Wednesday, April 10, 2013

HPQ: Up 55% in Six Months. Why Be Afraid?

We were concerned after the annual meeting that the company's directors had emerged unscathed, but we've finally had a small degree of accountability as former board Chair Ray Lane stepped down from his role, and two other board members resigned.  Ray Lane, if he did even a cursory examination of conscience, should have resigned.

Since he became board Chair in 2010, the stock plunged 42% before its rebound.  As Bill George mentioned on Bloomberg, destruction of value was widespread during Lane's disastrous tenure: $1.5 billion paid for ArcSight, $11 billion in cash paid for Autonomy, and plans made to spin out the PC business, which were later rescinded.  Bill George also points out that four rounds of board shakeup occurred under his chairmanship, including former Medtronic CFO Robert Ryan becoming so frustrated that he resigned.  His financial acumen and diligence were then missing during the Autonomy fiasco.

So, over the past six months Hewlett Packard's share price is up 55%, compared to about 15% for Cisco, and about 10% for the SP500.  So, what's not to like?  Goldman Sachs rates the stock a "Sell," which is unusual for a large cap tech friendly investment bank.  The stock price is clearly ahead of its fundamentals and reflects some turn in sentiment and a search for total return in equities with a decent dividend yield.

Financial market commentators talk about bringing  technology gurus and venture capitalists on to the board.  Nothing could be more tone deaf and ignorant of recent institutional memory.  Both ex-Chair Lane and current board member Marc Andreesen are venture capital fund managing partners.  CEO Whitman came in trumpeting that she was from "the Valley."  HP is not a recent exit from a venture capital fund.

It is a company with $120 billion in revenue, and an icon of global technology which is in danger of becoming  marginalized or irrelevant.  It certainly doesn't need to make any more foolish acquisitions.  The board needs some directors who understand how a balance sheet works, and who can empower an embattled CFO with few board allies, to do her job in building  the B/S back up to being bullet-proof and capable of returning excess capital to shareholders. As Bill George suggests on Bloomberg, former Medtronic CFO Robert Ryan was one of these directors, but he felt the need to resign from Ray Lane's board circus several years ago.

Giving the Board Chair to CEO Whitman is unwarranted and bad governance.  Fundamentally, she has said that the HP turnaround plan is an enterprise that will take "years."  If that's true, there is no greater way to add value than to let her and her executive team work the plan every day for years and let the plan work for the shareholders through the stock price.

The quality of the last quarter's outperformance was dubious, and as Goldman Sachs says in their commentary, any "cost savings" relative to some bloated baseline will be offset by continuing deterioration in the PC and Printer businesses, along with the commoditization of high volume server lines.  The turnaround has begun, but it can't reflect the 55% increase in value over six months in any rational calculus.

Finally, the Jekkyl and Hyde stance on Autonomy needs to stop.  "It's the greatest company on the planet, and we didn't overpay."  "We vastly overpaid, and we were lied to by fraudsters."  "It's in the hands of the SFO and the SEC."  "Autonomy remains a crucial part of our plans." Never mind that this most recent statement is completely out of sync with some of the executive statements made during Analysts Day, when it was suggested that their product development and sales processes weren't capable of being repeated in volume. Pick one story and stick to it: give numbers where possible.

Finally, Bill George laments the wimpy shareholder activism of HP shareholders.  The Bloomberg correspondent comes back at him by bringing up Ralph Whitworth's name as a counter-example.  What about Dodge and Cox?  They are, I believe, the largest, fundamental, long-term shareholder.  They have been passive to the extreme.  Like an electorate, shareholders get the company they deserve.

HP employees continue to be positive about some of the cultural changes at HP during CEO Whitman's reign.  Of course, her comparisons are easy against Mark Hurd and Leo Apotheker, but who cares?  Let the turnaround continue!

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