HP vs. Autonomy: Spilled Milk Meets Mop

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

For one reason or another, I’ve pounded the pavement all year coming to the defense of Hewlett-Packard (NYSE: HPQ) even though I no longer own the stock.  I cringed when the company announced last year that it had acquired British software maker Autonomy for $11 billion. It was a disaster in the making. But I remained loyal.

Going from bad to worse

Paying an 80% premium above fair market value was a hefty price for (in my opinion) an unproven company. Plus, it made even less sense knowing that rival Oracle (NYSE: ORCL) turned down a similar deal for a company that specialized in enterprise analytics and data management. This was right down Oracle’s alley. Oracle turned it down. Why?

Granted, HP was under considerable amounts of pressure. Except for its printing business, the company was losing market share in every other category. Despite the fact that I believed it paid too much in the deal (as did Wall Street) and that it would present significant execution risks, I gave the company the benefit of the doubt. I was wrong.

In the quarters that followed, HP has done very little to convince investors that it had thought this deal through. Now, aside from the fact that the company recently announced a writedown of $8.8 billion in regards to the deal, HP also screamed fraud. But it was more like "sour grapes."

HP claims an assortment of accounting improprieties and misrepresentations occurred at Autonomy that it did not know when it closed the deal. However, now it’s getting worse. There is evidence to suggest that HP actually knew something since it almost backed out of the deal. This new piece of information prompted a class-action lawsuit from investors. But what did HP know?

On Thursday investors learned that the U.S. Department of Justice will decide who’s right and who’s wrong. In an SEC filing, HP officially disclosed that an investigation in the fraud case was pending. Although no other details were provided. But will any outcome really alter the fate of the company.

At the end of the day, does it really matter?

From my vantage point, the company no longer deserves the benefit of the doubt – especially after Meg Whitman saw fit to throw former CEO, Leo Apotheker under the bus. It doesn’t escape me that Whitman was on the board when the Autonomy deal was constructed and she’s on record as having given a thumbs-up vote. However, now it's Apotheker's fault. Had the deal gone well, I doubt we would hear his name.

In other words, this is crying over spilled milk. HP’s handing of this entire debacle has been disappointing. Meanwhile, Autonomy’s founder, Mike Lynch, has been on a crusade to defend not only his name, but also Autonomy’s reputation. It remains to be seen how all of this unfolds.

However, regardless of whether or not this investigation ends up in HP’s favor (and I don’t think it will), the company still has to figure out a way to grow. For instance, Microsoft’s (NASDAQ: MSFT) Q1 report reveal that PC shipments dropped by 9% in the quarter. And experts suggest that the decline can reach the high teens by the second half of 2013. On the other hand, PCs have long been a low margin business for HP.

Too, Microsoft announced that its Windows division lost 33% year-over-year, and that should signal why HP should exit the business altogether. Making matters worse, sales of mobile devices continue to rise with Apple (NASDAQ: AAPL) having reached 53% market share according to a recent report by Kantar Worldpanel ComTech, which tracks sales data for the 12 weeks ended Nov. 25. But HP has no mobile strategy.

Mistakes still haunt

Essentially, while PCs are (in fact) dying, mobile devices have yet to peak. This confirms that HP is in the wrong business. Though I think HP should make a move for Research In Motion, unfortunately its hands are now tied. Meanwhile, Oracle has spared no expense to say “I told you so.” There has been no love lost between the two companies ever since Mark Hurd, Oracle’s current president, was fired as HP’s CEO two years ago - a mistake that still haunts HP.

Under his leadership as HP’s boss, the stock traded as high as $47 in August 2010. Since he left, the company has never been the same with the stock plummeting to a 10-year low of $11.35 a month ago. Although HP’s board won’t publicly admit that it was the wrong decision, it is one that they’ve now been given two chances to correct in two years with Leo Apotheker and now Meg Whitman. Now I wonder if Whitman will survive.

Bottom line

Despite all of this, it won’t be until 2014 until HP shows signs of life. As bad as 2012 was for the company, 2013 might provide answers to the question “how bad can things get.” The good news is the stock is not going to zero. Although I see value in the shares at current levels, I’m no longer convinced that current management is up to the task to harvest that value - not when they keep crying over spilled milk.


rsaintvilus is long AAPL and has no positions in the other stocks mentioned above. The Motley Fool owns shares of Apple, Microsoft, and Oracle. Motley Fool newsletter services recommend Apple and 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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