HP is either the greatest value in the technology industry or a company on the wane. Turns out there's not a lot of middle ground when it comes to HP.
The company's future---now in the hands of new CEO Meg Whitman---was a key topic in multiple places. On ZDNet's Great Debate series, the question was simple: Can Whitman turn around HP?
Whitman: The great HP fixer?
I took the side that Whitman wasn't going to bring HP back to its past glory. The primary reason is I see Whitman as an interim figure. She's the fixer, the communicator and the one who will hopefully create a structure that will enable an internal candidate to take the reins.
In other words, Whitman can stabilize HP and execute a short-term vision, which appears to be a spin-off of the PC business and a software strategy that revolves around Autonomy. However, is Whitman the CEO for the next decade?
Add it up and I argued that HP's problems will outlast Whitman's tenure:
Whatever HP decides it wants to be when it grows up it needs to focus on research and development and carve its own path. The current model revolves around being someone else---IBM, Cisco, Apple, whoever's next. The problem is that HP has starved R&D at 3 percent of revenue all through the Mark Hurd years. Now HP doesn't have the financial heft to suddenly jump to 6 percent (IBM levels) or even higher. That's why I'm arguing that Whitman can't turn around HP. HP's R&D problems will last longer than Whitman's tenure if history is any guide.
Given my points about Whitman, it's a natural leap to assume I think HP is broken. I don't necessarily see HP as broken because frankly I don't see it as one company. It's a series of companies that are stitched together in a way that doesn't quite make sense.
Among the moving parts:
- The enterprise server, storage and networking division could stand alone. That unit is the core of HP's system and data center beachhead.
- The PC business is profitable and No. 1 in market share. But is there a future for a consumer focused low-margin business?
- The printer unit is a cash cow, but in many respects it faces the same threats as the PC division. Another wild-card: What if society really goes paperless?
- The services unit is solid, but doesn't have the high-end strategic feel of an Accenture or IBM. Getting there takes work.
While you can debate whether HP is a broken company, there's also a good argument that the company needs to be broken up. HP is about to enter a multi-decade period of transformation. You can't create a long-term vision, boost R&D and improve continuity overnight.
On the flip side, HP has a strong brand and market standing. As Whitman said "HP matters," but it's an open question of how much relevance the company will have going forward.
The HP-as-broken theme was analyzed by Sanford Bernstein's Toni Sacconaghi earlier this week. Sacconaghi noted that HP is cheap at 4.9 times projected earnings. He wrote:
Prior to this month, not one tech stock with a market cap of >$5B has traded at less than 5.5x earnings in the last 20+ years. In fact, ex financials, only 19 stocks with market cap above $5B have traded below 5.5x since 1990 (of which nearly half were in the cyclical energy sector), and only 5 stocks with a market cap over $20B have traded that low.
Sacconaghi argued that HP isn't broken, but Wall Street is treating it like a dead company. That take led to an interesting discussion on the Enterprise Irregular email list. Among the notable comments:
- HP's valuation is based on historical metrics, but there are no guarantees that the company will have the same earnings and revenue profile going forward.
- Others argued that HP's demise really started with the acquisition of Compaq. The acquisition of EDS muddled the strategy even more. Now HP may need to merge with a major services firm and hand over management to the partner. Without a transformational merger, HP is going to ultimately have to sell off divisions.
- HP doesn't have a purpose and has lost it soul.
- Private equity has to salivating over HP and the prospects for a leveraged buyout. Also note that HP retained Goldman Sachs to fend off any hostile takeovers.
Has the HP hate gone too far? It's too early for definitive answers, but rest assured the polarized debate will continue.