In a bid to boost earnings, Hewlett-Packard (HP), the world's largest PC maker is acquiring UK-based software company Autonomy Corp for $11.7 billion.

Software has substantially higher margins than hardware.

 Over the last five years, Autonomy's revenue has grown at a compound annual growth rate of 55 per cent and operating profit at 83 per cent.

HP also said it is mulling options for its PC business, that could involve a spin-off, nine years after it acquired Compaq, which catapulted it to the world's largest PC maker.

The Californian company, based in Palo Alto has denied media speculation in the past that it plans to spin off or sell its personal-computer business, the world's largest and one of its biggest divisions that is also one of its least profitable.

Cambridge-based Autonomy, which has Procter & Gamble, Coca-Cola, Nestle and the US Securities and Exchange Commission and 25,000 others as its clients, is the second-largest software company in Europe.

Autonomy was founded by researchers at Cambridge University and specialises in a variety of enterprise search and knowledge management applications using adaptive pattern recognition  techniques, which can make sense of complex, unstructured information such as emails and phone calls.

The company, which has made six acquisitions since its founding in 1996, reported net income of $217 million on revenues of $870 million last year and had revenue of $256 million in the second quarter this year.

Autonomy has spent over $2 billion in acquisitions including buying Virage, NCorp, eTalk, Verity, Zantaz, Interwoven, Microlink, CA Technologies and Iron Mountain Digital.
Autonomy currently has a market cap of $7 billion and has been profitable in every quarter for the last five years with solid cash generation and no net debt.

Despite being the largest software firm in the UK, few people have ever heard of the company, although it has most of the world's leading companies as its clients such as AOL, BAE Systems, BBC, Bloomberg, Boeing, Citigroup, Coca Cola, Daimler, Deutsche Bank, Ericsson, FedEx, Ford, GlaxoSmithKline, Lloyds TSB, NASA, Nestlé, the New York Stock Exchange, Reuters, Shell, the US Department of Energy, the US Department of Homeland Security and the U.S. Securities and Exchange Commission.

Under the deal that has been approved by the board of both companies, HP will pay £25.50 ($42.11) per share in cash, a premium of 64 per cent to Autonomy's closing price on 17 August.

Dr Mike Lynch, founder and CEO of Autonomy, who owns over 8 per cent of the company, will make around £500 million from the transaction, while its UK employees will take £30 million on share options.

Dr Lynch will continue to lead Autonomy, which will operate as a separate entity of HP, and he will report to its president and CEO, Leo Apotheker.

''Autonomy presents an opportunity to accelerate our strategic vision to decisively and profitably lead a large and growing space,'' said Apotheker.

''Together with Autonomy, we plan to reinvent how both unstructured and structured data is processed, analyzed, optimized, automated and protected. Autonomy has an attractive business model, including a strong cloud based solution set, which is aligned with HP's efforts to improve our portfolio mix. We believe this bold action will squarely position HP in software and information to create the next-generation Information Platform, and thereby, create significant value for our shareholders,'' he added.

The acquisition would be HP's biggest software acquisition in recent times after it purchased IT services company EDS in 2008 for $13.9 billion.

It would also be the second largest deal is in the software industry after computer-security titan Symantec Corp acquired Veritas Software in 2005 for $13.5 billion.
HP became a powerhouse in computer technology after it had acquired its major rival Compaq Computer in a $25 billion deal in 2002.

HP's software division, which accounted for 2.4 per cent of its $32.4 billion revenue in its latest quarter, has acquired 15 software companies from 2005 through 2010.

Although its PC business is HP's biggest revenue earner, it has become the least profitable since growth has stalled with the arrival of tablet-style computers like Apple's iPad and Samsung's Galaxy. However, sales of its own TouchPad have been disappointing, but the company has repeatedly discounted it.

In the second quarter, HP's PC business saw sales decline by 5 per cent to $9.4 billion, which is still about a third of the company's quarterly revenue.

While releasing its third quarter results late last night, HP said as part of the transformation of the company, it would explore strategic alternatives for its Personal Systems Group, which would include a full or partial separation from HP through a spin-off or other transaction.