This monster transaction is all about a single word: growth.  HP is buying Autonomy so that it may capitalize on growth, especially at a time when HP shareholders, partners and customers, and the analysts covering HP, are becoming increasingly critical of the company’s stagnation.  (To be fair to HP, the global economy continues to suffer from its own case of the growth blues...but we digress.) 

First, we need to put this transaction in perspective: this is a big deal for all concerned, but none more than HP and its leaders.  HP is paying almost twelve times trailing revenue for a technology company that is itself an amalgamation of many acquisitions, from Verity back in 2005 to Neurodynamics, Zantaz, Interwoven, CA’s information governance unit and earlier in 2011 Iron Mountain’s Digital division. HP is using fully 80% of its available cash to seal the deal.  Thus, HP is clearly betting its software division’s future – and perhaps all of HP’s future, given the company’s other news from Thursday – on Autonomy and what it can do to help HP grow again.

That one of the world’s largest technology companies would be willing to make such a move is, in a nutshell, the power of growth.  In this case, HP believes it will be able to cash in on growth in four ways:

•  Revenue growth.  Ultimately, HP needs to grow its top line (revenue) in order to achieve greater profitability and therefore share price growth, which is where executives, shareholders and financial analysts are maintaining their laser focus.  Maintenance and support alone doesn’t help, so HP must find new, growing markets, offerings and revenue streams.  Why would HP signal it plans to exit a huge market (PCs) the same day it is spending such a fortune to purchase a relatively small software vendor that plays in relatively niche markets (compared to PCs, at least)?  That one’s easy: so that HP can enter said niche markets and thereby capture…
• Market growth.  Simply put, the PC business is not growing; by contrast, for leading players the eDiscovery and regulatory compliance markets are booming.  Furthermore, the “hosted” – aka cloud – segments of these markets are growing even faster (see Recommind’s Axcelerate On-Demand growth numbers next week for a snapshot of what huge growth looks like).  And information governance is a key sector which could very well be the next area for rapid growth.  Autonomy plays in all of these markets, giving HP access to market growth.  Why are these markets growing so much while most others stagnate?  In enterprise technology, the key to market growth is being able to effectively manage…
•  Data growth.  Various estimates put data growth at anywhere from 25%-200%, but even this does not account for the sheer variety and locational complexity of today’s information.  Enterprise IT departments must deal with all of this data.  They generally do a good job of this, as they can plan and execute as they have always done…except when it comes to the aforementioned markets, especially eDiscovery and regulatory compliance.  Lawyers, judges, investigators, regulators and law enforcement don’t care that company XYC now manages 50 TBs of data when they only managed 5 TBs 2 years ago; they want the information they requested yesterday, and if they don’t get it they will assume company XYC is hiding something.  Companies like XYC have no choice but to pay for powerful technology to help solve their problems, which is why these markets are growing…but only for differentiated players who can accurately automate as much of the process as possible (hence the explosive growth of Predictive Coding).  For enterprises, not wanting or being able to install software behind the firewall to address all of these situations has in turn led to explosive...
•  Cloud growth.  Let’s throw in services here too, as HP seems to be taking a page out of IBM’s playbook by shedding hardware assets in favor of services and, in a modern flair on IBM’s moves, the cloud.  As Google, Apple, Amazon and Facebook have clearly figured out, whomever owns or maintains data users want or need will win.  And while a detailed discussion of Autonomy’s “organic growth” shenanigans is beyond the pale of this post, suffice it to say the biggest (and perhaps only) area of their business which actually had solid organic growth (i.e. not from acquisition-driven obfuscation) was in their hosted (aka cloud) offerings.  HP has no real cloud offerings; thus, they immediately step into a decent foothold in several growth markets with high-growth offerings.

This deal was a big one indeed, which makes good theater in watching to see how everything shakes out over the next several years.  Will this acquisition go the route of Palm, whose webOS software is being discontinued a year after HP paid $1.2B for Palm?  Highly doubtful.  Or like Compaq, another “seminal” deal for HP when it was announced several years ago?  Certainly possible, although not probable.