Skip to main content

PALO ALTO, Calif. (

TheStreet

) --

Hewlett-Packard's

(HPQ) - Get HP Inc. Report

decision to throw down $1.5 billion for ArcSight (ARST)

may seem like a lot of money for a

little-known firm

, but the security software maker could play a key role in the tech giant's future.

One of

TheStreet.com's

top security stocks for 2010

, ArcSight makes security management and compliance software and is

widely acknowledged as one of the hottest companies in this space.

"The acquisition is a natural step for HP," explained Forrester analyst Jonathan Penn, in an email to

TheStreet Recommends

TheStreet

. "It's a significant expansion of HP's security portfolio tangential to, and also expanding beyond, network security."

Other analysts echoed Penn's sentiments. "We believe this acquisition makes sense given HP's current networking product portfolio lacks a strong overarching security management solution," wrote Jayson Noland, an analyst at R.W. Baird, in a note released on Wednesday. "We think HP is pursuing ArcSight to deliver a comprehensive network security management console."

HP has stated its desire to challenge networking giant (and one-time partner)

Cisco

(CSCO) - Get Cisco Systems, Inc. Report

with its ProCurve products, so ArcSight looks set to be another weapon in the firm's arsenal of enterprise products.

"We view HP to be a logical suitor for ArcSight and believe ArcSight will be complementary to HP's TippingPoint network security and its systems/network management business," added Stifel Nicolaus Analyst Todd Weller in a note. "While

the deal valuation is rich, we believe the likely drivers were ArcSight's high growth rate, scarcity

of alternatives, and likely a competitive bidding process."

Security expertise is

a chink in HP's armor

, particularly at a time when tech firms are providing increasingly complex bundle of systems, security and services. By spending big bucks on ArcSight, HP is looking to boost its profile in a market dominated by the likes of

Symantec

(SYMC) - Get Symantec Corporation Report

and

McAfee

( MFE), which was recently bought by

Intel

(INTC) - Get Intel Corporation Report

for $7.7 billion.

The ArcSight deal, however, is not just about security, and comes hot on the heels of

HP's controversial $2.35 billion acquisition of storage specialist 3Par (PARS)

.

Speaking during a conference call before market open, Bill Veghte, HP's executive vice president of software and solutions, said that ArcSight fits into the company's broader enterprise strategy. "We see a market that needs a proactive, holistic, new approach to security and compliance," he said.

Veghte explained that ArcSight's security and compliance technology could be applied at the earliest stages of firms' application development, as well as supporting HP's storage efforts.

"

HP's strategy is to build, operate, secure, and store applications and infrastructure," added Pat Walravens, an analyst at JMP Securities, in a note released on Monday. "3Par fits in the store portion, and ArcSight fits in secure."

HP is also using ArcSight to tighten its links with the government sector. The software specialist,

which recently blew past analysts' first-quarter estimates,

has strong ties across the U.S. federal government and counts the

Defense Information Systems Agency

amongst its customers. These relationships could prove crucial at a time of increasing cybersecurity threats. ArcSight CEO Tom Reilly recently explained that the firm is experiencing strong growth in both its government and commercial businesses, and is now expanding internationally.

On Monday's conference call, however, HP's Veghte was also asked whether the tech-bellwether is over-paying for growth that could be achieved organically. Recent months have been marked by major HP acquisitions. In addition to 3Par and ArcSight, the company has also spent $1.2 billion on mobile device specialist

Palm.

"HP has a very good and clear M&A strategy and approach -- we will always look at whether we build or we buy," replied Veghte, somewhat defensively.

With $14.8 billion in cash and investments exiting its recent third quarter, HP clearly feels that M&A is the best way to claw share from rivals such as

IBM

(IBM) - Get International Business Machines Corporation Report

, which was also rumored to be sniffing around ArcSight.

"It's almost always the case that big companies buy rather than innovate." explained Forrester's Penn, in his email to

TheStreet

. "And HP doesn't have a rich security pedigree anyway, being more of a systems management company."

ArcSight shares have been

trading at 52-week highs this month as M&A rumors continued to swirl around the company

and surged $8.67, or 24.7%, to $43.77 on Monday. HP shares dipped 4 cents, or 0.1%, to $38.16, as Nasdaq fell 1.67%.

--Written by James Rogers in New York.

>To follow the writer on Twitter, go to

http://twitter.com/jamesjrogers

.

>To submit a news tip, send an email to:

tips@thestreet.com

.