What Hewlett-Packard Needs To Do For A Turnaround

| About: HP Inc. (HPQ)

by Matthew Smith

Once one of the world's most affluent Information Technology multinationals, Hewlett-Packard (HPQ), commonly known as HP, has been on somewhat of a business rollercoaster over the past few years. In the past decade, we have seen it buy out Palm for $1.2 billion, merge with Compaq back in 2002, and acquire a number of associated technology firms including 3Com and EDS. Add this to confusion and chaos in senior management, and investors simply don't know where the company is at. It is hardly surprising that the share value of HP has took a significant long-term hit, with the stock now trading at around $24 compared to its previous high of just over $50.

What exactly is all the commotion at HP about? Firstly, both the company's structure and senior management team seem to change on a frequent basis. The most recent switch-around was announced last week, when HP announced its printing and PC divisions would together become one operating unit, to be led by PC division expert Todd Bradley. This move sees the departure of Vyomesh Joshi, former head of the printing division, from the corporation. Combination of the printing and PC divisions could signify a movement away from hardware specialism; HP revealed back in August 2011 that it planned to focus more on software solutions. It mentioned in particular cloud storage technology, suggesting this is a market it will be looking to penetrate.

But is seeking the high-profit margins of software enterprise really an intelligent move for HP? I don't think so; the company would face high levels of competition from new technology giant Apple (AAPL) along with Google (GOOG). Both of these companies already offer cloud storage, which works in sync with their respective app stores. In my opinion, HP would be better off sticking to its hardware production roots.

It's no secret that the extraordinary rise of Apple has been to HP's detriment, and is probably the root cause of its falling stock price. To a large extent, Apple has taken over a large proportion of HP's customer base with its innovative and eye-catching products which are particularly popular with the younger generation. Although Apple took slightly longer to reach the workplace, there is no doubt this is a transition taking place now. Enterprises are keen to keep up with the latest information and communication technology, and many are choosing to replace old HP computers with brand new Apple Macs.

I think the key to Apple's developing lead over HP lies in investment. Apple has spent billions of dollars over the past decade investing in research and development to ensure it has an edge over competitors. Innovation has allowed it to lead the market - not follow it, as HP would be doing if it pursued cloud technology. Unsurprisingly, investment at HP has been relatively low; capital depreciation has actually exceeded new investment since at least 2007. It seems the company has been using its resources instead to undertake acquisition after acquisition. The fact that technological innovation is crucial in the ICT industry hasn't been at the forefront on HP's business strategy, and it is for this reason, I believe it is suffering now.

A poor business strategy stems from poor management, and there is no doubt management is an issue at HP headquarters. The latest scandal here has led to a battle in the high court between BP and its close rival Oracle (ORCL), a competing US technology giant. The argument centers on a decision by Oracle last year to cease supporting the heavy-duty microprocessor Itanium. HP claims that continued support of Itanium was agreed in an earlier settlement between the two companies, and has sued Oracle in a state court in California over the issue. Oracle then counter-sued HP, stating HP did not accurately inform it of the terms of the contract with Intel. On Monday, both companies fought to secure pre-trial wins over the issue, and feud remains ongoing.

This isn't the first time in the past few years that Oracle and HP have had a falling out. Back in 2010, HP CEO Mark Hurd was forced to resign from his position amid controversy that he had an affair with a female member of the company; Leo Apotheker swiftly replaced him as head of the company. After Oracle's CEO criticized HP over its handling of the matter, the company quickly hired Hurd to work for them, with rumors of vast financial incentives. This later led to a trade secrets lawsuit being filed against Hurd by HP, who was accused of passing on inside information to his old rival. Despite this dispute being resolved quickly, the relationship between HP and Oracle remained sour.

So, how will Oracle react to the latest news that HP will be combining its computer and printing divisions? Most likely, not with great interest; the company is too busy getting bogged down over the current Intel lawsuit. Since Oracle's acquisition of Sun Microsystems in January 2010, it has operating as a producer of both hardware and software technology products, as opposed to its previous status as a specialist software company. It will therefore carefully be considering its position in the ever-changing technology industry carefully.

I think HP has two major aspects to consider if it wishes to remain a big player in the game. Firstly, it must carefully determine what market to focus on, and develop a strategic business plan with direction, remembering that Apple is only one of the superpowers ready to play ball if HP pitches its products against them. Secondly, HP needs to realize that neither a new CEO nor a fresh takeover is going to give it the edge over the competition. Investment, innovation and development should be three words on current CEO Meg Whitman's lips. Would I advise investment in the HP stock? No; I believe with the company's current market stance, its stock value will continue to creep ever downwards.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.