Hewlett-Packard Co. used
to be known as a place where innovative thinkers flocked to work on
great ideas that opened new frontiers in technology. These days, HP is
looking behind the times.
Coming off a five-year stretch of
miscalculations, HP is in such desperate need of a reboot that many
investors have written off its chances of a comeback.
Consider
this: Since Apple Inc. shifted the direction of computing with the
release of the iPhone in June 2007, HP's market value has plunged by 60
percent to $35 billion. During that time, HP has spent more than $40
billion on dozens of acquisitions that have largely turned out to be
duds so far.
"Just think of all the value that they have
destroyed," ISI Group analyst Brian Marshall said. "It has been a case
of just horrible management."
Marshall traces the bungling to the
reign of Carly Fiorina, who pushed through an acquisition of Compaq
Computer a decade ago despite staunch resistance from many shareholders,
including the heirs of HP's co-founders. After HP ousted Fiorina in
2005, other questionable deals and investments were made by two
subsequent CEOS, Mark Hurd and Leo Apotheker.
HP hired Meg Whitman
11 months ago in the latest effort to salvage what remains of one of
the most hallowed names in Silicon Valley 73 years after its start in a
Palo Alto, Calif., garage.
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The latest reminder of HP's ineptitude
came last week when the company reported an $8.9 billion quarterly loss,
the largest in the company's history. Most of the loss stemmed from an
accounting charge taken to acknowledge that HP paid far too much when it
bought technology consultant Electronic Data Systems for $13 billion in
2008.
HP might have been unchallenged for the ignominious title
as technology's most troubled company if not for one its biggest rivals,
Dell Inc.
Like HP, Dell missed the trends that have turned
selling PCs into one of technology's least profitable and slowest
growing niches. As a result, Dell's market value has also plummeted by
60 percent, to about $20 billion, since the iPhone's release.
That
means the combined market value of HP and Dell the two largest PC
makers in the U.S. is less than the $63 billion in revenue Apple got
from iPhones and various accessories during just the past nine months.
The
hand-held, touch-based computing revolution unleashed by the iPhone and
Apple's 2010 introduction of the iPad isn't the only challenge facing
HP and Dell.
They are also scrambling to catch up in two other rapidly growing fields "cloud computing" and "Big Data."
Cloud
computing refers to the practice of distributing software applications
over high-speed Internet connections from remote data centers so that
customers can used them on any device with online access. Big Data is a
broad term for hardware storage and other services that help navigate
the sea of information flowing in from the increasing amount of work,
play, shopping and social interaction happening online.
Both HP
and Dell want a piece of the action because cloud computing and Big Data
boast higher margins and growth opportunities than the PC business.
It's
not an impossible transition, as demonstrated by the once-slumping but
now-thriving IBM Corp., a technology icon even older than HP. But IBM
began its makeover during the 1990s under Louis Gerstner and went
through its share of turmoil before selling its PC business to Lenovo
Group in 2005. HP and Dell are now trying to emulate IBM, but they may
be making their moves too late as they try to compete with IBM and
Oracle Corp., as well as a crop of younger companies that focus
exclusively on cloud computing or Big Data.
A revival at HP will take time, something that HP CEO Meg Whitman has repeatedly stressed during her first 11 months on the job.
"Make
no mistake about it: We are still in the early stages of a turnaround,"
Whitman told analysts during a conference call last week.
The problems Whitman is trying to fix were inherited from Apotheker and Hurd.
HP
hired Apotheker after he was dumped by his previous employer. He lasted
less than a year as HP's CEO just long enough to engineer an $11
billion acquisition of business software maker Autonomy, another poorly
performing deal that is threatening to lump HP with another huge charge.
Before
Apotheker, Hurd won praise for cutting costs during his five-year reign
at HP, but Marshall believes HP was too slow to respond to the mobile
computing, cloud computing and Big Data craze that began to unfold under
Hurd's watch. HP also started its costly shopping spree while Hurd was
CEO.
How much further will HP and Dell fall before they hit bottom?
HP's
revenue has declined in each of the past four quarters, compared with
the same period a year earlier, and analysts expect the trend to extend
into next year. The most pessimistic scenarios envision HP's annual
revenue falling from about $120 billion this year to $90 billion toward
the end of this decade.
The latest projections for PC sales also
paint a grim picture. The research firm IDC now predicts PC shipments
this year will increase by less than 1 percent, down from its earlier
forecast of 5 percent.
Whitman is determined to offset the
crumbling revenue by trimming expenses. She already is trying to lower
annual costs by $3.5 billion during the next two years, mostly by
eliminating 27,000 jobs, or 8 percent of HP's workforce.
Marshall
expects Whitman's austerity campaign to enable HP to maintain its annual
earnings at about $4 per share, excluding accounting charges, for the
foreseeable future.
If HP can do that, Marshall believes the stock
will turn out to be a bargain investment, even though he isn't
expecting the business to grow during the next few years. The shares
dropped 37 cents Monday to finish at $17.21, HP's lowest closing price
in eight years.
One of the main reasons that Marshall still likes
HP's stock at this price is because of the company's quarterly dividend
of 13.2 cents per share. That translates into a dividend yield of about 3
percent, an attractive return during these times of puny interest
rates.
Dell's stock looks less attractive, partly because its
earnings appear to still be dropping. The company, which is based in
Round Rock, Texas, signaled its weakness last week, when it lowered its
earnings projection for the current fiscal year by 20 percent.
Dell
executives also indicated that the company is unlikely to get a sales
lift from the Oct. 26 release of Microsoft Corp.'s much-anticipated
makeover of its Windows operating system. That's because Dell focuses on
selling PCs to companies, which typically take a long time before they
decide to switch from one version of Windows to the next generation.
Dell shares slipped to a new three-year low of $11.10 in Monday trading before closing at $11.12, down 14 cents.
As PC sales languish, both HP and Dell are likely to spend more on cloud computing, data storage and technology consulting.
Although
those look like prudent bets now, HP and Dell probably should be
spending more money trying to develop products and services that turn
into "the next new thing" in three or four years, said Erik Gordon, a
University of Michigan law and business professor who has been tracking
the troubles of both companies.
"It's like they are both standing
on the dock watching boats that have already sailed," Gordon said. "They
are going to have to swim very fast just to have chance to climb back
on one of the boats."
Source: NDTV
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