Hewlett Packard’s $10 Billion Gamble
Karen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
New CEO Meg Whitman’s job is to take a PC manufacturing dinosaur once synonymous with engineering excellence and pull it out of a death spiral wrought by poor management decisions and fiscal irresponsibility. One of Ms. Whitman’s most urgent tasks is to sit down with the board of directors and map out a comprehensive strategy for the company.
Hewlett Packard (NYSE: HPQ) never could decide whether it wanted to be a hardware or software company and that indecision showed in its terrible acquisitions. In 2001 Hewlett Packard was getting squeezed out of the PC business by IBM (NYSE: IBM) on the high end and Dell (NASDAQ: DELL) on the low end. Under Chairman and CEO Carly Fiorina’s leadership, HP bought Compaq Computers in 2002 for $25 billion. But the two companies had significant overlap and the saturated PC market had slowed, leaving Hewlett Packard still unable to compete with their rivals.
In April 2010, CEO Mark Hurd decided HP should move from PC manufacturing to the fast growing mobile device market and bought the nearly bankrupt Palm for $1.2 billion. The idea behind the acquisition was to use Palm’s WebOS in HP smartphones and tablets. But Apple (NASDAQ: AAPL) and Google (NASDAQ: GOOG) already owned those markets, and Palm’s WebOS couldn’t compete with the iOS or Android. Hewlett Packard scrapped Palm, along with the $1.2 billion acquisition cost, a year later.
CEO Leo Apotheker decided it was time to compete with IBM again and in August 2011, Hewlett Packard purchased Autonomy, a stand-alone niche software company, for $10.3 billion. Mr. Apotheker wanted to phase out low profit margin PC manufacturing in favor of the more lucrative cloud computing, software development and connectivity services. Since the acquisition, the company has a quarterly earnings growth rate of -30.90% and the stock price has fallen from an August 2011 high of $35.50 to currently trading range of $19.00-$21.00.
Hewlett Packard’s expensive acquisitions did nothing to enhance the companies’ products. But how would their competitors have spent Hewlett Packard’s $11.5 billion? In July 2012, Dell spent $2.4 billion to acquire Quest Software, a company whose software products are already strongly aligned with Dell’s. In December 2011, IBM bought Demand Tec for $440 million to expand IBM’s Smarter Commerce Initiative division. Demand Tec adds cloud based analytical software for Big Blue’s business clients.
For only $1 billion more, Google acquire Motorola Mobility for $12.5 billion in August 2011 and, along with Motorola’s mobile device manufacturing for Android and Google TV, also got Motorola’s considerable patent portfolio. And in April 2010, Apple spent a scant $200 million to $250 million to acquire Siri for iPhones.
CEO Whitman is leading a company saddled with a bloated payroll, diminished market share and falling stock price. Approximately 27,000 employees are being laid off, a move which, when combined with other cost cutting measures, should save the company approximately $3.5 billion dollars. Ms. Whitman continues the trend to move Hewlett Packard out of hardware manufacturing business and into mobile computing and cloud software.
Hewlett Packard’s second quarter April 2011 revenue declined 31% from $2.3 billion to $1.6 billion in April 2012. Ms. Whitman needs to bring all the experience she acquired during her tenure at DreamWorks and Procter & Gamble and as CEO of Ebay during their expansion period to resolve Hewlett Packard’s formidable woes. With the company lurching from hardware to software, the $10.3 billion paid to buy Autonomy is one acquisition bet Hewlett Packard can’t afford to lose.
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