Is Hewlett-Packard’s Planned Acquisition of Aruba Networks a Wise Move?

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By Jacob Maslow

Hewlett PackardHewlett-Packard (NYSE:HPQ) recently announced that its talks to acquire network products company Aruba Networks (NASDAQ:ARUN) have succeeded. Aruba Networks has agreed to be bought out by the computer and printing giant. All told, the deal is valued at around $3 billion. Hewlett-Packard will be forking over $24.67 cash for each Aruba share. When news hit the market that the companies were in talks for acquisition, Aruba Networks stock skyrocketed 35% last week. Well, it appears that the run-up was well advised because the deal has panned out. While this deal is obviously a great windfall for Aruba Networks shareholders, is it a great deal for Hewlett-Packard shareholders?

You have to understand that whenever a company reaches the size of Hewlett-Packard, it will be under a tremendous amount of pressure to show upward growth. This pressure can be quite crushing. You have to understand that if you want to maintain your stock value at a certain market valuation, you have to continuously grow the company. You have to continuously justify the upward appreciation of the company stock. There is also the iron rule of the price-per-earnings ratio. The larger a company gets, the harder it would find itself resisting the downward pull of the price-per-earnings ratio. Companies are under a lot of pressure to grow their way to higher stock prices.

There are many ways to do this. Most people think that these companies would invent something in-house, create new business lines, and grow that way. While that is the commonly held view of corporate growth, that is actually just one part of the wide range of options corporate giants have in terms of market valuation justification. Increasingly, large public corporate entities are opting to buy their way into growth. They would analyze the market and look for a fast growing market segment that is dominated by a smaller player. They would then buy out that player and, by extension, buy their way into a growing space.

Make no mistake about it. Hewlett-Packard definitely needs to do this because its consumer business lines are slowing down. While its corporate lines show a lot of promise, they still need a lot of growth. This move to buy Aruba Networks makes a lot of sense within this broader context.

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