Last updated: September 13, 2010 10:10 pm

HP expands in security with ArcSight deal

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Hewlett-Packard has agreed to buy high-end technology security company ArcSight for $1.5bn to profit from its customers’ increasing concerns about protecting their data from hackers.

The cash offer of $43.50 a share for Silicon Valley neighbour ArcSight was more than 50 per cent above where the company was trading before reports last month that it was courting buyers. It values the equity at $1.5bn, or six times projected annual revenue.

Earlier this month, HP won an intense bidding war for storage gear maker 3Par. ArcSight shares traded slightly above the HP offer price as investors hoped for a repeat, while some analysts asked whether HP was on a buying spree that lacked financial discipline.

But the latest deal fits with HP’s long-held strategy of expanding into higher-margin software and services and relying less on commodity computer and printer sales. Software remains a small part of HP, which said it didn’t expect any material impact on next year’s earnings per share from the ArcSight acquisition.

Security is especially tempting for the biggest technology companies because it has growing sales and visibility among the top ranks of customers. Yet it remains highly fragmented and ripe for consolidation, with existing vendors typically specialising in software to protect individual users, network intrusion defence, identity auth-entication and other niches.

Especially since the disclosure in January of successful Chinese attacks on Google and other well regarded companies, tech buyers have been more willing to listen to the argument that they need a comprehensive overall approach to warding off hackers that uses a combination of methods to get at corporate data.

Few companies can claim to offer everything, though, and a recent surge in mergers does not change that.

Intel made by far the most dramatic bet in the sector with last month’s acquisition of No.2 US consumer-protection concern McAfee for $7.7bn. In the long term, Intel hopes to incorporate security into the chips it supplies to computers and mobile devices.

HP’s plan is more modest, to place security inside the management tools it offers. Bill Veghte, the company’s head of software and services, said it didn’t envision being a one-stop shop for security. “The end point security market is served by a wide variety of providers and we will integrate with them all” Mr Veghte told the Financial Times.

Instead, HP wants to combine the intrusion-detection software it got when it bought 3Com and its pre- existing software-management tools with ArcSight’s wares, which scan networks for unusual behaviour.

While small, ArcSight is growing by 40 per cent and has a strong presence at financial institutions and government agencies.

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