Friday, December 28, 2012

HP 2012 10-K: Share Buybacks and Potential Divestitures

HP's share buyback program to-date has been badly managed, as we discussed in a previous post.  Now, although the shares may be undervalued, the company is financially much less flexible than in the past.  In the 10-K, there are several risk factors discussed that militate against further large share buybacks:

  • The paramount need to raise the corporate credit rating;
  • "We may have to continue lowering the prices of many of our products and services to stay competitive.."
  • "We renewed our focus on developing new products, services and solutions..."
  • "W must make long-term investments, develop or obtain, and protect intellectual property and commit significant resources before knowing whether our predictions will accurately reflect customer demand for our products, services, and solutions.."
  • "...we must continue to successfully develop and deploy cloud based solutions for our customers."
  • The company has repeatedly suggested that it has underinvested in research and development in the past.
All of this taken together, along with many other similar statements, suggests that the higher return investments are within the business itself as opposed to in the stock market.  In fact, the company itself may be at risk as a stand-along entity if it doesn't reclaim a place at the table of technology leaders.  The cash needs to be invested in the business, and rationally within the portfolio.

In talking about their services business, particularly the lower value services business like business process outsourcing and staff augmentation, the company talks about not being able to manage the four key drivers of this business: rate, margin, utilization and leverage.  If this is what HP is talking about at this stage of their corporate development, these business segments might be candidates for divestiture to partners, particularly to foreign partners.  Valuations won't be stellar, and HP has no particular comparative advantage in these businesses. Foreign firms may be very interested in them in order to broaden their international scope. Sixty-five percent of HP revenues are outside of the U.S. These commodity businesses probably don't belong in a high performance portfolio. 

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