HP's Financial Wounds Are Still Festering

[Anonymous]

HP’s Financial Wounds Are Still Festering

Even after Hewlett-Packard Co. took a hefty $8 billion impairment charge to clear some of the burdensome goodwill on its balance sheet, the computer, consulting, services, and enterprise hardware company remains mired in debt and continues to hold limited attraction for investors. Furthermore, anyone surprised by the size of HP’s "goodwill" write-down should expect even bigger "one-time" charges in future.

Of course, HP may parcel out future charges in smaller chunks, but the same logic that forced the $8 billion charge announced earlier this month will force the company to take similar steps in future. The company must lighten its balance sheet and get rid of unsightly goodwill numbers that are like horrid scars on its corporate face. Before the latest impairment charge, HP’s net goodwill as at the end of the fiscal quarter ended April 30 was a titanic $44.9 billion, helping to boost the company’s total assets to $127.8 billion.

A large chunk of the "assets" is empty gas, though. The accumulated goodwill, for instance, is treated as an asset, even though the value of the underlying "assets" has fallen precipitously since HP began piling them up with a spate of acquisitions over the last ten years. The latest charge, for instance, is assigned only to the company’s services business and is related primarily to the $13.9 billion purchase of Electronic Data Systems in 2008.

Other large acquisition-related goodwill exists on HP’s balance sheet, but none is more controversial than the $10 billion purchase of Autonomy Corp. in 2011. HP paid a whopping 64 percent premium on Autonomy’s closing stock price one day prior to the announcement of the transaction last August. Many in the investment community panned the acquisition on the conviction that HP overpaid for the British enterprise information management software company. I didn’t like it either because it represents some of what is wrong with the company today. (See: Five Sources of Risk in 2011.)

HP insists the goodwill write-downs that follow transactions like the purchase of Autonomy and EDS do not "result in future cash expenditures or otherwise affect the ongoing business or financial performance of its services segment," said the company in a statement announcing a batch of organizational changes for enterprise services business. That’s correct, but it’s also baloney. It’s the type of switcheroo companies lob at investors and shareholders after a transaction they thought was solid had gone bad.

Here’s how I see it, in HP’s case. The company paid about $10.2 billion for Autonomy, representing "24 times Autonomy’s trailing earnings before interest, taxes, depreciation and amortization," according to a Bloomberg News calculation. Before the Autonomy deal, HP had also made other good-deals-gone-bad, including its $1.2 billion purchase of Palm Inc. The transaction helped HP secure Palm’s WebOS, but soon it discontinued the devices and took a "one-time charge" of about $1 billion in goodwill write-down.

Previous acquisitions that helped to balloon HP’s "goodwill" include the 2010 purchase of ArcSight Inc. and 3Par Inc., for $1.5 billion and $2.35 billion, respectively. The excess premiums paid for these companies are sitting like two tired elephants on HP’s balance sheet, distorting its financial profile. And, while HP and companies in similar situations may claim goodwill charges are not cash transactions and don’t hurt the enterprise on a long-term basis, they do represent actual monetary (or stock) outlays initially. A write-down, no matter how it is described, is an admission that resources were misused and demonstrates initial poor judgment on the part of the executives and board.

All this has long-term implications for the enterprise. These events foster the creation of an environment of seeming ineptitude and lack of trust in company senior executives. For example, would I trust HP if it were to announce today another big purchase? Would I believe the management had done its due diligence? Do I think they seriously consider long-term fiduciary responsibility and are not pandering to their own whims? And would I be certain the board of directors isn’t just hurling another dart at a board and hoping to hit the jackpot? Investors clearly think HP isn’t a hot investment, and the reasons for this certainly include its acquisition history.

HP’s market value of $38 billion, as at the time of writing this article, is about half its 52-week high, which is 64 percent below the two-year peak and vastly less than the $227 billion market capitalization of IBM Corp. (NYSE: IBM), not to mention the even more stunning $592 billion for Apple Inc. (Nasdaq: AAPL). Look at their annual fiscal revenues, though, and the three companies seem more or less in the same range. Apple had $108.3 billion in fiscal 2001, IBM $107 billion for calendar 2011, and HP $127.3 billion for its fiscal 2011. Something is off-base here if the capitalizations are so much different.

Of course, the companies’ sales growth rates are also quite different, although HP’s and IBM’s are tracking similarly. But that’s not the issue here. HP’s financial position is weak (long-term debts as at the end of the April quarter were $26 billion versus $8.3 billion in cash and short-term investments), and it will get weaker if the company, under new CEO Meg Whitman, pursues wrongheaded acquisitions similar to the ones her three predecessors did.

