Home Will Autonomy Break HP’s Back?

Will Autonomy Break HP’s Back?

The question of whether Hewlett-Packard can avoid a break-up will be answered over the next six months. That’s how long the company has to convince investors its PC, printer and technology-services businesses can generate the cash needed to build and sell products into growth markets, especially mobile and cloud computing.

Sharks have been circling HP for a while now (see June’s ReadWrite DeathWatch: Hewlett-Packard and October’s Why Meg Whitman’s Plan To Rescue HP Won’t Work), but the turnaround window shrank considerably Tuesday when HP claimed that it had been duped into paying $10.3 billion in 2011 for British software maker Autonomy. That led HP to garnish its fourth-quarter earnings with a whopping and disastrous $8.8 billion charge for the acquisition, with $5 billion directly related to accounting improprieties allegedly committed by Autonomy execs.

Not surprisingly, the disclosure rattled investors who sent HP shares plunging to a 10-year low. HP’s $6.85 billion net loss for the quarter ended Oct. 31 followed an $8.9 billion loss in the previous quarter. That loss, too, was primarily due to a huge write-down on a major acquistion, in that case the $9.2 billion spent in 2008 to buy tech services provider EDS.

To be fair, chief executive Meg Whitman inherited Autonomy and EDS from her predecessors, ousted CEOs Leo Apotheker and Mark Hurd, respectively. Nevertheless, she’s being paid millions to clean up the mess, and so far, for every step forward, the company has taken two steps back.

Leo Apotheker

Why Autonomy Is So Damaging

The Autonomy deal is especially troubling because it makes investors and analysts — not to mention customers, the media and just about everyone else — wonder how many more giant blunders are on the way. If in fact Autonomy executives are guilty of accounting malfeasance, as Whitman claims and Autonmy execs and Apotheker strongly deny, just how did HP execs get hoodwinked? And how can we be sure it won’t happen again?

Blaming others won’t ease the doubts about the competency of HP execs and its board. And without confidence in management, corporate customers are unlikely to bet big on HP. If that doesn’t happen, HP can’t generate the cash it needs to expand into growing and emerging markets.

“If they can’t do that (increase sales), then there’s going to be massive pressure for them to split the company up,” warned Crawford Del Prete, an analyst for IDC. “Otherwise, the perception would be they’re just going to atrophy,” he said. “Those assets are going to become less and less and less valuable.”

Unless Whitman can demonstrate — soon — that a turnaround is inevitable, investors will agitate for a breakup sooner than later, in order to get the highest returns on the pieces. The Autonomy setback gives Whitman less time to do that. Starting right now, she has to nail every move to stabilize the company and show steady progress.

Market Hurdles

Under even favorable conditions, boosting sales would be difficult. A quarter of HP’s revenue comes from PCs, and that market is taking a drubbing as people adopt smartphones and tablets. The PC market is expected to shrink 1.2%, to 348.7 million units, this year, according to IHS iSuppli. The decline is the first since 2001.

Worse, HP does not yet have a competitive smartphone or tablet. Whitman says a smartphone is coming, and the company is scheduled to release a business tablet, called the ElitePad, in January.

Then there’s the printer business, a major revenue stream for HP. Once again, the company will have to find a way to increase business in a contracting market as people forego expensive printers and ink for digital media.

HP Still Has Hope

HP is not without competitive products, however. In the high-margin enterprise market, for example, the company has competitive data-center hardware and software.

“There’s many product lines that Hewlett-Packard has that are world-class competitive and other product lines that can be world-class competitive,” Del Prete said.

Whitman isn’t sitting still through all of this. She is cutting 29,000 jobs by the end of fiscal year 2014 to reduce costs by as much as $3.5 billion. Whitman is also streamlining the printer portfolio and overhauling HP’s technology-services business.

If you set aside the Autonomy disaster, HP’s overall results were mixed. The company’s fourth quarter profit excluding the write-down and other items was $1.16 a share, besting the average of analysts’ estimates of $1.14. Revenue was $30 billion, just below analysts’ projections of $30.4 billion.

While those numbers are nothing to celebrate, they are the base line that HP must build upon if it hopes to stay in one piece. Oh, and must avoid any more Autonomy-style surprises. The iconic Silicon Valley pioneer simply won’t be able to survive any more shocks like that.

Images courtesy of Shutterstock.

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