The Hard Choices Ahead for H.P.

How soon before the next big, tough decision at Hewlett-Packard? It could be as early as October.
On Oct. 3, H.P. will hold its industry analyst day in San Francisco, when it is expected to spell out growth projections for the coming fiscal year, which begins Nov. 1. If those numbers are too low, or if Wall Street finds them improbably high, the stock is likely to fall.



That could create renewed pressure on Meg Whitman, H.P.’s chief executive, to do something radical. This is likely to mean further layoffs, another big write down or even a sell off of some of H.P.’s largest pieces.
Those are all radical moves, but the eroding value of H.P. makes the need for remedies hard to overstate. Between Tuesday morning and the close of trading on Thursday, H.P. lost some $4.8 billion in market capitalization, which in its current state was about 12 percent of H.P.’s total value. Since February, the company’s stock market value has fallen 41 percent.
The current stock price of H.P. “indicates a company that is bankrupt in six years,” said Amit Daryanani of RBC Capital Markets. While he did not think that projection is really prophetic, he thinks a breakup will at some point become possible. “A couple more quarters like Wednesday, and you have to ask if it’s better to split up the company so some of the smaller companies can prosper.”
Much of H.P.’s problem is a legacy of past successes, mixed with bad acquisitions. It is so big in things like personal computers, servers, and printers that little else matters. Those are growing slowly, if at all; on Thursday, the International Data Corporation projected worldwide demand for PCs would rise just 0.9 percent this year. Part of the reason, IDC said, is that many buyers are waiting for Microsoft‘s new operating system, Windows 8, which is expected in the fourth quarter.
On Wednesday H.P. delivered its fiscal third-quarter performance with a revenue that was slightly lower than expected, exits from a big company layoff that were faster than expected and a huge net loss tied to an $8 billion write-down in the value of its 2008 purchase of EDS.
Ms. Whitman certainly didn’t sugarcoat things in talking to Wall Street, which probably contributed to Thursday’s 8.15 percent stock drop. The computer server market was weak, she said. Enterprise Services is bad, though under new management. Autonomy, a software company that her predecessor, Leo Apotheker, purchased for $10 billion in cash, “still requires a great deal of attention.”
In printers, she said, “we continue to face the headwinds of lower volumes.” Most depressing of all was PCs, where revenue was down 10 percent, margins had shrunk and H.P. is in “serious, competitive battles” with its competitors (she most likely meant Lenovo of China) that H.P. is determined to win in order to retain its spot as the world’s biggest PC maker. Ms. Whitman said H.P. could prevail through more efficient management, but most analysts saw a price war that meant even smaller profit margins.
There were bright spots too, like high-end storage devices and networking, but those successes almost underline the main problem. PCs, printers and services were $23.3 billion of H.P.’s $30.4 net revenue. Regular servers were most of another $5.1 billion in the business that also includes storage and networking.
Over the years H.P. has built up such a huge presence in these areas that it is difficult for any new business, even one worth hundreds of millions and growing like a weed, to mean much to H.P.’s bottom line. And for now, it seems like PCs, printers, and servers will not come back the way H.P. needs. Between smartphones, tablets and cloud computing, the world has changed.
“You almost have to exit PCs and printers to have any new business that even moves the needle,” Mr. Daryanani said. “They are taking steps to have all the costs under control, and they hope the environment will improve, and they’ll get a tailwind. If things get worse, they’ll have to do something radical.”
Writing down the value of Autonomy would do little strategically useful for H.P. It can’t recover the $10 billion it paid for Autonomy. But a write down could have a cosmetic effect of making it easier for H.P. to show a return on invested capital. Autonomy’s $10 billion price represents almost a quarter of the $44 billion in intangibles the company carries on its balance sheet. Less invested capital, easier for growth to look big. At some point H.P.’s auditors might also compel it to admit that it overpaid for Autonomy, particularly if the stock falls further.
Layoffs, so soon after the 27,000 cuts announced in May, would seem to be a radical step. At the same time, however, subtracting 27,000 people from H.P. from the 349,600 employees it had at the end of October 2011 takes it roughly to the employment level of 324,600 that it had at the end of fiscal 2010. (It had 321,000 workers in fiscal 2008 and 304,000 in fiscal 2009) I.B.M., in the course of its far more drastic turnaround, went from 405,000 people in 1985 to 175,000 in 1996, before hiring resumed.
Ms. Whitman noted on Wednesday that H.P. was not in the straits of I.B.M. circa 1993, when it had lost over $15 billion over three years. She also considers the price advantages H.P. gets as one of the world’s biggest buyers of semiconductors critical to her business, which is one reason she decided last near not to sell the PC business.
Last November, however, H.P. also brought onto its board Ralph Whitworth, the founder of Relational Investors, an activist investor who played a role in significant asset sales when he was on the boards of J.C. Penny, Mattel and Apria Healthcare, among others. At some point, there is likely to be at least one voice for more radical change.