Meg Whitman’s Hewlett-Packard tried to put the debacle of its Autonomy acquisition behind it last week by taking an $8.8 billion write-off, charging that previous management had been misled by cooked books and other nefarious deeds on the part of the UK-based software automation company. The claims have turned into yet another public relations spectacle for the Palo Alto-based company as Autonomy founder and former CEO Mike Lynch fights back with fire and feist, and pundits again point fingers at HP’s management, board and outside advisers for ineptitude.
Meanwhile, a class action suit filed in San Francisco yesterday “alleged that HP had issued false and misleading statements on its financial performance and prospects between August 2011, when the $11 billion Autonomy deal was announced, and November 20 this year,” when the write down was made public, as Chris Nuttall reports in the Financial Times.
The write-off of Autonomy and class action lawsuits hit HP's stock hard today:
Hewlett-Packard Company (NYSE:HPQ) Share Price Between November 28, 2011 and November 27, 2012 - Google Finance (Click Image To Enlarge)
The civil action was not unexpected, and more lawsuits may follow. Labaton Sucharow partner Dominic Auld tells Nuttall while disclosing that his firm is considering action of its own.
“It’s hard to imagine that this deal goes so far south so quickly without somebody having culpability.”
Whitman, now HP president and CEO but only a yea-voting member of the HP board at the time of the acquisition, effectively blames her predecessor, Leo Apotheker, and the former chief strategy officer, Shane Robison, for the bad deal.
ISI Group analyst Brian Marshall told Reuters’ Poornima Gupta and Nicola Leske when the write-off was announced.
"To put it bluntly ... this story has been an unmitigated train wreck, and it seems every time management speaks to the Street, there is new negative incremental information forthcoming."
The Wall Street Journal’s “Heard on the Street” columnist, Rolfe Winkler, offers a scathing appraisal of the situation this morning, pointing out in his lede that
“More than two people from Hewlett-Packard were responsible for the disastrous Autonomy acquisition, never mind what chief executive Meg Whitman says.”
He names names, from current CFO Cathie Lesjak to current board chairman Raymond J. Lane. But although investors might like to see “more heads roll,” that may not be a prudent response.
Winkler concludes.
“The sad reality may be that the company is in such bad shape that it can't afford more turnover at the top. Until it can, investors should stay away from the shares, no matter how cheap they appear.”
And as Reuters’ Nadia Damouni and Nicola Leske pointed out last week,
“15 different financial, legal and accounting firms were involved in the transaction -- and none raised a flag about what HP said Tuesday was a major accounting fraud.”
Meanwhile, Lynch, who in 1991 played a hunch that the “theories of the then-little-known 18th-century Presbyterian minister and mathematician Thomas Bayes could be used to search and understand unstructured data,” as Wendy M. Grossman relates in The Guardian, has been vigorously pushing back against HP’s charges.
The New York Times’ Quentin Hardy writes.
“Lynch has been unusually candid and vocal in defending himself and the company he built, rather than hiding out behind a phalanx of lawyers as might be expected. He says he was blindsided by a long-prepared public relations onslaught by HP, little of which had to do with the substance of its claims about Autonomy.”
Lynch is not limiting himself to denying the accusations. Among his charges in an interview with Business Insider’s Julie Bort:
"HP executives engineered the ouster of Apotheker and appointment of Whitman because they feared Apotheker's plan to spin off the hardware business in favor of software, which caused Whitman to abandon the software strategy, which left Autonomy and Lynch in the lurch."
And to top it off,
“HP's convoluted bureaucracy created situations where its own salespeople couldn't sell Autonomy.”
If all these convolutions have you scratching your head, Reuters’ “Breakingviews” columnist, Quentin Webb, delves into such accounting procedures as “Vendor Specific Objective Evidence” (VSOE), which allows companies “to book upfront payments in full if they establish a predictable pricing framework,” in a “Guide for the Perplexed” piece.
Webb writes, pointing out.
“As things stand, HP’s accusations are hard to judge that it still has to prove its claim that it was duped by fraud which could not be detected before acquisition.”
The market makes its own judgments, of course.
Richard Waters and Chris Nuttall wrote in the Financial Times Friday evening.
“As HP’s reputation as the company that cannot shoot straight has grown to almost legendary proportions, its stock price has collapsed.”
It was up 2.4% yesterday to $12.74, but was trading in the $50 range as recently as April 2010. At the end of trading on November 27, 2012, HPQ shares ended at 12.36, down 0.38 or 2.98%, then dropped an additional 0.03 or 0.24% in after-hours trading.
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COMMENTARY: Coming off the biggest quarterly loss in Hewlett-Packard's history, CEO Meg Whitman braced investors for even more trouble ahead as she methodically tries to fix a wide range of longstanding problems. Those challenges will be compounded by a feeble economy that Whitman expects to weaken even more during the next year.
Hewlett-Packard Company (NYSE:HPQ) Annual Revenues, Gross Profits and After-Tax Income FY Ending October 31, 2009 through FY Ending October 31, 2012 - Google Finance (Click Image To Enlarge)
Hewlett-Packard Company (NYSE:HPQ) Quarterly Revenues, Gross Profits and After-Tax Income - Google Finance (Click Image To Enlarge)
On Wednesday, October 3, 2012, Whitman delivered the disappointing forecast at a meeting that the ailing Silicon Valley pioneer held for analysts and investors. The gathering gave Whitman the opportunity to persuade Wall Street that she has come up with a compelling strategy for turning around HP one year after being named CEO.
