HP's Hurd faces first big test - was the Compaq buy a failure?

Answer arrives this afternoon

HP CEO Mark Hurd's first chance to be the anti-Fiorina will arise this afternoon when the company reports second quarter results as the US financial markets close.

CEOs rarely relish the idea of lowering expectations or apologizing publicly for past mistakes. Hurd, however, has earned a small excuse window by being an outsider thrust to the helm of a corporate structure he did not create. This is his one chance to point out exactly where former CEO Carly Fiorina went wrong and distance himself from her actions.

The most obvious spot for Hurd to put some miles between himself and Fiorina would be by writing down the goodwill from HP's $20bn acquisition of Compaq. As stated in a recent Wall Street Journal story looking at this issue, writing down the Compaq buy would pretty much signal HP's recognition of the deal as a failure - something Fiorina was never willing to do.

"Goodwill may be an arcane accounting concept, but writing it down can be contentious," the paper stated. "Companies record goodwill on their balance sheets when they acquire another company for more than the target's tangible assets. Under accounting rules, companies must conduct an annual review to determine if their goodwill is 'impaired' - that is, if the acquired company is worth less than the acquirer paid for it. If goodwill is impaired, companies reduce, or 'write down,' the goodwill on their balance sheets and record a noncash expense on their income statements. More significant, this write-down is perceived as an acknowledgment by the purchaser that it overpaid for a company."

In the biggest context, the merger has been a failure. HP remains stuck between IBM and Dell - not quite big enough to rattle as much Global Services business as hoped and not nimble enough to match Dell's supply chain or pricing techniques. HP's share priced has languished, its business units haven't shown consistent performance and there are very serious internal conflicts still present between the aggressive Compaq staffers and more pragmatic HP veterans.

Still, however, Compaq's assets have been key to keeping HP from suffering even more during the downturn in IT spending. Compaq's old ProLiant shop has been the star of the company's server line, turning consistent profits while the pricey, higher-margin Unix gear from HP languished. In PCs, HP has remained competitive from a market share standpoint with Dell thanks, in part, to the strong Compaq brand.

It's these server and PC units that have guided HP's longtime CFO Bob Wayman on the writedown matter. Should the units remain profitable on a consistent basis then a writedown will not be necessary, according to Wayman. Hurd, of course, might see things differently and chop into the close to $14.5bn in goodwill present from the acquisition.

Another area where Hurd may chose to part ways with Fiorina is via his tone and forecasts for future quarters. Fiorina was notorious for spinning positive quarters to great heights and ignoring the real issues behind poor quarters. Hurd has an opening here to set more modest projections and be more reserved in his description of HP's prospects.

Shareholders don't tend to respond to this strategy terribly well - as Fiorina knew. So we'll see just how much room Hurd thinks he has to work with as a fresh recruit.

Many news outlets have billed Hurd as this boring, basic counter to his flashy, media star predecessor. Will Hurd live up to these dull expectations? We'll soon find out. ®

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