Monday, September 21, 2015

Hewlett Packard‘s 21st Century Adventures: Stupid Is as Stupid Does

Hewlett Packard and its shareholders have suffered during the first 15 years of this century. I previously highlighted the issues here and here. The underlying problem is an attachment by HP’s CEOs starting with Carly Fiorina and continuing with current CEO Meg Whitman to a doomed attempt by a mature low-growth, hardware-based, old tech conglomerate to regain its growth mojo thru acquisition related consolidation. Back in 2013 I recommended an alternative path to grow old gracefully by managing for cash and returning it to shareholders instead of growth. This is a difficult recommendation for most managers to accept; they seem instinctively opposed to shrinking even when it is the right thing to do. I thought it might be interesting to see how HP has progressed as it approaches the split of its PC and printing business from its services group.

Some of the items I suggested and HP’s reactions are as follows:

1)     Improved Efficiency: lots of cost/job cuts-54,000 with another 30,000 planned. Unfortunately, margins and returns have remained weak as core revenues continue to decline. So “A” for effort but “C” for impact.
2)     Refocus Product Portfolio: still burdened with overly board product lines. Remains a work in process with a grade of “C”.
3)     Improve Focus: the split/spin off of the PC and printer divisions to HP, Inc and the service units to Hewlett Packard Enterprise should improve focus. Additionally, it allows more tailored financial polices-see # 4 and 5 below. Grade “A”.
4)     Improve Balance Sheet: the balance sheet and ratings were weakened by a disastrous series of acquisitions. The company’s net debt position was reduced to “0” prior to the spinoff. Post split, Inc will have a net debt of $2.3B while Enterprise will have $5.5B more cash than debt. Grade “A”.
5)     Improve Capital Discipline (i.e. increase shareholder distributions): dividends have increased, but represent only 13% of free cash flow (FCF) compared to IBM’s over 30%. Post split, however, Inc will payout 50-75% of FCF while Enterprises FCF payout is targeted at 50%. Grade “A”.
6)     Curtail Acquisitions: acquired relatively small Aruba Networks (revenues around $700 Mln) for $2.7B earlier this year. Seems to make strategic sense with manageable integration risk. CEO Whitman recently stated their M&A goal is not to do anything (again?)-sounds like a sensible approach to me. Grade “B”.

Lots of unanswered questions remain for the spun off divisions; overall grade-“A-“ Whitman has done “ok”. My concern is with revenue, margins and returns under pressure as reflected in a stagnating stock price, the HP entities will fall prey to the growth fetish and “do something stupid” again. Initially, Enterprise headed by Whitman will have more financial slack to do something stupid. Let’s hope that HP Inc and Enterprises accept financial reality and maturity by focusing on efficiency and capital disciple instead of growth. Their empires may be smaller, but their shareholders will be richer. Let’s hope the HP entities have fewer future adventures than they had over the first of the 21st century.


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