Seeking Alpha
Profile| Send Message|
( followers)  

Last Friday afternoon, Bloomberg ran an in depth piece on the potential for a breakup of tech giant Hewlett-Packard (NYSE:HPQ). The consensus of the technology analyst community seems to be that HP's management should sell off the PC and printer divisions to pay down debt and support investment in higher-growth areas. If it is impossible to sell those divisions at a decent price, other analysts would like to see them spun off into a separate company. These actions are expected to create "value" in some way, and could boost the stock price to $20.

Tech analyst Brian White's comment seems typical: "This whole mishap with Autonomy should be a wake-up call to do something. I think it's time... How much more pain can investors take before you understand that something needs to be done?" However, this attitude will not help HP shareholders in the long run. Indeed, the main reason why HP is in the situation it currently faces is because previous management teams thought "that something need[ed] to be done." For example, recent reports have alleged that the Autonomy acquisition came about because former HP CEO Leo Apotheker was "desperate" for a transformative acquisition. Autonomy was perhaps the fourth software company HP looked at in Apotheker's brief reign.

While the Autonomy acquisition has probably been HP's biggest blunder of the past decade (due to the steep price tag, recently reported accounting irregularities, and the quick writedown), it was just the last of many. Carly Fiorina tried to put her stamp on the company by paying nearly $25 billion to merge with Compaq and gain the #1 position in PCs. The ongoing commoditization of the PC business has made it difficult for HP to make profits here; around the same time HP was doubling down on PCs, IBM (NYSE:IBM) was exiting the business. Earlier this year, HP had to write down the value of the "Compaq" trade name by $1.2 billion.

Recently, the reign of Fiorina's successor, Mark Hurd, has been viewed as a golden age for HP. The company grew its profits and its stock price. That said, much of HP's growth was the result of pricey acquisitions, something for which the company was recently criticized by infamous short-seller Jim Chanos. Under Hurd's watch, HP spent nearly $14 billion to buy EDS, a technology services/outsourcing company. While Hurd was confident at the time that HP would be able to make the services unit a profitable driver of growth, it has become a disaster area for HP, due to under-investment (particularly in higher value-added segments). HP had to write down the goodwill from the EDS purchase by $8 billion this summer. Hurd's purchase of mobile device maker Palm does not appear to have worked out too well, either. While HP did acquire some IP that could be worth something, the company found that it was too far behind Apple (NASDAQ:AAPL) and others to compete in the smartphone and tablet markets with Palm's WebOS platform.

Thus, HP's recent history has been marked by CEOs trying to "do something" in order to please analysts and shareholders in the short term. However, management's job is not to find short term band-aids to make things look good. A spinoff of the PC and printer divisions would be just that. When HP considered spinning off the PC division last year, its customers were befuddled, and the company ultimately recognized that its reduction in purchasing power would have a severe impact on costs. There is every reason to believe that the combined profitability of two HPs (after a spinoff) would be less than the company's profit today, because of these lost synergies. Thus, a transaction of this sort cannot be said to create "value" in any meaningful sense.

As I mentioned earlier, analysts think that HP could be worth $20 if it executes a spinoff. The added "value" would come from the market potentially assigning a higher multiple to the remaining enterprise business. However, HP is probably already worth more than $20. HP analysts are simply trying to engineer a scenario that will quickly boost the stock price. If anything, a PC/printer spinoff would make it harder for management to organize a successful turnaround, by adding fur complexity. By contrast, I have previously argued that if HP's management can execute on its current plans for each business unit, the stock could be worth $45 by 2017.

Thus, if you are a long term shareholder, your best bet is to ignore the analyst chatter, and hope that HP's management team does so as well. The company still pays a 3.8% dividend, and that should be ample incentive to wait for the rest of the market to regain some measure of confidence in HP. All HP needs to do is focus on executing the turnaround plan presented at the October analyst meeting. By contrast, if I sense that HP is about to make another desperate move (such as the PC/printer spinoff analysts are recommending): that's when I will head for the exit.

Source: HP's Best Recovery Plan: Ignore The Analysts