Tuesday, November 27, 2012

HP: The Elephant's Been In the Room All Along

August 2010:
"HP shares continue to look like a value play, but I suspect that there's a very large, cultural elephant in the room that could slow any transformation into a sustainable, growth story."
 September 2011:

"Here's what's reported in the NY Times about the final process leading up to the selection of Mr. Apotheker as the CEO:
"Before a final vote on Mr. Apotheker, H.P. search committee members again urged other directors to meet him. No one took them up. At least one director, Ms. Salhany, tried to slow the process, worrying aloud that “no one has ever met him. Are we sure?” But her concerns were brushed aside." Without making reference to a duty of care, this is a total abdication of any professional responsibility for a business decision that would be critical, given the recent history of CEO failures and their effect on business under performance.
Now, more shareholder value will be destroyed by paying the exiting CEO, which makes the company even more of a laughing stock.  More important is the fact that a successor will have to make sense of an acquisition for which HP is acknowledged to have grossly overpaid. Integrating Autonomy's corporate culture with the divided, rudderless and dysfunctional HP culture will be a Sisyphean task. The frustration and disappointment of customers, as for example Fluor's CIO saying that HP is "lost now," will haunt the new CEO also.  Without some fresh air in the board room, it's hard to see how HP becomes anything other than a "value trap."
September 2011:
"The same board is in place, with the same unhealthy dynamics and deeply flawed visions.  Board chair Lane's public flip flops on former CEO Apotheker don't give any comfort about temperament or judgment, and there's the continuing question about how much his position as Oracle's #2 is an asset to HP or a liability.  Oracle's poke in the eye to HP by hiring Mark Hurd was great PR grandstanding. 
Value investors looking at HP won't get an extra reward for being early, because so many of the risks are unknown at this time.  Technicals and noise trading should dominate the stock in the near term, Time is the friend of a new, fundamental investor looking at this stock."
August 2012:

"The board at IBM knew that the company was in trouble to the extent that it went to a total outsider as their new CEO, someone who understood the mechanics and language of efficiency and cost.  It's unclear whether the HP board really understands anything. At some point, some of the new investors like Dodge and Cox and GMO should get involved in planning for a significant refresh in the HP board for the next proxy season. 
 Aside from looking at metrics relative to HP history or industry comps, it's hard to make a bull case for HP.  This argument sometimes appears as, "It can't get much cheaper."  Investors who got in at $20-25 felt this way, and we disagreed in prior posts. Unless HP as an organization believes it is in trouble and acts that way, as Gerstner says, then it may be a short-term trade from depressed levels, or a value trap.  Time will tell, and it's very early in this story, with no clarity."

" The Autonomy question still needs to be answered.  Besides the CEO having a digital dashboard (another hackneyed IT phrase) for Autonomy, is this the platform to take HP into the Big Data future?  Any more writedowns?  Some industry types suggest that their sales penetration pre-acquisition was narrowly focused on areas of Internet security rather than on the broader analytics of Big Data.
 Meg Whitman also says for the Times, "I am the the first (HP) CEO in a long time who is from the Valley."  This statement sounds a bit delusional.  Having board members or the CEO from a geographical provenance wouldn't seem to be associated with value creation." 
October 15, 2012:
 "The board of directors that CEO Whitman needs to help her move the company forward is a different one from what is there today.  Now that the CEO has finished the fact-finding, channel checking and strategic reset, she should take on this task because it will be critical, in my opinion, for moving the company away from some of the flawed assumptions of the past which led to the acquisition of EDS and the absurd price paid for Autonomy."
November 1, 2012:
" We've heard good things about the internal bureaucracy busting, cultural changes being initiated by CEO Whitman.  This is akin to taking down a fifty foot oak with a tomahawk.  The new CEO needs lots of help from her executive team, middle management, and her board."
Can you identify the elephant?  Institutional shareholders shouldn't need an ISS report to think about what has to be done to light a fire under this company.  If they remain passive, then they are not acting to protect the best interests of their own fund shareholders.

It will also be interesting to see if the CEO and CFO can sign the fiscal 2012 Section 404 certification attesting to the existence and effectiveness of  financial controls over use of corporate assets and financial reporting.Can the auditors give their blessing again without identifying significant deficiencies?  Billions in value were destroyed while the controls were apparently in place and effective. If this fiction continues, then Sarbanes-Oxley is another example of regulatory form over substance.

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