September 19, 2018
Wayback: HP's prop-up in a meltdown week
Ten years ago this week the HP shareholder community got a slender boost amid a storm of financial crisis around the world. While the US economy was in a meltdown, Hewlett-Packard -- still a single company -- made a fresh promise to buy back its stock for $8 billion. Companies of HP's size were being labelled Too Big to Fail. The snarl of the banking collapse would be a turning point for a Presidential election. A Wall Street Journal article on the buybacks called HP's move a display of strength. HP wanted to ensure its market capitalization wouldn't take a pounding.
HP was electing to pump a smaller buyback into its shares compared to a competitor's effort. Microsoft was announcing a $40 billion buyback in the same week. At the time, the two companies were trading at about the same share price. Hewlett-Packard was working through its final season with a 3000 lab, tying a bow on the final PowerPatch of the MPE era. One customer recently called that last 2008 release "MPE/iX 7.5.5."
The company was looking to get into a new operating system business in September of 2008, though. HP would be developing a server of its own built upon a core OS of Linux. HP closed down its Nashua, New Hampshire facility just a few months earlier. The offices where VMS was being revived were going dark. At least HP was still selling hardware and growing. We took note of the contrast between selling goods and shuffling financial paper.
Not all of the US economy is in tatters, despite what trouble is being trumpeted today. HP and Microsoft and Nike still run operations which supply product that the world still demands, product which can't be easily swapped in some shadowy back-door schemes like debt paper or mortgage hedges.
A decade later, much has changed and yet not enough to help HP's enterprise OS customers. VMS development has been sold off to a third party firm, OpenVMS Inc. That move into Linux has created a low-cost business server line for HP which doesn't even mention an OS. Meanwhile, Microsoft's stock is trading above $120 a share and HP's split-up parts sell for between $15 and $27 a share, covering the HP Enterprise and PC siblings.
Last week Microsoft announced an impressive AI acquisition, Lobe. For its part, HP Enterprise announced it was refinancing its debt "to fund the repayment of the $1.05 billion outstanding principal amount of its 2.85% notes due 2018, the repayment of the $250 million outstanding principal amount of its floating rate notes due 2018, and for general corporate purposes." A decade ago financial headwinds were in every corporate face. By this year the markets have sorted out the followers from the leaders. HP stepped away from OS software and has created a firm where sales of its Enterprise unit has gone flat.
Stock buybacks offer a mixed bag of results. Sometimes the company doing the buyback simply doesn't have the strength and bright enough future to hope to reap some benefit—for the company. Shareholders love them, though. The customers are a secondary concern at times.
The $8 billion probably seemed like a good idea at the time, considering it was in the Leo Apotheker era and its misguided acquistions. (A deal for 3Par comes to mind, where a storage service vendor recently noted that it was Dell that drove up the 3Par acquistion price by pretending to bid for it.) The trouble with stock buybacks is just about nobody can stop them. Shareholders are always happy to have shares rise, either on the news of the buyback or the upswing over the next quarter.
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