Really, Really Bad News for this Silicon Valley Giant

Margie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Silicon giant Hewlett-Packard (NYSE: HPQ) is in serious trouble.  Shares have fallen more than 10% today after the company announced an $8 billion write-down for its purchase of British software maker Autonomy last year.

HP stated: "This appears to have been a willful effort on behalf of certain former Autonomy employees to inflate the underlying financial metrics of the company in order to mislead investors and potential buyers. These misrepresentations and lack of disclosure severely impacted HP management's ability to fairly value Autonomy at the time of the deal."

8 billion

The money's down the drain. Since when did $1 billion get to be such a small amount of money?  That number has been thrown about regularly in today's market, but maybe $8 billion is still considered a lot, right?

No wonder the stock has fallen by over 50% this year.  That could have been $8 billion in dividends paid out to shareholders.  Perhaps you can tell by my tone that I am long HP.

What does Autonomy do?

Those using Autonomy's software include intelligence agencies, who use it to conduct searches through information like emails, phone calls, videos, and photos looking for patterns that merit further investigation.

While the software still has some value to HP, management was taken to the cleaners.

New financial outlook

To quote the Wall Street Journal: "The comments on the deal overshadowed H-P's earnings, which the company said included a swing to a loss following the write-down. For the fourth quarter, ended Oct. 31, HP reported a loss of $6.9 billion, or $3.49 a share, versus a year-ago profit of $239 million, or 12 cents a share. The year-earlier period included $885 million of charges tied to HP's decision to wind down its webOS device business following the acquisition of Palm Inc."


Hewlett-Packard has had a series of horrendous CEOs.  Marc Hurd absolutely gutted the company's research and development in favor of short-term profits (and his stock options), leaving HP's pipeline of new technology absolutely dry.  He also oversaw the acquisition of Palm Inc., which last year led to that $885 million in write-down charges (less than a billion, nothing right?).

And say what I will about Marc Hurd, (I don't like the guy) at least he didn't give away $8 billion in shareholder money, as Leo Apotheker did, whose rationale at the time was to get the company into a higher margin business. (He desired to jettison the company’s cutthroat PC business as well.)

Additionally, after moving over to Oracle (NYSE: ORCL) Marc Hurd was on the team considering purchasing Autonomy.  They rejected a $6 billion price, claiming the asking price to be far, far, far too much.  Then Apotheker comes in and offers $10 billion for it? Huh? How did this guy get to be CEO of this once illustrious company?

Once again, Oracle Larry Ellison comes off looking like a fox.

Where does this leave the company?

A hell of a lot more poor.  Last month HP fell under book value, after this write-down, that's obviously no longer the case. The smart money out there knew something was afoot.

Additionally, HP is experiencing diminished demand for up its once lucrative and core printing business, as documents can be signed online, and transmitted via mobile devices.  For example, if I have a Groupon coupon, I do not need to print it, I just offer the business my mobile phone to scan.

And don’t expect the PC business to turn around, ever.  More and more people are migrating to tablets and smart phones, leaving behind their dinosaur-like PC.  However, the PC will not go extinct any time soon, as content creators will need the processing power and larger screen offered for the foreseeable future.

Speaking of the PC, Microsoft (NASDAQ: MSFT) hasn't exactly set the world on fire with their recent Windows 8 release, but the system is meant to operate the PC, tablet, and smart phone, and thus still might gain traction over time.  Unfortunately, Hewlett-Packard has dumped its tablet and smart phone entries, leaving it out of these races.

The company's revenues have fallen for five straight quarters and revenues have turned from positive to negative, while total costs have increased.

Worst of all with the declining stock price, and many employee options granted by the company currently worthless, HP's engineering talent is ripe for the picking by other corporations.

Can HP be saved?

CEO Meg Whitman certainly has her work cut out for her.  She has made overtures to refinance the research and development that once made HP proud, but without new technologies, and a declining stock price, the company looks to be a takeover candidate, most likely from someone like Oracle. Would Ellison consider that a feather in his cap?

The takeaway for investors

Once again the words Warren Buffett seem to be prophetic.  One of the main criteria one uses when analyzing a company is management's track record, and how much faith he has in them.  If he deems management no good, he won't invest.

Obviously as individual investors we are not the ones conducting the interviews of potential CEOs, but nevertheless, if we are investing our hard-earned savings into a company, it would behoove us to do as much research as possible.  Anything really to avoid a repeat fiasco of my Hewlett-Packard investment. 

margiecfl is long Microsoft and Hewlett-Packard. The Motley Fool owns shares of Microsoft and Oracle. Motley Fool newsletter services recommend Microsoft. 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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