UPDATE: H-P To Buy IT Security Company ArcSight For $1.5 Billion

Hewlett-Packard Co. (HPQ) agreed to buy security-software maker ArcSight Inc. (ARST) for about $1.5 billion, continuing the company's spending spree that began after Chief Executive Mark Hurd resigned last month.

The deal also represents the latest purchase of a smaller security firm by a huge technology company, a trend some see continuing as big tech considers the importance of adding security to their product portfolio. ArSight makes software that monitors corporate networks for unusual activity, such as a hacker's attempt to break into a system.

ArcSight shares recently traded at $44.35 premarket, above H-P's offer price of $43.50 a share, suggesting some traders may be expecting or hoping for a higher bid, similar to what happened with storage maker 3PAR Inc. (PAR). The agreed-upon deal already provides a 24% premium to ArcSight's closing price Friday and a 70% premium to where it was trading a month ago.

H-P expects the acquisition to close by the end of the calendar year and doesn't see any material earnings dilution in its next fiscal year. The company is in the fourth quarter of its fiscal 2010 year. H-P shares, down 26% so far this year, added 28 cents to $38.48.

"The combination of H-P and ArcSight will provide clients with the ability to fortify their applications, proactively monitor events and respond to threats," said Bill Veghte, H-P's executive vice president of software and solutions.

ArcSight, of Cupertino, Calif., had been quietly shopping itself to a handful of big technology companies. ArcSight attracted interest from a number of companies, and bidding quickly surpassed $40 a share, people familiar with the matter said.

ArcSight, which went public in 2008, reported revenue of $181.4 million in the fiscal year ended April 30, up 33% from a year earlier. Profit for the fiscal year grew to $28.4 million from $9.9 million a year before.

The ArcSight deal continues H-P's push into software and other areas outside of its core computer-hardware businesses that began under Hurd. Software, networking, storage and services--all areas in which H-P has expanded recently--have higher margins than the company's core personal-computer and server-system businesses. H-P executives have said repeatedly that the company will continue the expansion strategy.

The deal for ArcSight is the latest episode in a month-long drama starring H-P. Last month, Hurd resigned following violations of the Palo Alto, Calif., company's code of business conduct, including failure to disclose a personal relationship with a contractor and filing inaccurate expense reports.

Then H-P launched its public bidding war with Dell for 3PAR, eventually winning it with a bid of $2.35 billion, or $33 a share, almost double the $18 a share that Dell had initially agreed to pay. Amid criticism from analysts that it was overspending on 3PAR, H-P's board announced that it had authorized the company to buy back $10 billion of its stock.

Before things had a chance to quiet down, Hurd joined H-P rival Oracle Corp. (ORCL) as co-president, a move that triggered a lawsuit from H-P arguing that the former CEO was breaking the confidentiality agreement he signed as part of his exit package.

"While such an acquisition would fit into the company's overall enterprise strategy, we believe Street sentiment would likely rather see the company get a new CEO announcement behind them and look to digest some of the acquisitions it has recently or will be completing (i.e., 3Com, Palm, 3PAR)," Stifel Nicolaus analyst Aaron C. Rakers said in a research note Monday.

Others noted the deal continues a wave of consolidation in the information technology sector.

"This purchase," Jefferies analyst Katherine Egbert said, "could spur the large software, systems and hardware vendors to assess the importance of IT security to their product portfolio, thereby possibly sparking a wave of consolidation--like what happened several years ago in the [business intelligence] and analytics area."

Last month, chip maker Intel Corp. (INTC) agreed to buy security specialist McAfee Inc. (MFE) for $7.7 billion.

Security companies have attracted interest from larger information-technology providers lately as the industry's biggest companies look to offer a wider variety of products. Software that helps companies manage data securely is especially in demand.

Egbert noted seven other security companies that could attract interest from larger tech companies. They were: Sourcefire Inc. (FIRE), Fortinet Inc. (FTNT), Vasco Data Security International Inc. (VDSI), Symantec Corp. (SYMC), Check Point Software Technologies Ltd. (CHKP), Blue Coat Systems Inc. (BCSI) and Websense Inc. (WBSN).

The analyst added, though, "we do not believe any of these vendors are an active target right now."

-By Shara Tibken, Dow Jones Newswires; 212-416-2189; shara.tibken@dowjones.com

(George Stahl, Ben Worthen and Anupreeta Das contributed to this report.)

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