The acquisition, rumored for months, will allow HP to combine its OpenView enterprise management software business with Mercury Interactives market leading application development testing tools and applications management software.
Combined, the two businesses, once the acquisition closes in the fourth quarter of this year, will create a $2 billion software business for HP.
Together the OpenView and Mercury product lines will give HP "end-to-end management of the entire IT lifecycle," said Mark Hurd, HP president and CEO, on a conference call.
"This allows our customers to use IT as a business enabler, rather than serving as an obstacle. [Together] we can build an ERP-like capability for the management software market," he added.
Despite Mercury Interactives recent stock options backdating scandal and the fact that the SEC investigation into those practices is not yet completed, Hurd said there are no unforeseen liabilities that it will take on, and that HP struck a fair deal for Mercury.
"We are comfortable with our due diligence. We believe the issues are limited to those disclosed," he said.
Of the 33 percent premium HP is paying at $52 per share, he said, "The premium accurately reflects the value of the company."
HP in other software acquisitions has demonstrated a willingness to take such risks, according to Ray Paquet, managing vice president at Gartner in Lowell, Mass.
"Remember, this is the company that bought Peregrine, and they werent finished with the SEC investigation [when the acquisition was done]. And Peregrine was a much more significant SEC investigation than Mercury is so far, although nobody really knows for sure yet."
Mercury early this year was delisted from NASDAQ after it failed to meet a deadline for restating its financial results, due to its stock option grant irregularities.
Late in 2005, three executives, including Chairman and CEO Amnon Landan, resigned over the scandal.
Mercury Interactive will become a part of the HP Software business when the acquisition is complete and will report to Tom Hogan, senior vice president of software.
Mercury Interactive CEO Tony Zingale said in the conference call that he "will become part of the organization going forward in the short and medium term."
Officials say there is no overlap between product lines, and that the two are highly complementary.
OpenView brings to the combination strength in systems, network and IT service management, while Mercury contributes application management and delivery, IT governance as well as service-oriented architecture governance.
"Its a good fit actually. There is some overlap, but its not significant," Paquet said.
"Where there are overlaps between the companies, the decisions [on what to cut] are fairly obvious," he added.
How this affects the competitive landscape with traditional HP OpenView competitors such as CA, IBMs Tivoli unit and BMC Software remains to be seen.
CA and BMC Software "are concentrating on helping customers get more from existing IT management technologies today, and they are focusing their efforts on helping their customers understand how to apply their business service management and solutions with prepackaged automated workflows," said Rich Ptak, principal at Ptak, Noel & Associates in Amherst, N.H.
Editors Note: This story was updated to include additional information and comments.