December 27, 2012
Hewlett-Packard shareholders must be sick and tired – of scandal after scandal, bad deal after bad deal, CEO after CEO. Tired, mostly, of seeing the value of their stock sink lower and lower.
Even after a recent rally, HP stock has plunged 45 percent this year, making it far and away the worst performer of the 30 stocks in the Dow Jones industrial average. Shareholders have suffered through another annus horibilis, following a similarly rotten 2011. Over the last few tumultuous years, HP shares have lost nearly three quarters of their value. Forget tired – any shareholders who have held on for that entire time must just be sick.
The problems at HP extend further back than that. For more than a decade, the company has lurched from one strategy to another, recruiting outside leaders to try to fix the daunting problems it faced. Carly Fiorina was brought on from Lucent Technologies in 1999 with the goal of reinvigorating and repositioning the company to consumers, adding a sense of “speed” and “urgency” for the burgeoning internet age. But her “new HP” stumbled over many of the same old management and strategic issues.
Mark Hurd came from NCR in 2005 to address execution and profitability problems. HP became leaner and more profitable – and the stock had a healthy run – but Hurd left the company suddenly in 2010 after an internal investigation into allegations of sexual harassment turned up some expense report improprieties. HP again looked outside the company, bringing in Léo Apotheker, who had been at German business-software company SAP.
Each CEO brought a new strategy, fueled by acquisitions, in search of growth. And each CEO faced internal conflicts that, individually and together, made clear how bungling and directionless HP’s board of directors has been.
“The lack of stability at the board and CEO level, which are related, has made it very difficult for HP to reach any kind of a steady state, and the strategies that each CEO has brought forward have been dramatically different than their predecessor,” says analyst Rob Enderle of the Enderle Group. “Carly Fiorina was heavily focused on consumer, Mark Hurd was heavily focused on cost reduction and corporate, Apotheker, for as little as he lasted, was heavily focused on software, and Meg Whitman right now is heavily focused on trying to fix HP. So the end result is they’ve had a lot of massive changes in terms of leadership and direction.”
The years of turmoil in 2010 led Joe Nocera of The New York Times to call HP’s “the Most Inept Board in America” and the ongoing stream of news coming out of the company since then only reinforced that dubious distinction. The latest black eye, revealed to the world last month, was an astounding $8.8 billion writedown due primarily to what the company alleged were “serious accounting improprieties” by British software maker Autonomy, which HP bought last year for $11.1 billion. (The deal was done under Apotheker’s watch, but Meg Whitman had voted for the purchase at the time as a recently installed member of HP’s board.)
Even before HP raised its allegations of accounting fraud, the acquisition was clearly not going well. The promised financial benefits failed to materialize. Former Autonomy staff complained about HP’s stifling bureaucracy. “We believe HP looked for ways to renege on the Autonomy acquisition soon after the deal was signed but unfortunately was unable to discover any evidence of improprieties until now,” Jefferies analyst Peter Misek wrote after the writedown was announced. “Aside from possible fraud, we believe the integration as measured by financial results has been woeful. Less than two quarters after launch, growth slowed to almost nothing and serious sales issues arose.”
Whitman has said she still sees value in the Autonomy assets HP bought. And time may well prove her right. But this isn’t the only acquisition that has blown up for HP and slashed billions from its balance sheet. It’s not even the only megadeal to result is a multi-billion-dollar charge this year. In August, HP wrote off $8 billion in value from its $14 billion buyout of EDS in 2008.
Since 2001, HP had spent a reported $67 billion on mergers and acquisitions, more than double its current market value of around $28 billion. That market cap isn’t much higher than the value of writedowns, restructuring charges and deal-related expenses HP has taken since 2006.
HP’s acquisitions, and the way the company accounted for them, had raised concerns before the Autonomy writedown was announced. “In the last decade, there’s been a major change in acquisition process, and HP didn’t make that change,” says Enderle. Companies like IBM, EMC and Dell, he says, all made “major changes” in how they do acquisitions, putting more emphasis on maintaining the value of the assets they buy rather than forcing integration even when cultures clash, as some Autonomy staffers claimed was the case with the more bureaucratic Hewlett-Packard. With all the turmoil at HP, Enderle says, “none of the leaders were able to focus on that particular process, and as a result, their acquisitions have been pretty bad in terms of underlying execution.”
The way HP accounted for its purchases also set off some red flags. The acquisitions also drove up the amount of debt on HP’s balance sheet, and the company late last month had its credit rating downgraded by Moody’s Investors Service, which added that the outlook for the rating was “negative” and unlikely to be raised over the next year. “The negative rating outlook reflects our concerns about HP's ability to contend with the significant competitive, secular and execution challenges facing the company,” Moody’s explained, citing “slow to no growth prospects” for many of HP’s business lines over the coming years.
Analysts at financial research firm GMI Ratings had consistently rated HP’s accounting and governance practices as “very aggressive” -- riskier than 96 percent to 99 percent of North American companies going back to at least December 2009. “One reason for the low score is that HP overpaid for its acquisitions in earlier years, exposing itself to the risk of having to write them down later as less than originally thought,” GMI’s analysts wrote in May. Just a day before the Autonomy writedown was announced, GMI analysts put HP on their “Black Swan” list of companies with a high risk of major stock-price drops within six months.
“Our rating is not going to improve very much, despite the fact that they’ve now acknowledged at least a couple of poor mergers and they’ve written down the goodwill,” says Agnes Grunfeld, managing director of GMI Ratings. “That has to help, but the truth is I don’t think it’s going to help a lot in the near term unless they really change the way they go about their business.”
Whitman is, of course, trying to do just that, but she has made clear that turning around the tech giant -- which still generated $120 billion in revenue for the 12 months ended in October -- will be a difficult, multi-year process, with the restructuring not complete until the end of 2014 and real growth taking longer than that. “It takes five to seven years to do a turnaround of this magnitude,” Enderle says. “You can look at Steve Jobs at Apple or Lou Gerstner at IBM. Five to seven years is what it takes. Much of the heavy lifting happens in the first few years and most of the benefits don’t happen until you’re almost all the way done.”
After another year badly lagging other blue chip stocks, the end of that bumpy road still seems a very long way away.