How the HP-Aruba Networks Deal Impacts HPQ Stock

Hewlett-Packard Company (NYSE:HPQ) and Aruba Networks, Inc. (NASDAQ:ARUN) agreed to terms today on a $2.7 billion buyout aimed at beefing up HP’s exposure to mobile infrastructure. How can investors expect the deal to affect HPQ stock price going forward?

how the hewlett packard company aruba networks inc deal impacts hpq stockHPQ stock, after soaring more than 40% last year, was off more than 13% in 2015 through the end of February. Shares of the PC-maker suffered a major setback last week when light first-quarter revenues marked a disappointing beginning to a very important year in HP’s turnaround process.

Where Aruba Networks, Inc. (ARUN) Fits in at HPQ

Under terms of the acquisition, HPQ will pay $24.67 in cash for each share of Aruba Networks, a detail that sent the ARUN stock price down modestly this morning. Wall Street was anticipating the deal and bid up the price of ARUN stock after Bloomberg reported the two companies were in talks last Wednesday.

The pickup makes a lot of sense for Hewlett-Packard, which — like Yahoo! Inc. (NASDAQ:YHOO) and other major Silicon Valley players — is trying to tap into the lucrative, high-growth area of mobile.

Aruba Networks makes both the hardware and software required to get Wi-Fi networks for corporate clients up and running. With exposure to emerging markets like China and Qatar, some of ARUN’s biggest clients are hotels, shopping malls and universities. With HPQ stock set to split into two divisions later this year — one focusing on corporate customers, the other on PCs and printers — the Aruba acquisition should bolster the new, enterprise-facing company that CEO Meg Whitman will helm upon its eventual spinoff.

The Impact and Concerns from HPQ-ARUN

It’s a savvy move for HPQ stock, which hasn’t gotten much of a financial boost from its networking group; the networking division on the whole contributed just 2.1% to the company’s sales in HP’s fiscal first quarter.

While the addition of ARUN stock isn’t insignificant, the $2.7 billion purchase won’t immediately move the needle for the HPQ stock price. Analysts expect Hewlett Packard to report $105 billion in revenue this fiscal year, while Aruba Networks should do just over $860 million in sales in fiscal 2015.

That said, when the HPQ stock split goes into effect later this year and the company is split into roughly equal halves, ARUN will have twice the impact it did on the larger, single company.

Longtime HPQ stock investors might find themselves skeptical of acquisitions after the epic and painful blunder known as the Autonomy acquisition. Just a year after snapping up search software developer Autonomy Corp for $10.3 billion (a 64% premium at the time) in 2011, HP admitted defeat and took an $8.8 billion writedown on Autonomy, chalking the staggering losses up to fraudulent accounting at the company.

Well, there’s good news for you worry-warts out there: The ARUN acquisition isn’t anything like that ill-fated Autonomy buyout. In 2011, HP was, according to InvestorPlace Editor Jeff Reeves, “everything that’s wrong with corporate America right now — stupidity, a lack of innovation, bloated operations and no leadership.”

Years later, with Meg Whitman at the helm and HPQ in year four of a five-year turnaround plan, HP is a very different company. I’d expect Aruba Networks to be moderately accretive, but not a game-changer, for the HPQ stock price in the years to come.

As of this writing John Divine held no positions in any of the stocks mentioned. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.

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