IBM Writes Rx for HP

IBM CEO Sam Palmisano made some incisive comments about HP's recent public travails. "HP used to be a very inventive company," he is quoted as saying in the Wall Street Journal. This is one of the key issues: it has been living off its printing and consumables franchise for many years now, while failing to innovate around its corporate systems businesses.

While the former HP CEO is rightly criticized for a number of things, I take issue with Palmisano's comment that Hurd "cut out all the research and development." For its most recent fiscal year, HP's R&D spend was $2.8 BILLION, or 2.5% of revenue, versus $3.5 BILLION, or 4% of revenue in the first year of Hurd's tenure. Only someone in the Federal government could call this cutting out all spending. On the face of it, a reasonable investor doesn't have the information to make any sense of this number.

What ongoing projects are in both numbers? What percent is related to new products versus product line extensions versus think tank expenditures? IBM and AT&T grew new businesses from their expenditures at IBM Labs and Bell Labs. Those were headier days of monopolies, bigger margins, and weaker customer power. Shareholders would need explanations if these kinds of projects were being funded to a large extent, which I doubt.

My suspicion is that much of HP's R&D is under managed and unproductive. This is the obvious explanation for the pressure to go out and seek exorbitantly priced acquisitions. Boards, shareholders and analysts should demand to see what's under the covers of numbers like $3 billion in annual R&D.