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A Former Tech Legend Is Dow's Biggest Flop of 2012


The constant flow of bad news coming out of the company has helped its board live up to the title of "Most Inept Board in America."

Whitman has said she still sees value in the Autonomy assets HP bought. And time may well prove her right. But this isn't the only acquisition that has blown up for HP and slashed billions from its balance sheet. It's not even the only megadeal to result is a multi-billion-dollar charge this year. In August, HP wrote off $8 billion in value from its $14 billion buyout of EDS in 2008.

Since 2001, HP had spent a reported $67 billion on mergers and acquisitions, more than double its current market value of around $28 billion. That market cap isn't much higher than the value of writedowns, restructuring charges and deal-related expenses HP has taken since 2006.

HP's acquisitions, and the way the company accounted for them, had raised concerns before the Autonomy writedown was announced. "In the last decade, there's been a major change in acquisition process, and HP didn't make that change," says Enderle. Companies like IBM, EMC, and Dell, he says, all made "major changes" in how they do acquisitions, putting more emphasis on maintaining the value of the assets they buy rather than forcing integration even when cultures clash, as some Autonomy staffers claimed was the case with the more bureaucratic Hewlett-Packard. With all the turmoil at HP, Enderle says, "[N]one of the leaders were able to focus on that particular process, and as a result, their acquisitions have been pretty bad in terms of underlying execution."

The way HP accounted for its purchases also set off some red flags. The acquisitions also drove up the amount of debt on HP's balance sheet, and the company late last month had its credit rating downgraded by Moody's Investors Service, which added that the outlook for the rating was "negative" and unlikely to be raised over the next year. "The negative rating outlook reflects our concerns about HP's ability to contend with the significant competitive, secular, and execution challenges facing the company," Moody's explained, citing "slow to no growth prospects" for many of HP's business lines over the coming years.

Analysts at financial research firm GMI Ratings had consistently rated HP's accounting and governance practices as "very aggressive" -- riskier than 96% to 99% of North American companies going back to at least December 2009. "One reason for the low score is that HP overpaid for its acquisitions in earlier years, exposing itself to the risk of having to write them down later as less than originally thought," GMI's analysts wrote in May. Just a day before the Autonomy writedown was announced, GMI analysts put HP on their "Black Swan" list of companies with a high risk of major stock-price drops within six months.

"Our rating is not going to improve very much, despite the fact that they've now acknowledged at least a couple of poor mergers and they've written down the goodwill," says Agnes Grunfeld, managing director of GMI Ratings. "That has to help, but the truth is I don't think it's going to help a lot in the near term unless they really change the way they go about their business."

Whitman is, of course, trying to do just that, but she has made clear that turning around the tech giant -- which still generated $120 billion in revenue for the 12 months ended in October -- will be a difficult, multi-year process, with the restructuring not complete until the end of 2014 and real growth taking longer than that. "It takes five to seven years to do a turnaround of this magnitude," Enderle says. "You can look at Steve Jobs at Apple or Lou Gerstner at IBM. Five to seven years is what it takes. Much of the heavy lifting happens in the first few years and most of the benefits don't happen until you're almost all the way done."

After another year badly lagging other blue chip stocks, the end of that bumpy road still seems a very long way away.

Editor's Note: This article by Yuvel Rosenberg originally appeared on The Fiscal Times.

For more from The Fiscal Times:

Winners and Losers in Business in 2012

5 Health Care Reform Changes Coming in 2013

The Overtaxed 250K Couple

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