Sources inform "Globes" that Mercury Interactive Corporation (Nasdaq: MERQ) has recently become a target for acquisition by several global computer giants. In recent months, rumors are circulating in the market concerning increasing interest by IBM (NYSE: IBM), HP-Hewlett-Packard (NYSE: HPQ), and apparently also Computer Associates (NYSE: CA) in acquiring Mercury. These major companies are attracted by Mercury’s combination of software testing, application performance management (APM), and control and monitoring tools for IT governance (ITG).
At this point, no real negotiations are taking place yet; only initial viability checks are involved. It appears, however, that these companies have definitely marked Mercury. Up until several months ago, HP was showing the most interest, but rumors have been spreading recently of interest on the part of IBM. HP may have lost some interest since Carly Fiorina resigned as its chairperson and CEO, but an acquisition by HP is still under consideration.
In order for the merger to take place, both sides must be willing. As of now, it appears that Mercury chairman, president, and CEO Amnon Landan does not wish to sell the company, mostly because he believes that it is on the verge of a real breakthrough. In his opinion, the company can reach sales of $1 billion, easily making it one of the world’s leading software companies.
Furthermore, it is very difficult to imagine Landan agreeing to play second fiddle, let alone working as a division manager (although division managers at IBM, for example, enjoy great autonomy and freedom of action). On the other hand, the shareholders’ benefit takes priority over any other consideration. It is therefore reasonable to assume that for the right price, Landan will find refusing to sell difficult. The right price, however, will unquestionably include a very large premium on the company market cap. In any case, the share is not getting excited. Mercury’s share rose only 3% in the past month, closing at $42.22 on Friday, reflecting a market cap of $3.66 billion.
Why has Mercury become an acquisition target now? The principle reason why IBM, HP, and CA are interested in acquiring Mercury has to do with a new threat to them from Microsoft (Nasdaq: MSFT), which is about to launch an array of cheap, high-quality software testing products. These products will upgrade what it has to offer customers in the IT market, and make Microsoft more attractive to them than IBM, HP, and CA. Microsoft’s new range of products includes tools for testing functions (its systems test whether software actually performs all the operation that it is supposed to) and management tools, which manage the testing process.
Microsoft’s new systems will compete with Mercury’s quality centers. As of now, there is no evidence that Microsoft plans to supply tools for testing loads (Mercury’s other software testing product). Just how ready Microsoft’s new testing products are at present, and when exactly they will be launched, is unclear, but IBM, HP, and probably also CA are well aware that they must prepare accordingly, and as soon as possible.
The IT market believes that the testing systems that Microsoft plans to offer will good enough to attract a wide range of customers. Furthermore, it is clear to all players in the field that Microsoft will supply these systems at negligible cost. A basket of products that includes testing tools and testing management tools is currently sold to customers at an average price of tens, and sometimes even hundreds, of thousands of dollars. It is believed that Microsoft will supply this basket of products for just a few thousand dollars. IBM and HP are now increasing concerned that as a result, Microsoft’s overall offer to customers will be much more interesting that what IBM and HP are currently offering.
Mercury, which has accumulated vast experience in the field, and has a market share of over 60%, is the only company that has nothing to fear from Microsoft’s entry into the market. The fact that Mercury provides a suitable answer to Microsoft’s future systems is the main reason why the giants are interested in acquiring it.
Of course, as with every acquisition, acquiring Mercury also has negative aspects. The main reason deterring IBM’s board of directors from the acquisition of Mercury is the fact that three years ago, IBM acquired Rational Software Corp. Before the acquisition, Rational was Mercury’s strongest competitor in software testing. Immediately after the acquisition, it became obvious that IBM had acquired the company for its software development tools. IBM almost completely neglected Rational’s software testing activity.
In view of the fact that software testing constitutes 60-65% of Mercury’s business, it can be assumed that some IBM directors will ask why they should acquire Mercury only three years after acquiring Rational and allowing the latter’s line of testing products to wither. On the other hand, it cannot be ruled out that IBM will be interested making its entry into the testing field with a company having the largest market share.
Another factor that makes Mercury an acquisition target for the three above-mentioned giants is its APM system, especially its Topaz system. Mercury’s four main competitors in this market are BMC Software’s (NYSE: BMC) Patrol product, HP’s Openview, CA’s Unicenter, and the systems of IBM’s Tivoli division.
Mercury has a number of advantages over each of these competitors in APM, and each of them therefore has an interest in acquiring Mercury. BMC is not expected to acquire Mercury, because the latter has become too big for it. CA could acquire Mercury, but it should be kept in mind that the two companies’ corporate cultures are very different, which greatly increases the risk of an unsuccessful merger. IBM and HP, on the other hand, are close to Mercury in corporate culture, and in the level of messages delivered to their customers. Furthermore, they have similar concepts of helping the customer.
As far as synergy is concerned, because of conceptual differences between the products of these three companies and Mercury, it is clear that the products can be regarded as complementing each other. The concept behind the products of the three giants is that every element in the system (every printer, every server part, every firewall, etc.) should be monitored. Each component’s effect on the entire system should then be evaluated. Mercury’s concept, on the other hand, holds that testing should be in the opposite direction. First the system’s functioning should be tested as a whole, i.e. whether business processes are being performed at the necessary speed, without malfunctions, and to the customer’s satisfaction. If not, Mercury’s systems search for the element causing the malfunction or poor performance.
Mercury’s third field of activity, ITG, is expected to grow by more than 100% in the coming years. IBM, which aspires to encompass the entire IT market, and which is positioning itself as the dominant force in it, is currently searching for ways to strengthen its grip in the field that includes all of Mercury’s products, in order to provide a comprehensive business solution. In other words, acquiring Mercury would enable IBM to provide a much broader solution that it currently offers. While HP comes from the hardware field, it is also interested in increasing its IT market share, and it could therefore also find this combination appropriate for it.
ITG is a new field that is just getting started, and competition in it is consequently less intense than in Mercury’s other business. Most of its competitors in ITG operate in the low-end market; there is almost no competition in the high-end market. The only players that can be considered competitors for the high-end market are Microsoft, which has a project management product, and companies like SAP (NYSE, LSE, DAX: SAP), whose enterprise resource planning (ERP) solution is designed to manage all of an enterprise’s resources. All in all, ITG is suitable for the expansion plans of HP, IBM, and CA, although it is of less interest to them than Mercury’s other activity.
The bottom line is that the players who might take an interest in acquiring Mercury are IT players aspiring to provide comprehensive solutions, including software testing, security, management software, databases, etc. Today, no one company provides all these solutions. It appears that IBM provides the broadest array of products, and therefore none of Mercury’s products is unknown to it. HP does not operate in these fields, but it cannot be ruled out that it might wish to enter them. If not, HP could always abandon some of Mercury’s product lines. Eventually, whether or not Mercury is acquired, one thing is sure - the IT field will be very interesting in the coming year.
Published by Globes [online] - www.globes.co.il - on June 6, 2005