Hewlett-Packard: Four Big Mistakes
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How did tech titan Hewlett-Packard (NYSE: HPQ) lose over 70% of its market capitalization in just over two years? The Palo Alto, California-based company, once considered a bellwether of the tech industry, has slowly withered after a series of jarring leadership changes, expensive acquisitions and poorly executed business decisions. Just how bad has Hewlett Packard fared over the past year? Let’s take a look at HP’s 12-month performance vs. Dell (NASDAQ: DELL), Lenovo (PINK:LNVGY) and Apple.
Source: Google Finance
In my humble opinion, four major mistakes over the past two years crippled Hewlett-Packard. Although each of these events have been well documented in financial media, it’s worth connecting all these dots just to see how this row of dominoes collapsed.
Mistake #1: Fire Your CEO at the Apex of His Popularity
There’s no question that HP started its downhill slide with the departure of popular CEO Mark Hurd, who had been regarded as the turnaround force at the computing giant. Mark Hurd’s aggressive cost-cutting initiatives and workforce reductions, combined with steady and safe product launches, contributed to the stock’s 130% surge between 2005 and 2010.
Under Hurd’s leadership, HP claimed the top spot in laptop computer sales in 2006 and desktop computers in 2007. The New York Times lauded him, stating that Hurd “pulled off one of the great rescue missions in American corporate history, refocusing the strife-ridden company and leading it to five years of revenue gains.”
Yet at the peak of his popularity in August 2010, HP’s board forced him to resign, alleging that he had an improper relationship with a female contractor at HP which led to irregularities in his personal expense account.
Hurd didn’t stay unemployed for long. Oracle (NYSE: ORCL) CEO Larry Ellison, a close personal friend, immediately swooped in and gave him a top position at his company - one of HP’s biggest rivals in the cloud computing and enterprise data storage field.
Ellison described Hurd’s dismissal by HP as “the worst personnel decision since the idiots on the Apple board fired Steve Jobs.” Ellison criticized HP’s “long list of failed CEOs” and praised Hurd for “doing a brilliant job reviving HP to its former greatness.”
Mistake #2: Buy More Stuff to Compensate for an Absent CEO
Without a proper CEO appointed after Hurd’s abrupt dismissal, HP then engaged its longtime rival Dell in a bidding war for data storage company 3Par. In September 2010, HP acquired 3Par for $2.35 billion, shelling out a whopping 200% acquisition premium that shocked many analysts and investors.
If HP’s intention was to distract investors with a shiny new business and promises of future growth, then it failed. Some analysts believe that Dell, knowing that it would be outbid, baited HP into overpaying for 3Par, which subsequently had to pay Dell $72 million to break its initial merger agreement.
Mistake #3: Hire a Controversial New CEO Who Tries to Dismantle the Company
While HP investors were still scratching their heads over the 3Par deal, the board of directors appointed Leo Apotheker - the former co-CEO of German software company SAP (NYSE: SAP) - as the new CEO. Apotheker had served as the head of SAP for two years before being forced to resign.
Rather than adjust his leadership style for HP’s delicately balanced business model of personal computers, imaging hardware, corporate data storage and IT services, Apotheker started an ill-fated crusade to transform HP into an enterprise software company resembling his former employer, SAP.
On paper, Apotheker’s transition from lower-margin hardware sales to higher-margin data services could have succeeded. After all, IBM (NYSE: IBM) successfully sold off its personal computing unit to Lenovo in 2005, and channeled its efforts into producing industry standard corporate servers instead. IBM’s stock has more than doubled since the turnaround effort.
Unfortunately, Apotheker appeared dead set on transforming HP into SAP overnight. In August 2011, Apotheker announced that he would discontinue HP’s WebOS-based smartphone efforts and the TouchPad - HP’s fledgling tablet - thus wasting the $1.2 billion that the company had just spent acquiring Palm under Hurd’s tenure.
Apotheker then announced that HP would spin off its PC business - its largest business segment - in an effort to pursue a pure ESSN (Enterprise Servers, Storage and Networking) business model. In other words, he wanted HP to change into a business that he was more familiar with - instantly.
Finally, to drive his point home to the board and investors, Apotheker had HP acquire British software giant Autonomy for $11.1 billion - a 58% acquisition premium - to boost HP’s presence in the enterprise data storage field. Although the board approved of Apotheker’s radical initiatives - unlike investors, who were fleeing - they were reportedly frustrated by his inability to execute plans quickly and effectively.
Mistake #4: Fire Your CEO Again & Reverse Your Previous Decisions
Less than a year after appointing Apotheker, HP’s board grew weary of his radical changes and his inability to execute them properly. In September 2011, they fired him and replaced him with former eBay CEO Meg Whitman.
Whitman reversed Apotheker’s decision to spin off HP’s personal computer business, and renamed its idle WebOS unit “Gram,” while creating a new open source version of the operating system. HP has been secretive regarding its intentions for Gram, but industry watchers believe that HP could be relying on developers to revive the nearly defunct operating system.
In May 2012, Whitman announced that she would lay off 27,000 employees in a massive restructuring effort. Despite maintaining the status quo for HP’s business model, which is still being rapidly eroded by smartphones, tablets and other hybrid devices, Whitman has managed to instill a degree of investor confidence that was non-existent under Apotheker’s short and stormy reign.
However, HP has yet to see Whitman’s efforts pay off. In its most recent quarter, HP reported a GAAP adjusted loss of $6.41 per share, down from a profit of $3.32 per share in the prior year quarter. Revenue slid 7% to $30 billion.
Whitman blamed Apotheker’s $11.1 billion acquisition of Autonomy as the primary reason for HP’s drop in earnings per share. HP now claims that it was misled into overpaying for Autonomy, which it claims engaged in accounting malpractices to inflate its numbers in an effort to force a higher bid. HP took an $8.8 billion write off in its most recent quarter to review and repair Autonomy’s “serious accounting improprieties.” The U.S. Department of Justice has initiated a probe into HP’s claims, but a quick resolution of this debacle seems unlikely. HP has now formally sued Autonomy and its auditors, KPMG and Deloitte, for compensation.
Time is running out for HP. The company should be accelerating an initiative to take advantage of Windows 8 by introducing a viable tablet or hybrid device, but it is stuck trying to undo the self-inflicted damage from the dismissal of Hurd and appointment of Apotheker. HP shareholders don’t need the company to sue its own subsidiary. What it needs is a road map for future growth. Let’s see what analysts are expecting from HP.
Fiscal 2012 Earnings Growth
Fiscal 2012 Revenue Growth
Expected Fiscal 2013 Earnings Growth
Expected Fiscal 2013 Revenue Growth
The bar has certainly been set low, but Wall Street still expects HP to grow its top line through 2013. Blaming Apple and Google for all its problems, as Dell has also done, won’t work for much longer. HP would benefit strongly from a business shift towards its ESSN segment - which generates 17% of its annual revenue - but an increasing number of investors are questioning the future of aging x86 servers in the future. In other words, HP needs to stop bickering, start planning and show investors that the grown ups have come home.
Leo Sun owns a long position in Apple. The Motley Fool owns shares of Apple, International Business Machines, and Oracle. Motley Fool newsletter services recommend Apple and 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!