported, as-a-service software purchasing.
The sale news doesn’t come as much of a surprise since Whitman has been focused on taking out costs and disposing off non-core assets. In May, she announced the spin-off and merger of the business-services division with Computer Sciences Corp. in a deal valued at $8.5 billion for HPE shareholders.
And this was just a continuation of restructuring actions that started last year when Hewlett-Packard Company split itself into the consumer facing HP Inc (HPQ - Free Report) and the enterprise facing Hewlett Packard Enterprise after a prior attempt to sell the computing business wasn’t well received by investors.
Just as Cisco (CSCO - Free Report) did recently when it announced a 7% cutback in its workforce, HPE too is trimming the fat so it can mobilize resources to the fast-growing areas of the cloud such as SDN and converged and hyper-converged infrastructure.
Understanding The Opportunity
As more companies move their workloads to the cloud, vendors have been trying to differentiate themselves by providing improved efficiency, lower operational complexity and rapid scaling. This in turn has led to various degrees of convergence of the IT building blocks (computing, storage and increasingly, networking resources).
Companies like EMC Corp (EMC - Free Report) may be able to supply fully integrated solutions where it also offers all the components or include components made by other technology vendors (depending on customer demand). Both these categories use discrete systems that are designed to work in combination.
The single-vendor market is dominated by EMC, Oracle and HPE. These three companies accounted for 25.5%, 24.0% and 22.5% of this $1.58 billion market in the first quarter according to IDC. EMC and HPE grew strong double-digits while Oracle declined. The Cisco/NetApp combine dominated the multivendor market with 55.2% market share (up low single-digits) in the first quarter, with EMC the only other major player with 35.6% share representing a high single digit decline.
EMC is in the process of being acquired by Dell, so the five major vendors will then be Dell, Oracle, HPE, Cisco and NetApp.
But that’s not the end of the story. There is a third and emerging category (hyper-converged solution) that offers storage and computing as a single unit using the same server resources. Gartner says that this market will grow 79% to reach almost $2 billion in 2016 growing steadily from those levels to $5 billion, or 24% of the converged infrastructure market by 2019. IDC says this market grew 148.0% in the first quarter to $371.88 million.
This last segment is dominated by smaller players like Nutanix and SimpliVity that pioneered the concept, as well as others like NimBoxx, Scale Computing and Pivot3. The only major player here is VMware , which is owned by EMC, which Dell is buying. Since most of the players are lesser-known and also have more limited resources, enterprise adoption is probably slower than it could be.
But with Cisco claiming strong demand for its HyperFlex (management mentioned 500 new customers in the first full quarter since launch) and VMware saying that its hyper-converged license bookings, including VSAN and VxRail grew over 200% from last year, things could be about to change. HPE has offerings including the Hyper Converged 380 and HPE Hyper Converged 250 but the company would clearly like to do more here.
To Conclude
Dell entering the picture strengthens HPE’s competitor and Cisco’s clout at customers and its UCS advantage makes for another very strong competitor, not to mention VMware, which is already moving ahead full steam. So HPE needs to raise its game.
Also, the hyper-converged segment is likely to be somewhat cannibalistic for existing vendors unless they cede share completely. So the company is taking the best course of action: freeing up some cash to innovate/buy its way into this opportunity.
Confidential: Zacks' Best Investment Ideas
Would you like to see a hand-picked "all-star" selection of investment ideas from the man who heads up Zacks' trading and investing services? Steve Reitmeister knows when key trades are about to be triggered and which of our experts has the hottest hand. Click for his selected trades right now >>