The EDS charge is the main reason that HP lost $8.9 billion during its most recent quarter, which ended in October 31. In early October, some analysts are worried HP would absorb another charge on an $11 billion acquisition of software maker Autonomy, which hasn't lived up to expectations since the deal closed last year. This finally came to pass today.
HP bought EDS while it was being run by Mark Hurd, who resigned in 2010 after the company's board raised questions about his expense reports. The company agreed to buy Autonomy during the reign of Leo Apotheker, who lasted less than a year as CEO before being replaced by Whitman.
Hewlett-Packard Merry-Go-Round in the last seven years includes CEO's Carly Fiorina, Mark Hurd, Leo Apotheker and now Meg Whitman (Click Image To Enlarge)
Whitman said.
"There are no silver bullets to solve our challenges. We will solve our challenges through consistency of leadership, focus, good blocking and tackling and, most importantly, great products and services delivered in the way that customers want to buy them."
HP said the internal and economic turmoil will cause its earnings to fall by more than 10 percent next year, a decline that hadn't been anticipated by analysts who follow one of the world's largest — and most dysfunctional — technology companies.
Investors evidently didn't like what they heard. HP's stock plunged 13 percent after Whitman's presentation, shoving the company's shares to their lowest level in nearly a decade.
HP's troubles stem from a combination of managerial malaise, high-priced acquisitions that haven't paid off and an inability to offset the damage done to its personal computer and printer divisions by the rising popularity of smartphones and tablet computers.
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Whitman maintained that she inherited a bloated, poorly managed company that hasn't been innovating quickly enough in any of its divisions, which span from PCs and printers to software and data storage.
In a recurring theme during her tenure, Whitman said that she will instill the discipline, focus and accountability needed to rehabilitate HP, but she reiterated that the recovery will take several years to complete.
It could be 2015 before Hewlett-Packard Co.'s revenue growth begins to accelerate again, according to Whitman. By 2016, she envisions HP's revenue increasing as the same pace as the U.S. economy's overall growth, with earnings rising at a faster clip.
Whitman said.
"It is going to take longer to right this ship than any of us would like."
Investors are worried HP's woes will allow its competitors — a long list that includes such technology powerhouse as Apple Inc., IBM Corp. and Oracle Corp. — to race even further ahead. In that scenario, HP is constantly scrambling to catch up with new technology trends, leaving the company in a state of perpetual disarray.
Whitman, who won acclaim during a successful decade-long stint running eBay Inc., is confident HP can recapture the drive and creativity that established the company as an industry leader through most of its 73-year history.
She hopes to orchestrate the same kind of turnaround that has revitalized IBM after a long stretch of decay brought on by the shift from mainframe computers to personal computers in the 1980s and 1990s. IBM managed to transform itself into a company focused on providing technology services and software, a transformation that HP is struggling to duplicate.
HP Turnaround Initiatives
Whitman mentioned the following initiatives to turnaround HP:
- Reduce Staff - In her shake-up of HP, Whitman has already reshuffled management and started to eliminate 29,000 jobs through employee buyouts, attrition and layoffs. She's trying to trim the company's annual expenses by more than $3 billion.
- Performance-Based Compensation Programs - She assured analysts Wednesday that she is imposing more internal controls to align employees' paychecks with their performance.
- Utilize New Technologies - She said she is also requiring the company to subscribe to technology services offered by smaller companies such as Salesforce.com Inc. and Workday Inc. to automate many of HP's customer management and personnel systems.
- Reducing Product Lines and Inventories - HP also is reducing the number of different printers that it makes. It is also rolling out a new line of personal computers and tablets running on Windows 8, an overhaul of Microsoft Corp.'s operating system that's designed to appeal to consumers and companies that want more mobile devices with touch-control display screens.
- Introduce New HP Smartphone - Whtman wants HP to design another smartphone, something it did two years ago after buying Palm Inc. only to scrap the device after a few months on the market. HP's return to the smartphone business isn't planned for next year, though.
- Cloud Computing Products - Whitman also is lacing big bets on "cloud computing" — a term that refers to the increasingly popular trend of storing software applications in remote data centers that are accessed over the Internet instead of installing programs on individual machines.
- Big Data Products - HP also is angling for a bigger piece of the "Big Data" market, a field devoted to helping companies and government agencies navigate through the torrent of information cascading through Internet-connected devices.
The Payoff
But the payoff from those initiatives won't come in HP's fiscal 2013, which starts Nov. 1.
The company, which is based in Palo Alto, Calif., expects its earnings for fiscal 2013 to range from $3.40 to $3.60 per share, after stripping out charges for layoffs and other accounting measures unrelated to its ongoing business. The projection translates to an 11 percent to 16 percent drop from the adjusted earnings of $4.06 per share that HP expects to deliver in its current fiscal year.
HP Shares Tumble
Whitman's forecast for next year caught investors off guard because analysts, on average, had predicted HP's adjusted earnings would be $4.17 per share.
HP shares shed $2.22 to close Wednesday at $14.91. The stock price has fallen by 35 percent since Whitman became CEO last September.
Courtesy of an article dated November 27, 2012 appearing in MediaPost Publications Marketing Daily Top Of The News
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