Management Changes Can Result in a Rally

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

The troubles of Hewlett Packard (NYSE: HPQ) and falling sales of the PC industry are no secret. The company was once the largest PC and printer manufacturer in the world. The issue here is not industry dominance, as HP is still placed pretty well in both the PC and printer industries--it's an issue of maturing industries. HP faces tough competition from the Chinese technology giant Lenovo (NASDAQOTH: LNVGY), which owns the world famous laptop brand ThinkPad, which originally belonged to IBM. The decline in HP's PC shipments suggested that the company might fall behind Lenovo, but recent data could mean that HP retains its top spot. 

The chart below shows the consistent decline in both share price and revenues at HP. The company has failed to drive growth from other sources to account for the decline in the printer and PC segments. The primary culprit has been the rise in the popularity of handheld devices. For instance, tablets are fast becoming an alternative for computing and threaten the entire PC industry. These devices are also very useful for reading on the go, a job which once belonged to printed paper. Therefore, this revolution has not only reduced the demand for the printed paper, but has also shifted computing away from PCs.

<img src="http://media.ycharts.com/charts/080ede81399806764605278f6ce5e65c.png" />

HPQ data by YCharts

While the growth in its two primary segments was slowing down, HP was not sitting idle. In the last few years, the company has made some of the worst acquisitions of the technology sector. The Autonomy acquisition leads the race of HP’s ill-fated attempts to stop its declining sales. HP acquired the British software company Autonomy back in 2011 for a whopping $11.1 billion, and recently wrote off $8.8 billion off its value. Autonomy was not the only folly of HP; other major failed acquisitions include EDS and Palm. During this time the company lacked the leadership that could have turn it around and was being led by the much criticized CEO Leo Apotheker. He was also one of the driving forces behind Autonomy’s acquisition. The company was therefore placed in such a severe crisis by its directors, which could not stop making terrible acquisitions.

Shipments 

The competition in the PC industry has never been tougher, despite a considerable slowdown. As can be seen in the table below, Lenovo has overtaken Dell (NASDAQ: DELL) as the second largest PC manufacturer. The Chinese giant has utilized its ability to compete on price to increase its total market share from 13.6% to 15.5%. The total shipments of Lenovo have seen an 8.2% growth in the same period. Dell, on the other hand, has seen a slide in its market share, which has decreased from 12.2% to only 10.2% in 4Q 2012. The company has seen a staggering 20% decline in its PC shipments compared to the same period last year.

Gartner: PC Shipments 4Q 2012 (Units)

<table> <tbody> <tr> <td> <p><br /> <strong>Company</strong></p> </td> <td> <p><strong>4Q12 Shipments</strong></p> </td> <td> <p><strong>4Q12 Market Share (%)</strong></p> </td> <td> <p><strong>4Q11 Shipments</strong></p> </td> <td> <p><strong>4Q11 Market Share (%)</strong></p> </td> <td> <p><strong>4Q12-4Q11 Growth (%)</strong></p> </td> </tr> <tr> <td> <p>HP</p> </td> <td> <p>14,645,041</p> </td> <td> <p>16.2</p> </td> <td> <p>14,711,280</p> </td> <td> <p>15.5</p> </td> <td> <p>-0.5</p> </td> </tr> <tr> <td> <p>Lenovo</p> </td> <td> <p>13,976,668</p> </td> <td> <p>15.5</p> </td> <td> <p>12,915,766</p> </td> <td> <p>13.6</p> </td> <td> <p>8.2</p> </td> </tr> <tr> <td> <p>Dell</p> </td> <td> <p>9,206,391</p> </td> <td> <p>10.2</p> </td> <td> <p>11,633,387</p> </td> <td> <p>12.2</p> </td> <td> <p>-20.9</p> </td> </tr> <tr> <td> <p>Acer Group</p> </td> <td> <p>8,622,701</p> </td> <td> <p>9.5</p> </td> <td> <p>9,690,624</p> </td> <td> <p>10.2</p> </td> <td> <p>-11.0</p> </td> </tr> <tr> <td> <p>ASUS</p> </td> <td> <p>6,528,228</p> </td> <td> <p>7.2</p> </td> <td> <p>6,133,042</p> </td> <td> <p>6.5</p> </td> <td> <p>6.4</p> </td> </tr> <tr> <td> <p>Others</p> </td> <td> <p>37,393,913</p> </td> <td> <p>41.4</p> </td> <td> <p>39,934,184</p> </td> <td> <p>42.0</p> </td> <td> <p>-6.4</p> </td> </tr> <tr> <td> <p><strong>Total</strong></p> </td> <td> <p><strong>90,372,942</strong></p> </td> <td> <p><strong>100.0</strong></p> </td> <td> <p><strong>95,018,284</strong></p> </td> <td> <p><strong>100.0</strong></p> </td> <td> <p><strong>-4.9</strong></p> </td> </tr> </tbody> </table>

Proxy Fight

HP has recently made some positive moves in the handheld industry. It recently launched one of the cheapest tablets in the industry, the Slate 7. The new tablet can be a game changer in the industry, which is currently dominated by players like Apple and Amazon. As could be expected after a scandal as big as the Autonomy acquisition failure, it seems once again there will be some major leadership changes at HP. It all started last Tuesday when proxy advisory firm ISS recommended shareholders of HP vote against the chairman and two other directors. According to the advisory firm, investors should vote against the Chairman Ray Lane and directors G. Kennedy Thompson & John Hammergren.

The recommendation is based upon the role of these individual in the Autonomy acquisition and the lack of due diligence on their part. Glass Lewis has also recommended investors oust 4 directors, adding Rajiv Gupta and Marc Andreessen to the ISS’ list. The firm has advised investors against reelecting these members last year as well, due to their role in hiring HP CEO Leo Apotheker. New York City’s public pension fund has also joined the efforts to stop the reelection of these members. The fund only holds 5.5 million shares of HP, i.e. approximately $116 million, but their opinion holds a lot of sway over the market.

Bottom line

The situation is becoming pretty interesting just before the annual meeting of shareholders, which will be held in Mountain View on March 20. It seems that the market will witness a change in the board of HP, which makes sense after the terrible decisions that have received the blessing of this board. It seems that Dell is not the only PC manufacturer going through a transition. The founder of Dell is trying to take the company private in a multibillion dollar deal, but the offer is facing a lot of resistance from a number of shareholders.

The dumping of HP’s current management might result in a positive reaction from the market and short term buying opportunity for investors.


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