Opsware

Opsware was a pioneering American software company that specialized in automating data center operations. It was founded by Marc Andreessen, Ben Horowitz, Tim Howes, and In Sik Rhee. The company’s story is a legendary tale in Silicon Valley lore, not just for its technology but for its dramatic business transformation. Originally launched in 1999 as “Loudcloud,” it was one of the first to offer computing infrastructure and services over the internet—a precursor to today's cloud computing giants. However, after going public at the height of the dot-com bubble, Loudcloud was nearly wiped out in the subsequent crash. In a daring move, the management team sold off the capital-intensive hosting business and rebranded the company as Opsware, focusing solely on selling the sophisticated automation software they had developed internally. This successful business pivot culminated in Opsware's acquisition by Hewlett-Packard (HP) in 2007 for $1.6 billion, a testament to the immense value created from the ashes of a near-failure.

The journey from Loudcloud to Opsware is one of corporate survival, reinvention, and ultimately, triumph. It serves as a powerful case study for investors on how value can be unearthed in the most unlikely of places.

Loudcloud began with a bold vision: to provide the computing power and services that internet companies needed to run their websites, a business model we now call Infrastructure as a Service (IaaS). It held its Initial Public Offering (IPO) in 2001, just as the dot-com bubble was violently bursting. As its customers—mostly other tech startups—went bankrupt, Loudcloud’s revenue evaporated, and its stock price collapsed from $6 to just $0.30. Facing ruin, the management team made a gut-wrenching decision. They realized their most valuable asset wasn't the hosting business itself, but the brilliant software they had built to manage their own complex data centers. This software, codenamed “Opsware,” was the secret sauce. In 2002, they sold the hosting business and its remaining customers to Electronic Data Systems (EDS) for $63.5 million in cash and focused the entire company on selling this software to large enterprises. The company was reborn as Opsware Inc.

The pivot was a resounding success. Opsware established itself as a leader in the IT automation market, helping large corporations manage their sprawling server farms. The market, which had once priced the company for bankruptcy, began to recognize its true worth. In July 2007, Hewlett-Packard announced it would acquire Opsware for $14.25 per share in cash, valuing the company at approximately $1.6 billion. This was a massive premium and a stunning victory for the team and the investors who believed in the turnaround.

The Opsware saga is more than just a thrilling business story; it’s packed with timeless lessons for the discerning investor.

The Opsware turnaround is a masterclass in the importance of a high-quality, resilient management team. Horowitz and Andreessen faced near-certain bankruptcy and made incredibly difficult decisions to save the company. Their ability to see the hidden value within their own company and execute a radical pivot is a rare skill. As an investor, evaluating the character and capability of leadership, especially during a crisis, is paramount. Ben Horowitz's celebrated book, The Hard Thing About Hard Things, is largely based on this experience and is essential reading for understanding the brutal realities of running a business.

Loudcloud, the services business, was failing. However, hidden inside was Opsware, a world-class software asset. Value investors actively seek these situations—where the market misprices a company by focusing on its struggling primary business while ignoring a valuable secondary asset or “crown jewel.” The key is to look beyond the headline numbers and understand the true sum of a company's parts. The lesson is powerful: what looks like a company's internal cost center might actually be its most valuable product.

The market priced Loudcloud for bankruptcy, largely ignoring the potential of its internal software. This created a massive opportunity for investors who did their homework. This illustrates core tenets of value investing:

• The market price is what you pay; the intrinsic value is what you get. The two can diverge dramatically.
• Periods of extreme pessimism, like the post-dot-com crash, can create the most attractive bargains for those willing to go against the herd.
• A company's narrative can change. An investor's job is to anticipate that change before the rest of the market does.

The sale to HP proved that the intrinsic value of the Opsware software was far greater than what the stock market had implied just a few years earlier, rewarding patient investors handsomely.