Hewlett-Packard Co. (HP) announced that it would buy off Aruba Networks Inc., for $2.7 billion as part of HP’s efforts to boost its share in the networking business. Aruba is one of the best-known makers of wireless networks used in shopping malls, in the hospitality industry and by educational institutions.
Hewlett-Packard To Acquire Aruba Networks in a $2.7 billion Deal
Shareholders of Aruba will sell off their shares for $424.67 per share. Inclusive of cash and debt, the acquisition deal will offer Aruba $3 billion in value.
Soon as the deal was announced, Aruba shares sank down to 1.6% to $24.42 on the New York stock exchange. However, the share prices increased exponentially in the days following the announcement and closed at $24.81 per share in the week that ended February 27.
Meanwhile, HP shares increased by less than 1% to $34.94 in the week starting March 2.
This is HP’s biggest buyout in many years, as part of efforts by CEO Meg Whitman to cut costs and promote a profit model for the business. This year, HP, the multinational information technology company will be divided into two companies: HP Inc and Hewlett-Packard Enterprise, both of which will be publicly traded. Whitman will still be head of Hewlett-Packard Enterprise with a focus on corporate clients.
Market observers are not too optimistic about the impact of the imminent split. The HP Enterprise part of the business will continue to compete with industry titans SAP S.E., Oracle Corp, and IBM while the HP Inc. hardware section of the business will continue to face competitors from the Asian market including Lenovo, Asus, Toshiba and Acer.
Presently, HP is not performing too well in the software or hardware front and observers see the split as something that may increase the company’s weaknesses.
Market forecasts already show low profit expectations for HP. This compounded by the company’s ability to adapt to a rapidly changing business environment makes the Aruba acquisition quite risky.
Whitman’s strategy could be to target the network infrastructure maker in an effort to boost revenue and eliminate some of its competitive advantage problems.
Some of Aruba’s biggest customers include the Edzan Hotesl in Qatar, California State University in Los Angeles and Dalian Wanda Group in China.
Aruba’s annual sales are set to grow to over $1 billion by 2017, down from $729 million in fiscal year 2017, according to analysts’ average. By acquiring Aruba, which is based in Sunnyvale, California, HP would significantly boost its networking business.
In the last quarter that closed January, HP’s networking business brought in sales worth $562 million, a decline of 11% from the previous year. Meanwhile Aruba’s last quarter earnings that ended in October amounted to $207.8 million, a 29% growth.
In recent years, HP, which has ventured into the corporate wireless business, has lost traction against industry giants such as Cisco Systems Inc., which dominates almost half of the market.
The HP-Aruba merger would allow HP to dominate about 20% of the corporate wireless market, according to Rich Valera, a Needham & Co. analyst.
Valera, who recommends that investors purchase Aruba shares said, “Aruba’s shares have been gaining while HP’s shares have been losing. Aruba is at the leading edge and has very good products.”
At a time when many western tech companies are having trouble in China, the Aruba acquisition would give HP an additional opportunity to penetrate the Chinese market, the second largest economy in the world.
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