Yesterday's announcements by HP (NYSE:HPQ) and Oracle (NYSE:ORCL) show two companies going in opposite directions. HP has laid off hundreds of employees in its ill-fated foray into the mobile ecosystem. HP is trying to spin off its PC unit and, at the same time, find a home for its fast deteriorating mobile assets, having spent billions of dollars trying to break into phones and tablets ($1 billion+ to buy Palm, investments in the business and write off of inventory) and then yanking the cord approximately 60 days into the adventure.
Oracle, on the other hand, had its best software quarter and is humming with 12% revenue growth and a 36% jump in profitability. Oracle is up 3% after hours after Larry Ellison pointed out (full transcript here) that
[In] Q1, the transition away from selling low-margin commodity servers to selling high-margin engineering systems increased both the gross margins and the overall profitability of our hardware business.
Oracle acquired Sun and barely missed a beat despite picking up a new hardware business.
As Mark Hurd said on the earnings call:
Now fourth, I want to make sure this point is clear. In addition to Exadata and Exalogic growth, our SPARC server products grew this quarter. We had growth in the core SPARC product line. Our strategy around high-intellectual property, high attach, high-margin solutions, that include Exadata, Exalogic and the SPARC server products is working. You're also beginning to see that show up in these industry market share figures that show us gaining shares.
Last, we are continuing to hire. We added 350 people to the sales organization in Q1.
HP spent $11 billion buying Autonomy at at 12X-14X revenue multiple, which now represents approximately 1/4 of HPQ's market cap, which now stands below $45 billion. Revenue for those keeping score was $128 billion (TTM), making HPQ trade at less than 0.5 of revenue.
Mark Hurd, well known as a brilliant operator, is now essentially at the helm at Oracle. Previously, he was at HP until an expense report scandal caused the board to send him running to Larry Ellison's outsretched arms. Since Hurd joined Oracle, the stock is up approximately 25% and has been up as much as 50%. Since Leo Apotheker took over HP from Hurd, HP's stock has lost approximately 50% of its value, has yo-yo'd on its mobile strategy, decided to jettison the PC business and overpay for a software acquisition.
So what could happen here: HPQ has said that it will spin off the PC business if there are buyers for an $8 billion business with 5% net margins in a category that is increasingly threatened by tablets and phones where HP now does not have a play. The Mobile business at HPQ is finished. The printer business contributes north of $800Mn in profit to HPQ and could also be a candidate for a spin off or merger with Kodak to make a giant printer business. HP would then use its EDS and Autonomy acquisitions and its existing software, services and server business to focus on software and services, targeting IBM (NYSE:IBM) and Oracle.
Truth is, the company is not big enough for that nor, with Hurd gone, does it have the operating discipline to make that fly under Apotheker (if he lasts that long). This leaves the HP board with some unpalatable options:
- Find yet another CEO to follow Carly Fiorina, Mark Hurd and Leo Apotheker in rapid succession.
- Break up the business and keep the software and services business under the HP name, selling the printer business and PC business.
- Sell the PC business and watch the services business run right into the outstretched arms of...you guessed it, Mark Hurd and Oracle who knows the business well and will fold it into its growing software business and operate it like a well-oiled machine.
It would be sad to see such an icon of Silicon Valley (HPQ) disappear, but I do not think it is out of the question as the board and management fumble their way from acquisition to spinoff and shrink their market cap to a point it becomes vulnerable to takeover.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.