Back to Smaller Buys for HP?

I read earlier today that HP will take another 18 months to digest its 3Com acquisition. At the same time, HP must figure out how best to leverage the assets it acquired from Palm.

3Com was a bigger purchase, and one that is integral to HP’s desire to topple Cisco from its networking throne. Still, Mark Hurd’s HP doesn’t act on capricious whims, so I suspect an abundance of resources and thought will go into trying to ensure that Palm doesn’t become HP’s mobile white elephant. Even so, Palm might come to naught — or simply not enough.

The point is, HP has considerable integration work to do on two major fronts. While I don’t expect the computing conglomerate to stop fishing M&A waters, I think it will look to hook smaller deals rather than anything more ambitious, at least for the time being.

An article by David Goldman at CNNMoney.com covers similar ground. In discussing how HP’s colossal size inhibits fast-paced growth, Goldman suggests that HP might continue to seek growth inorganically, through strategic purchases. The problem is, HP is constrained by a diminished pool of cash reserves ($14 billion), competitive engagements on multiple fronts, and the need to properly integrate and assimilate its non-trivial 3Com and Palm acquisitions.

Regarding a potential acquisition of Teradata to fill a database hole in HP’s product portfolio, Goldman quotes Mark Kelleher, analyst at Brigantine Advisors:

“HP really has its hands full with integrating 3Com and Palm. I don’t see them pivoting towards a fight with Oracle, especially since HP has really made a concerted effort to take on Cisco.”

There’s a lot of logic in that argument. Unless HP has gone mad with hubris, it probably will pursue tuck-in acquisitions rather than costlier, ambitious ones that open major new competitive fronts.

A logical question is, what — besides obvious criteria — demarcates a tuck-in acquisition from a larger purchase? Part of the answer is valuation, I think, and part of it relates to target market.

If the market capitalization of a target acquisition is more than $5 billion, now is probably not a great time for HP to make the move. Similarly, if HP is buying into a space that is established but new to HP —  and, as a result, would involve protracted competitive warfare against well-entrenched players — now probably is not the best time for that sort of challenge. HP needs to fully digest 3Com and Palm, and it needs to ensure that those acquisitions serve their strategic purposes.

Still, that leaves HP with enough room to play the market, and to bolster and extend its capabilities in areas where it’s already active.

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