The wounds former CEOs Carly Fiorina, Mark Hurd, and Léo Apotheker inflicted on HP are deep and can’t be written off.

http://www.bloomberg.com/news/2012-08-09/hewlett-packard-s-whitman-dismantles-hurd-era-empire.html
Hewlett-Packard’s Whitman Dismantles Hurd-Era Empire
Hewlett-Packard Co. Chief Executive Officer Meg Whitman, in her drive to boost profitability, took another step toward dismantling the computing empire former CEO Mark Hurd built with $24.3 billion in acquisitions.

The company is writing down the value of its enterprise- services business by $8 billion and shuffling management at the top of the division, Hewlett-Packard said yesterday. That follows an announcement in May that Whitman is eliminating 27,000 jobs, many of them from that unit.

The writedown reflects the dwindling value of Electronic Data Systems Corp., bought by Hurd for $13.2 billion in 2008. The deal pushed Hewlett-Packard into the low-margin business of information-technology outsourcing, handled more efficiently by rivals such as Wipro Ltd. (WPRO) and Tata Consultancy Services Ltd. (TCS) It left the company Whitman inherited ill-equipped for the shift toward cloud computing, making it a laggard in services that help clients deliver software over the Internet.

“She’s taking the company toward higher margin, more strategic categories,” said Jayson Noland, an analyst at Robert W. Baird & Co. in San Francisco. “If she does what she says she’s going to do, services is going to be a smaller, more profitable business. She’s talking about cloud, analytics and security — and not competing with the Wipros and Tatas of the world.”

Whitman, CEO since September, is revamping the services business after saying in December that Hewlett-Packard will turn WebOS into an open-source project. That resolved a debate over how to salvage assets from another Hurd acquisition — the $1.2 billion purchase of Palm Inc. in 2010.
Visentin Departs

Among the moves announced yesterday, Palo Alto, California- based Hewlett-Packard said it’s replacing John Visentin, the executive who’d been heading enterprise services, a year after former CEO Leo Apotheker promoted him to the job. Mike Nefkens, a services executive in Europe, is taking his place on an acting basis, and Jean-Jacques Charhon, chief financial officer for enterprise services, becomes the unit’s chief operating officer.

Sales in Hewlett-Packard’s services business barely budged last fiscal year, rising 1.2 percent to $36 billion. The division grew less than 1 percent in fiscal 2010.

Within the services division, about 30 percent of sales come from repairing and maintaining machines sold by Hewlett- Packard, which according to Abhey Lamba, an analyst at Mizuho Securities USA Inc. in New York, is a profitable business. More than 40 percent of revenue is from lower-margin technology outsourcing, the business bolstered by the EDS deal.

Unsuccessful Deal
“The EDS acquisition was not a success for the company, because ever since it occurred we have not seen strong growth in their services business, and margins have come down,” said Shebly Seyrafi, an analyst at FBN Securities in New York.

Hewlett-Packard was unchanged at $19.41 at the close in New York, and has declined 25 percent this year.

Whitman’s bid to turn around the services business hinges on Hewlett-Packard’s ability to build teams that can help companies use modern programming techniques and deliver their applications via cloud computing to become more efficient. At the same time, Hewlett-Packard needs to lessen reliance on the more conventional work of running customers’ IT operations.

Hewlett-Packard yesterday also raised its third-quarter earnings forecast. Profit excluding some items will be $1 a share, up from a prior projection of 94 cents to 97 cents. The net loss will be $4.31 to $4.49 a share, Hewlett-Packard said. That indicates a loss of $8.56 billion to $8.92 billion, the biggest since at least 1989, data compiled by Bloomberg show.

Writedown Coming
In the third quarter, Hewlett-Packard said it expects a writedown of approximately $8 billion stemming from “business trends within the services segment.”

The company also anticipates a pretax charge of $1.5 billion to $1.7 billion related to job cuts, up from a prior projection of $1 billion.

Hewlett-Packard may report a profit margin of 23.1 percent in the current fiscal year, down from the 23.4 percent margin the company reported for its 2011 fiscal year, according to the average of analysts’ estimates compiled by Bloomberg.

“They’re making changes, but it’s going to be several years before they get it right,” Seyrafi said. “The charges are a recognition that the prior management strategy did not succeed.”

[Author]

August 16, 2012 at 8:52 AM