New acquisitions heat up the move toward usage-based service

February 16, 2004

The slow but inexorable movement of companies providing pay-as-you-go computing services could soon turn into a stampede. Last week, behemoth Hewlett-Packard snapped up IT automation companies Consera and Novadigm. It has now plucked five companies in the utility space in the last six months.

The acquisitions pave the way to HP’s grand utility vision of the future, which it calls the Adaptive Enterprise. The goal is nothing less than the complete automation of a company’s routine business processes. IBM, Sun Microsystems, and Microsoft all have their own renditions. IBM stepped up its efforts in May, purchasing ThinkDynamics, a maker of software that automatically provisions servers, storage and software based on changing demand. Sun picked up CenterRun, a company that automates the configuration and deployment of web applications in enterprise data centers in August.

The idea behind utility computing – sometimes called adaptive, or on-demand, computing – is to offer computing power as a usage-based service, like water or electricity. “The utility computing space is very strategic to the big players, says Cameron Myhrvold, a managing director at Ignition Ventures and Consera board member. “HP, IBM, and Veritas want to own the technology because they want to own the space.” The technologies created by Consera and Novadigm build up HP’s OpenView platform, a suite of software products. “OpenView needed configuration management,” says Ron Lissak, managing partner and founder of Catapult Advisors, an investment bank that specializes in software mergers and acquisitions. “They still need several pieces, which they can either buy or build. Look for them to do both.” Consera, a startup that raised $8.5 million from venture capital firms Ignition Ventures and Matrix Partners, originally sought to partner with HP. Consera’s software functions as the nerve center of an IT infrastructure, monitoring and orchestrating other applications. “HP realized the power of the technology and it made more sense to acquire it,” says Nora Denzel, the senior vice president of HP’s global software business. HP acquired Consera for an undisclosed amount. Novadigm focuses on automating software functions. Software upgrades and patches, among other things, would no longer need to be handled manually. HP will pay $120 million in an all-cash deal for the company, which went public in 1995. In the last six months, HP has acquired Baltimore Technologies Identity Management Solution, Talking Blocks, and Persist Technologies. Companies that automate data centers alleviate a big pain point for HP customers. “This gives HP a more complete tool set to respond to IBM’s autonomics efforts,” says Rick Sturm, an analyst at research firm Enterprise Management. “These developments are important for anybody trying to move into the automatic, adaptive operations space.” HP’s rivals will also be on the prowl for companies in the utility computing area. “Other companies with grand visions will have to follow suit, which means either building the pieces or buying them,” says Glen O’Donnell, an analyst at IT consultant the Meta Group. He predicts more mergers and acquisitions in the sector. As growth slows in their traditional businesses, established players are seeking new, high-growth markets. Utility computing is winning favor. IBM already provides utility services with its On-Demand Computing offering, while Microsoft is touting its Dynamic Systems Initiative, and Sun has its N1 platform. Because of the sprawling, interconnected nature of the technology, consumers must make their first choices wisely. Sharing data between applications will be critical, which means a single vendor can have a lock on certain platforms. “If an organization uses the HP or IBM approach, it will tend to be a commitment,” says Mr. Sturm. To get an early advantage, vendors are focusing on areas using too much time on processes that could be automated. Storage and security functions are two frontrunners. HP will have to work hard to catch up to companies like IBM, whose expansive consulting business gives it an edge in selling and configuring its systems. HP has earmarked $1 billion for acquisitions, and hopes that a spending spree can even the odds. But the recent acquisitions are far from satiating HP’s hunger. They are more like appetizers, whetting the palate for the meal to come.



Value Meals
Big corporations are beginning to harvest small-size utility companies to enhance their offerings – a few look particularly ripe for the picking.

Sycron
Location: San Mateo, California
Founded: December, 1998
Employees: 33
Financing: $11 million, 3 rounds
Investors: Dot Edu, First European American Ventures, Sigma Partners Note: Currently raising a $10 million round that it hopes to close in the second quarter. A corporate investor in the round could be an indication of where the company is going.

Cassatt
Location: San Jose, California
Founded: September, 2003
Employees: 24
Financing: N/A
Investors: Hewlett-Packard, Quatris Fund, Warburg Pincus Note: BEA co-founder Bill Coleman is at the helm with HP already an investor.

MetiLinx
Location: San Mateo, California
Founded: January, 1999
Employees: 11
Investors: Syntek Capital
Financing: Spun out from Mariner Systems, profitable from inception Note: Impressive roster of customers includes Cisco, Compaq, and JP Morgan among others with a number of European banks in trials.