What's Gone Wrong With H-P?
A Lengthy Turnaround Plan Will Require CEO Stability, Responsible Spending and Refresh of Products
By BEN WORTHEN
Wall Street Journal, Nov. 6, 2012
In 2010, Hewlett-Packard Co.'s HPQ -0.76% then-chief executive Mark Hurd boasted the company was "the largest IT company in the world" and said "we are still not to our full potential."
Two years and two CEOs later, H-P is stumbling. Over that time, the Palo Alto, Calif., company's market capitalization has fallen to less than $30 billion from more than $100 billion. On Friday, H-P's shares hit a new 10-year low.
Current CEO Meg Whitman has said H-P—which sells tech products including personal computers, printers, servers and consulting services—is now saddled with outdated products, poor internal processes and has "no silver bullets" for a rebound. She predicts profits will fall again next year and that H-P won't achieve meaningful growth until at least 2015.
An H-P spokesman said the company has a turnaround plan and has "put a strong leadership team in place," among other moves.
Here's a look at H-P's problems, and how the company plans to fix them:
Revolving Door at the Top
Four CEOs have run H-P since 2005. Each brought his or her own executives, often from outside the company. More than two dozen executives ranked senior vice president or higher have left in the last two years alone.
At an event for financial analysts last month, Ms. Whitman called the constant change at the top "the single biggest challenge facing H-P." The churn, she said, "has caused multiple inconsistent strategic choices" and "significant executional miscues."
In 2005, for example, then-CEO Carly Fiorina combined H-P's personal-computer business with its printer business. Ms. Fiorina was replaced later that year by Mr. Hurd, who split the two businesses up.
After Mr. Hurd was ousted in 2010, his successor Leo Apotheker, announced a plan to spin off the PC business. That was reversed by Ms. Whitman after she became CEO in 2011.
Meanwhile, the various CEOs have laid off—or pledged to cut—about 75,000 workers since 2005. Ms. Whitman herself has plans to lay off upwards of 29,000 employees, more than 8% of H-P's total 349,000-person workforce.
Given the constant reshuffling, H-P's employee morale has collapsed. A decade-plus of pay cuts and layoffs have left many rank-and-file employees distrustful of H-P's leadership, said Kimberly Elsbach, a professor at the business school at University of California, Davis, who recently wrote a case study of H-P. "There's an anxiety that permeates the workforce that has a chronic impact on people," she said.
H-P's fix-it strategy: Even as she cuts the workforce, Ms. Whitman has said that stable leadership will result in a consistent strategy and boost morale over time. She has pledged to remain CEO.
Lack of Investments
Mr. Hurd steadily increased H-P's profits—but he did so partly by cutting spending on programs that could have set the company up for future growth. Research and development spending, for instance, fell from $3.5 billion a year before he took the helm to $3 billion the year he left.
Among the areas where Mr. Hurd cut most aggressively was the services business, eliminating thousands of the employees brought over from a $13 billion purchase of outsourcing giant Electronic Data Systems Corp. in 2008. EDS's outsourcing model required massive investments in facilities, equipment and people, and relied on large, long-term contracts.
In 2011, Mr. Apotheker said the business didn't have the skills it needed to compete for high-end contracts.
More recently, four of the unit's biggest customers didn't renew deals. Unlike H-P's PC or printer businesses where the company can order fewer parts when sales slump, the services business is made up of thousands of consultants. Getting costs in line with revenue means cutting jobs, but that can form a vicious cycle.
"In the technology business, cost cutting is not a great long-term strategy," said Rob Cihra, an analyst at Evercore Partners EVR +1.25% .
At last month's analyst meeting, Ms. Whitman said H-P's past cuts to product development was hurting the company. She highlighted a fast-growing segment of the printer market where H-P hadn't updated its entry for seven years.
H-P's fix-it strategy: The company plans to spend some of the savings from Ms. Whitman's 29,000 layoffs on new research and development. Ms. Whitman also has said H-P will put in place new software for managing its sales and human-resources needs and for tracking its consultants that will make the company run more efficiently.
Poor Use of Cash
Like most big tech companies, H-P has acquired new technologies. But many of its biggest purchases have fizzled, leaving the company with less cash and more debt than its rivals and effectively shutting it out of future deals.
In 2007, H-P had more than $11 billion in cash and $5 billion in debt. In four of the next six fiscal years, however, H-P spent close to twice the amount of its free cash flow on acquisitions, such as the 2008 deal to buy outsourcing giant EDS and share repurchases.
At the end of its most recent quarter, H-P had just $9.5 billion in cash and more than $24 billion in long-term debt.
H-P's cash is well below that of its rivals—Oracle Corp. ORCL -0.21% has $32 billion and Cisco Systems Inc. CSCO +0.07% has $49 billion, for example—and it is among the few major tech companies to have more debt than cash.
Neither H-P's buybacks nor acquisitions have panned out.
H-P wrote off $8 billion of the $13 billion EDS deal earlier this year. In 2010, H-P also spent $1.2 billion to acquire mobile-device maker Palm, but shut down the unit and wrote it off a year later.
Last year, H-P paid more than $10 billion to acquire software maker Autonomy, but has already said sales in that business are declining.
Meanwhile, H-P spent more than $20 billion in the last few years to buy and retire its own shares. Yet the stock recently hit its lowest level in a decade.
Credit-rating agency Moody'sMCO +0.09% has said it is reviewing H-P for a possible downgrade, which might make it harder for the tech company to borrow and harm its ability to finance deals for customers.
H-P's fix-it strategy: Ms. Whitman has said H-P must pay off debt and build up its cash balance before it makes any big deals. The company has slowed share repurchases, even as its stock has declined.
Through the first nine months of 2012, H-P only bought back $1.5 billion of its stock—and just $365 million in the most recent quarter—while generating $6.5 billion in cash.
Declining Product Lines
Each of H-P's major businesses is in the midst of an industry-wide decline—and the company is losing share to boot. Worldwide personal computer sales fell more than 8% in the most recent quarter, as consumers gravitated to tablets and smartphones. H-P's share of the PC market fell to 15.9% in the third quarter from 17.4% a year earlier, according to research firm IDC.
Printer sales slid 3% in the most recent quarter as people print less; server sales also fell 3% as business embrace online services that don't require hardware purchases. H-P's server business has also been hurt by a dispute with Oracle over software development for some high-end systems.
As sales have fallen, expenses have risen. In fiscal 2011, H-P increased its headcount by 25,000 employees, even as sales began declining. Through the first nine months of 2012, sales fell almost $5 billion from a year earlier to $90.4 billion, but sales-related expenses climbed.
While H-P has some compelling products, the company "is unable to communicate the value of H-P," said Martin Reynolds, an analyst at research company Gartner.
H-P's fix-it strategy: Ms. Whitman has said H-P's days of heady growth are over and she expects the company to grow in line with the economy.
She plans to increase profitability in part by eliminating many of the company's products that are similar to others such as half of its 2,100 different laser printers.
Ms. Whitman is also working to refresh the design of H-P's products, especially PCs, which is the company's biggest line.