An Inside Look at H-P’s Problems

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It’s “the single biggest challenge facing Hewlett-Packard (NYSE: HPQ),” said CEO Meg Whitman.

Problems Abounding

H-P is in deep.  The company faces economic headwinds, strong competition, high debt, decreasing earnings, failed acquisitions, and torn strategy. 

Can it recover?  If there is a chance, H-P will first have to overcome numerous obstacles.

Employee Morale

Meg Whitman says that executive churn at H-P “has caused multiple inconsistent strategic choices” and “significant executional miscues.”  In the last eight years, four CEOs have led the company, each bringing his or her own stable of executives. 

But the CEO job is not the only “revolving door.”  More than 24 employees ranked Sr. Vice President or higher have left.  This has led the company to mish-mash strategies and to (try to) implement unclear visions.  Together, these make up what Whitman calls the biggest challenge facing H-P.

The same goes for the rank-and-file workforce.  Whitman plans to lay off 29,000 of H-P’s 349,000 workers, bringing further uncertainty and possible dissension to the company.  The layoffs will go a long way in bringing down fixed costs, which H-P must do, but company morale will continue to erode.

Cash Struggles

H-P has just $9.5 billion of cash on hand, compared to $24 billion of debt.  In 2007, however, the company had $11 billion in its coffers and owed just $5 billion.  The Wall Street Journal explains where the cash went:

In four of the next six fiscal years, however, H-P spent close to twice the amount of its free cash flow on acquisitions, such as the 2008 deal to buy outsourcing giant EDS and share repurchases.

H-P wrote off $8 billion of its $13 billion investment in EDS; it shut down its Palm unit after acquiring the company; and it says that revenues are already declining at Autonomy, its $10 billion, 2011 acquisition.

Fierce Competition in Servers

Many of H-P’s businesses are threatened by fierce competition.  The high-end blade server business is one of them.  Oracle (NYSE: ORCL), IBM (NYSE: IBM) and Cisco (NASDAQ: CSCO) present ever-constant threats in the server space.

Looking at the firms' websites for varying types of blade servers, each firm puts together a strong product.  However, each firm displays each product a little bit differently on its sales page.  Oracle’s site, for example, presents a more streamlined page, but gives potential buyers the opportunity to download numerous whitepapers.  It calls these whitepapers “Tools for Evaluating.”  Oracle also provides a slick 3-D demo of the server that allows potential buyers to view the high-end item up-close.

IBM is heavy on features, though it gives a Virtual tour and a nicely made Product demo.  The product page is for the IBM BladeCenter HS23.  One feature of this specific server, according to the product demo, is that it runs using Intel’s (NASDAQ: INTC) Xeon E5-2600 processor.  The chip gives up to a 62% performance increase.  As an aside, Intel is in a strong position in the hardware value chain – relative to the server makers – because it sells the important chips that are a major component of these types of servers (a profit model known as “Value chain position profit”).

Cisco’s site actually surprised me.  Cisco’s sales page has less product information, but far more call-to-action elements that allow a prospective customer to initiate contact with a salesperson.  Cisco also allows prospects to click through various products easily, and it drafted a few whitepapers.

H-P, however, does a fine job explaining the benefits of its servers.  For example, H-P has whitepapers covering “Business Value of Blades,” “Virtualizing on Blades,” and “Gartner: HP Blade Servers Lead the Market.”

Short-Term Focus

H-P trimmed expenses during Mark Hurd’s CEO tenure, notably cutting R&D from $3.5 billion to $3 billion.  Cost-cutting may have appeared good at the time, especially in light of H-P’s flurry of acquisitions.  However, for a fast-moving tech company, business investment is not a place to skimp.  As a result, H-P could find itself with a growing number of outdated products in a world where competition is growing increasingly fierce. 

Potential Turnaround?

Meg Whitman is in the unenviable position of having to cut costs and turn around a company with little cash, large debt, and mounting competitive pressures.  Can H-P make the changes necessary to succeed?

If you think so, then perhaps now could be a time to scoop up H-P on the cheap, with its stock price in continual decline and with Whitman not projecting serious growth until 2015.  But if you think that H-P’s ailments are here to stay, then consider avoiding this shaky company.

ChrisMarasco has no positions in the stocks mentioned above. The Motley Fool owns shares of International Business Machines and Oracle. Motley Fool newsletter services recommend International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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