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H-P’s Big Investors Finally Can’t Take It Anymore


Wolf Richter

www.testosteronepit.com   www.amazon.com/author/wolfrichter

Investors are fuming. But traders, the lucky ones who got the timing right, love it. And so do the big Wall Street firms that shuffle companies around. For decades, Hewlett-Packard did what they wanted it to do: swallow other companies, whole or in pieces, spit out some limbs, mangled or undigested, and dump tens of thousands of employees.

Since 1990, H-P has gobbled up well over 100 companies, and not necessarily Silicon Valley startups, but major corporations, including such American stalwarts as Palm in 2010, or in 2002 hot-shot Compaq that once upon a time just about invented the portable computer—a box with a handle, light enough for an adult to lug around. Each acquisition was accompanied by mass layoffs, chaos, morale problems, defections, entanglements, and integration fiascos.

The process was interrupted only by spin-offs to undo the unmanageable clutter amassing around whoever was CEO at the time, part of the eternal Wall-Street flip-flop of acquisitions as a “growth strategy” and spin-offs as some sort of “focus strategy.” Wall Street firms made money coming and going, and each time executives of target companies moved on, they were handed rich reward packages, and CEOs got a boost to their bonuses and egos. Laid-off employees got a consolation price that, for the older folks, usually ran out before they found another job—if they ever did.

A corporate spy scandal in 2006 added some frisson, as did the delicious imbroglio that cost CEO Mark Hurd his job in 2010. And then there was the debacle of his successor, Leo Apotheker, the German guy who got H-P stuck with its latest nightmare, the nearly $11 billion acquisition of UK software maker Autonomy.

It was the result of a classic combination: a new CEO with a big ego who wanted to mark his territory, pressure by the board for a “growth strategy,” however inane, banks that were lusting for fees, and a target company that wasn’t all that forthcoming about inconvenient details in its financial information.

Reality was ugly. The day after the board approved the deal, H-P slashed its outlook, axed its smartphone and tablet, and announced it would try to spin off its PC division. Its growth strategy? Autonomy. The path to software nirvana.

The stock plunged 20%. A little over a month later, Apotheker, 11 months on the job, got fired. Autonomy’s performance disappointed form get-go. So H-P, alleging accounting improprieties, wrote off $8.8 billion of the acquisition—a sum that remains inexplicable. Rarely do corporations waste so much stockholder money in such a short time. The Justice Department, the SEC, the UK’s Serious Fraud Office, and UK’s Financial Reporting Council are investigating (Wall Street Journal).

And someone ended up holding the bag….

“H-P shareholders are once again suffering from disastrous deal making, lack of accountability and flawed oversight,” lamented William Patterson, executive director of CtW Investment Group, part of the union-sponsored pension system in Wisconsin. It holds about 7.8 million of these misbegotten shares that were trading above $66 in early 2000, then crashed, then recovered, crashed again during the financial crisis, recovered to $53 in early 2010, then swooned into the low teens in late 2012, only to rally about 50% to a whopping $19, a level they’d already visited in 1995—and there’s been a touch of inflation since then!

Patterson has had it. He’s helping to foment a shareholder revolt, according to the Wall Street Journal. He’s getting together about 20 large H-P shareholders to meet with members of the board on Monday. Others would join by phone, like Anne Sheehan, director of corporate governance for California State Teachers’ Retirement System—”It is our understanding that they are looking for new board members,” she said. Patterson figured that the group owned almost 7% of H-P’s outstanding shares.

On the other side of the table: H-P Chairman Ray Lane, board members John Hammergren (chairman the board’s finance committee), Kennedy Thompson (chairman of the board’s audit committee), and Rajiv Gupta (lead independent director). The first three are fighting for their jobs.

“We look forward to discussing any concerns this particular group of investors may have,” H-P spokesman Howard Clabo told the Journal. CEO Meg Whitman was sanguine. “We have a very good collection of individuals,” she said about the board.

That “very good collection” is responsible for adding complexity and bulk to a corporate hulk whose business model has been to acquire other companies, lay off people, and practice acquisition accounting to hide operational realities. If H-P could just swallow another huge player to distract everyone and throw a welcome veil over the current mess!

But thanks to the giant credit bubble the Fed has created, large corporations can borrow themselves out of trouble for nearly free. These Fed policies are also growing deposits far faster than banks can deploy them, or than the economy can use them. And so, there are “hundreds of billions of dollars of potential fuel unused.” Therein lies the potential for big problems. Read…. The Fed Is Blowing A Dangerous Bank Deposit Bubble.

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