HP Continues Burning Through Its Wallet

Includes: ARST, DELL, HPQ, PAR
by: Nikhil Nichani

Hewlett-Packard Co. (NYSE:HPQ) further extended its earning spree that started in August, with the latest offer to acquire security-software maker ArcSight Inc. (ARST) for $1.5 billion. The offer announced over the weekend adds to the $2.1 billion HP agreed to pay for 3PAR Inc. (NYSE:PAR) and the $10 billion share buyback program HP announced. With $14.7 billion in cash and $15.6 billion in account receivables, the constant spending is going to take a huge hit on HP's cash account. Let’s brake down the effects of HP's shopping spree on its wallet.

Before Mark Hurd’s departure, HP announced that as of July 31st, the company still had $4.9 billion left from its $8 billion stock repurchase program announced last November. Add the $10 billion program announced this past month, and you have a program that equals 101% of HP's outstanding cash. Assuming all the ARs are received, the stock repurchase program alone accounts to 49% of AR and cash outstanding combined.

After weeks of bidding against Dell (DELL), HP ended paying a hefty premium for a small share in the cloud computing market through 3PAR Inc. The $2.1 billion sum paid by HP is 14.9x 3PAR’s book value, 342.3x its cash flow and 10.1x its sales. The price is 14.2% of HPs cash outstanding. Combine that with the proposed stock repurchase plan and you have an astounding 56.1% of cash and AR outstanding. The purchase of 3PAR won’t bring any of 3PAR's cash over to HP because after breaking the deal with Dell, 3PAR actually owed Dell a $72 million breakup fee, which is 148.8% higher than 3PARs outstanding cash, so the excess fee owed will most likely come from HP's cash account.

But HP wasn’t done there. Over the weekend it announced to buy out ArcSight Inc. for $1.5 billion. So how much is ArcSight worth to HP? $1.5 billion would make ARST worth $43.35 a share. That would be 8.08x sales, 10.37x book value, 52.22x earnings, 9.89x cash, and 47.11x cash flow. Hey, at least it’s not as overvalued as 3PAR, right? Add that to the above mentioned programs and HP has already planned to spend 125% of its outstanding cash and the year isn’t even over yet. Instead of raising dividends on its common stock and rewarding its shareholders, HP would rather spend 101% of outstanding cash to buy back a portion of its shares. Investors obviously aren’t finding this beneficial for them as HP's stock as barely moved since the announced plan.

Disclosure: No positions