The $4.5 billion acquisition of Mercury Interactive Corp. by personal computer maker Hewlett-Packard likely won't be the last big, hi-tech merger Israel sees, as local companies become increasingly attractive candidates for major deals in the industry. "The consolidations are a global trend that we are seeing impact Israel, and the Mercury deal is the most notable one to date," said Daniel Meron, vice president and research analyst at RBC Capital Markets. "There is a big pool of knowledge and know-how that has gathered in Israel in the last couple of decades where other tech companies can look to strengthen their leadership and grow into new businesses or enter new niches." Meanwhile, the HP - Mercury merger, which was signed after US markets closed Tuesday, marks the largest ever hi-tech acquisition of an Israeli company and boosts HP's Israeli employee base by some 50 percent. HP agreed to pay $52 per share for Mercury in its first major acquisition since the $18.9b. buy of Compaq Computer Corp. in 2002. The purchase is the latest in a string of Israeli companies bought by HP over the years, including last year's acquisition of Scitex Vision for $230m. and its buyout of Indigo in September 2001 for $882m. - itself a record-making deal at the time for Israeli hi-tech. When the Mercury deal closes, HP will have its largest research and development center in Israel. HP stressed that Israel's R&D capabilities was a driving factor in its pursuit of the deal, which is expected to close in the fourth quarter. "It should be clear that we bought this business because our product lines are highly complementary. It gives more value to our customers and we look at Mercury's sales and R&D capabilities as some of the leading in the industry," said David Gee, VP software at HP in a conference call. Gee noted that HP already has over 2,000 employees in Israel and the Mercury merger will add close to 1,000 more. Mercury has, in total, 3,000 workers globally. "From a software standpoint, this will be one of the largest R&D facilities of any we have anywhere in the world," Gee added. Mercury, which makes software testing solutions, will boost HP's software business, which Gee said would create "one of the world's most powerful management software companies" and send a message to competitors [such as BMC and IBM] that it intends to be aggressive in that market. HP is looking to the deal to boost its software business which it expects to grow to $2b. annual revenue as a result. The merger will stimulate revenue growth of approximately 10-15% in the first year and some 20% in fiscal 2008, HP said. HP downplayed reports that it was taking advantage of the low share price Mercury has been trading at since it became embroiled in regulatory probes over its grants of options to top executives, three of whom have left the company. As a result, Mercury has had to restate its financial statements as far back as 1998 and its shares have been reduced to trading on the Nasdaq's "pink sheets." Meanwhile, the price HP agreed to was 33% higher than Mercury's share price at the close of trade Tuesday when the deal was announced. The stock, which already was up 40% this year, in part on expectations the options scandal would make the Mercury a takeover target, rose 27% to $49.74 during afternoon trade in New York on Wednesday after the announcement. HP also downplayed its decision to give its Israel operations such a boost while fighting intensified in northern Israel. "Essentially this was a strategic business decision and there is no connection between the deal and the political situation," said Yuval Scarlet, senior VP of products at Mercury Israel. "But the timing is perfect. This country needs some good news and I think we delivered some very exciting news for the market in times when people are not so happy here." Analysts were more upbeat about the timing of the agreement. "Following Warren Buffet's acquisition of Iscar Corporation, this is another example of exerting confidence in the economy and in Israeli companies," said Richard Gussow, senior analyst at Excellence Nessuah. "To have agreed to the transaction at this time with war going on up North, is even more impressive." The deal also comes against the backdrop of a wave of recent international hi-tech mergers including a $5.4b. buyout of ATI by Advanced Micro Devices Inc. earlier this week. Analysts were confident this trend would continue. "Given the recent state of high-premium acquisitions in the software space, we would expect consolidation to continue at current valuation levels," said WR Hambrecht analyst Robert Stimson in a research note. He called the price paid for Mercury "a sizable premium." Looking specifically at the Israeli market, RBC's Meron listed M-Systems, Retalix, ECTel and TTI Telecom as companies that have been the subject of speculation as possible takeover targets, but said he was not aware of any pending deals. "A lot of Israeli companies are well entrenched and have a leading market share in their respective industries, Meron said. "I think over the next few years you will definitely see more and more consolidations in the tech industry as a whole. I think Israel is part of the bigger picture." Bloomberg contributed to this report.