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HP Bets $1 Billion to Build New Cloud Services Brand

The computing giant is scrambling to build a business around cloud services, but it may be too little too late.


It was more than three years and one CEO ago that computing giant Hewlett-Packard vowed to become a meaningful player in the field of cloud computing services. Today, the company renewed the promise once again with a pledge to invest $1 billion over two years to build new data centers, staff up and boost its service offerings.

Helion, which CEO Meg Whitman will present in a webcast later today, is HP’s plan to double down on OpenStack, the open source cloud computing operating system that was first developed at NASA. HP will offer two flavors of OpenStack: One, called Community, will be free and suitable for what HP calls “basic production workloads.” Later on, a commercial edition will include a full range of HP-built management tools.

For HP, which is playing catch-up to faster-moving rivals like Amazon, Google and even IBM, going big on cloud services is vital to a fully developed IT services portfolio. As big companies have sought to save money on their computing infrastructure, they have increasingly turned to third parties like Amazon, IBM and Rackspace to operate leased computing infrastructure. As a result, they’ve bought less of the computing hardware that companies like HP and IBM would traditionally sell them, causing a fundamental shift in the balance of power in enterprise computing.

Hardware vendors that once dominated the corporate computing food chain have been forced to scramble as cloud service providers like Amazon and Google built their own custom hardware with the help of lower-cost contract manufacturers like Quanta and SuperMicro. Last week, HP said it would team up with Foxconn on a plan to build stripped-down servers aimed at winning new business from cloud companies.

Last summer, the research firm Gartner listed HP as a “niche player” on its closely-watched Magic Quadrant. Its one saving grace was that its position on the graph was slightly higher and more to the right than that of IBM — but IBM’s position on the list didn’t account for its combination with SoftLayer, the Texas-based cloud services player that Big Blue acquired last summer for about $2 billion.

If HP’s announcement feels a tad familiar, it’s because it should. IBM has similarly scrambled to raise its profile in the cloud business. After closing the SoftLayer deal last summer, it pledged early this year to invest $1.2 billion to build out its data center footprint and flesh out its range of cloud services. It has since argued that it is, at least on a revenue basis, the biggest cloud company in the world, though that’s a dubious argument.

Coming back from behind will clearly take a bigger move for HP. It will need an acquisition. With its debts paid off (it still maintains a long-term debt as part of its finance unit) and $16 billion in cash on its balance sheet, HP has tentatively signaled that it may buy something as soon as this year. It could conceivably opt to echo IBM again and buy a cloud infrastructure player in order to up its game.

There’s at least one potential target: Since an unexpected management shakeup, shares of Rackspace have come down to their lowest level in four years, and its market cap as of Tuesday was below $4 billion. In 2013 it ran a profit of nearly $87 million on $1.5 billion in revenue. It has also been a big backer of the OpenStack operating system.

The trouble is that Rackspace has been a perennial subject of takeover rumors and speculation, and that has played a role in inflating its value. It currently trades at a valuation of more than 45 times the trailing year’s earnings. Compare that to Verizon, which in 2011 paid $1.4 billion for Terremark, a money-loser at the time. That deal valued Terremark at about four times its forward revenue. Valued that way, Rackspace, currently trading at just over two times forward revenue, might appear a bargain.

Still, having overpaid for Autonomy to the tune of about $8 billion in 2011, HP would have a hard time defending a deal for Rackspace even after its recent declines. And aside from some smaller independent players — Saavis was acquired by CenturyLink in 2011 for $2.5 billion — there aren’t any others worth HP’s attention.

And that makes it hard for HP to move the needle with this announcement. A billion dollars over two years may sound like a lot, but in context it isn’t. As The Wall Street Journal observed this morning, Amazon and Microsoft spend as much as twice that every quarter on their cloud infrastructure, either building data centers or buying the real estate where they’re going to be built. If HP is serious about becoming a cloud player, it will need to make a more meaningful investment.

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