When Meg Whitman Met the Tiger
Kyle is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Have you ever wondered why tigers have stripes? Tigers have stripes because many of the animals that tigers eat – deer, moose, water buffalo, antelope – are either completely color blind or can only see certain colors. An antelope, for example, might catch the scent of a carnivore in the air, but it won't be able to see it until it moves: a tiger's vertical stripes look like ordinary bands of light and shadow in the tall grass.
Can you see the tiger?
If Meg Whitman's accusations are true, then Hewlett-Packard (NYSE: HPQ) is now one of a growing number of high-profile victims taken in by M&A predators camouflaged by creative accounting. On Tuesday, Nov. 20, HP reported a write-down of $8.8 billion on a company HP acquired only last year for $10.2 billion - the Cambridge, U.K-based multinational enterprise software company Autonomy.
According to Forbes staff writer Daniel Fisher, HP's management was apparently taken in by one of the oldest tricks in the book: Make customers an offer they can't refuse on a low-margin product like hardware, but enter the order into the accounting books as the sale of a high-margin product, like software. Then go hunting around for a low-margin, cash-rich company to buy you out.
Here's your pitch:
"Our new software package is red-hot! Look at that top-line growth! With your distribution network and our product, we're going to be bigger than the Beatles!"
Call it the Fountain Of Youth Gambit.
For HP – a company anchored to the lucrative but dying PC platform – Autonomy was a way to recoup ground the company had lost by the commoditization of the PC and the paradigm shift to mobile. HP's laundry list of high-profile corporate clients would provide the perfect springboard for Autonomy's data mining capabilities.
HP isn't the first large-cap company to blow its toe off trying to buy its way out from under. Microsoft's (NASDAQ: MSFT) $6.2 billion acquisition of the online advertising company aQuantative was supposed to take the fight to rival Google by allowing Microsoft to serve up millions of ads all over the web.
While aQuantative wasn't a due diligence failure on Microsoft's part – Redmond simply hadn't thought the matter through when it came to integration with the company's existing product suites – the epic fail sprang from the same root cause as Hewlett-Packard's current woes: a cash-flush company tries to steal a march on the competition by buying up a “hot” new property that has nothing to do with the company's core competency.
Sometimes, even healthy companies are tempted to cook the books if it means getting a deal done. In 2002, AOL (NYSE: AOL) was America's #1 ISP. Nevertheless, AOL management inflated the company's sales figures via “round-trip” (or “Lazy Susans”) transaction accounting in order to seal a merger-of-equals with media conglomerate Time Warner (NYSE: TWX). It took Time Warner executives ten months to wrest control of the company back and spin off AOL.
Though AOL was already an established household name rather than an "up-and-comer," the pattern remains the same. Time Warner executives were afraid that their sprawling media empire would be outflanked by the Internet. AOL's then-COO Bob Pittman played those fears like a fiddle by offering Time Warner a turn-key solution to avoid extinction:
"All you need to do is put a catalyst to [Time Warner], and in a short period, you can alter the growth rate. The growth rate will be like an Internet company." (emphasis mine)
Hewlett-Packard started out life as a nimble, one-car garage start-up in Palo Alto. If Whitman wants to restore HP to its former glory as the founder of Silicon Valley, she's going to have to come to grips with the fact that there's no magic bullet for growth. A rich old company can't become a young company through acquisition, any more than a rich old man can become a young man by dating a woman half his age. Youth isn't like cooties. It doesn't rub off on you.
Let the lawsuits begin!
FatalX has no positions in the stocks mentioned above. The Motley Fool owns shares of Microsoft. Motley Fool newsletter services recommend Microsoft and Time Warner. 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!