November 30, 2012
It's time to admit that IBM won at being No. 1
It's taken more than 10 years for all of the votes from the business community to be counted. But after HP launched into a campaign to become the world's largest computer company, by buying Compaq in 2001, the enterprise IT legend that HP's chased has finished at No. 1.
Not in company sales, of course. As Kane's financial manager Mr. Bernstein says in Citizen Kane, "Well, it's no trick to make a lot of money... if what you want to do is make a lot of money." The trick HP wanted was to make a lot of profit while increasing shareholder's value. This week we received two pieces of news about that odyssey to be No. 1. Both suggest the game is over, and HP will need to try to win the next, different game.
First, the bond rating service Moody's has downgraded the value of HP's debt paper to just three steps above junk bonds. HP's debt carries the steepest risk ever at a Baa1 rating. This didn't matter as much when HP held so little long-term debt. That's not the case today. About $25 billion in debt is affected, Moody’s said.
Second, the price of HP's stock has taken a tumble all through 2012. It's dropped so low in company valuation that Public Storage of America, a $1.8 billion storage unit renter, is now just below HP's valuation. Hewlett-Packard is the diving blue dot in the valuation chart, and PSA is the green. HP now needs 330,000 employees and $130 billion a year in sales to keep up with a storage unit company's value. HP lost that valuation that's charted there in a little more than one quarter. There seems little chance of regaining it while HP's built the way it is today. 2013's February 21 looks like a genuine fork in the road. HP reports its Q1 results that day.
In this week's New York Times, an op-ed piece written by a CEO contemporary of the Bill-and-Dave HP says it's time to split up Hewlett-Packard. Not to improve its valuation. To save the company, says Bill George, now a professor of management practice at Harvard Business School.Immediate salvation is required, if you read the business press. You could talk about the HP leadership of this era by pointing at articles like "Why HP Won't Fire Meg Whitman (At Least Not Right Away)." If they do, that would be the fourth straight CEO fired by HP. The last CEO who held the job through a peaceful resignation was also the final CEO groomed from within HP's ranks. Wow, Lew Platt: who among us ever thought he'd look like a powerful business leader?
But Platt wasn't made of the stuff that sent HP sniffing after every computer business where it didn't have a lead and wanted it, all in the chase to make a lot of money. That $22 billion to buy Compaq was Carly Fiorina's first brainstorm, but the profits didn't rain down on the company. Then there was the $14 billion spent on EDS, just so HP could puff itself up with a 144,000-employee headcount and compete with IBM's Services business. This too was recently written down.
All that Platt seemed to know how to do was lead an HP that was still investing in enterprise technology. His was the last CEO term where the sensible 10 percent R&D expense was safe on the HP books. R&D grows value in companies, especially ones like HP that can't carry off an Apple turtleneck cool or maintain IBM's ediface reputation.
The only thing that's succeeded in the HP march toward bigness, is, well, bigness. An employee force so large that it could lay off 75,000 workers over a decade and still be larger than it ever has been, paycheck-wise. IBM dropped its PC business at about the same time HP bought up billions of Compaq sales. Add in $10 billion of Autonomy (another writedown, with a swindle story in play) and HP's gotten what it wanted to be. Very big.
But while it drifted from the HP Way, the company watched Apple pass it to become the largest technology company in sales. HP has struggled because it wanted to be IBM and Apple at the same time. Each of these companies outflanks HP in size that matters: valuation and profitability. By factors of 10, or more.
George, who was CEO of Medtronic before he moved to the Harvard business faculty, pointed out that HP's quest to be No. 1 has been costly.
With 330,000 employees and $120 billion in revenue, HP has become too big to manage.
It is really two businesses: a commodity personal computer and printer business and an enterprise systems, services and software business. The characteristics of these businesses are entirely different.
And so while you've been assuming that a very large vendor could deliver very large value, HP's R&D and management have been taken from pillar to post, from PC to IT. That thrashing means that now a storage unit company is worth just slightly less than the creator of the MPE/iX, PA-RISC, Superdome, IMAGE, and ink-jet printing.
Whitman -- for as long as she lasts after a scary 2012 where shares tumbled as steeply as the chart at right shows -- should be tossing in the towel on this fight to be No. 1. She's got to try to bail out a listing ship. George points out in his article that HP's enterprise business demands heavy R&D, "including very sophisticated software (an area where HP is sorely lagging behind IBM, Oracle and SAP), high touch customer service, and an expensive support structure to meet its customers’ complex needs."
In its current form, Hewlett-Packard is a wasting asset, whose value to customers, employees and shareholders is steadily declining. It is time for the board to move quickly to restore its former status as a company everyone can admire, one that can compete successfully in two very different global markets.
There's a game where HP can finish on top, perhaps. It lies on a different field from trying to run a company large enough to be No. 1, while trying to beat two wildly different rivals at the same time. Whenever HP starts playing that new game -- cleaving itself into a $60 billion IT company and a $60 billion PC company -- its enterprise users can look away from this blowout loss that's taken a decade to sink in, after chasing No. 1.
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