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Profit piranhas want a bite of HP

Apotheker needs to walk on water

Comment Private equity firms are circling HP, looking for a way to carve up the IT behemoth and make a few quick and easy bucks – just as they do every time a new CEO has trouble running the company.

Bankers, brokerages, private equity firms, and other stockjobbers and moneylenders talk a good game about investing for the long haul, but for the most part they are looking for bubbles and quick returns, and have little patience for what used to be called investing and what now should more accurately be called gambling with our retirements.

These worthies make money when companies such as HP embiggen themselves by spending tens of billions on acquisitions – in HP's case, Compaq and EDS being the dominant ones, giving the company respectable PC, server, and services businesses.

Then they make the money all over again as they tear these behemoths apart because size only breeds stability, not fast and easy profits.

If you're lucky like Big Blue, you have a wickedly profitable mainframe hardware base to which you can sell servers priced like Tiffany jewelry – and damned near as custom made – along with software for them that is more expensive than a 1787 Chateau Lafite.

To make its money, HP has to play the volume game

HP had aspired to have that annuity-like revenue stream, but the combined HP-UX and OpenVMS businesses could never command the kind of premiums that IBM extracts from mainframe customers.

Microsoft plays the repeat-revenue game with its Office suite – at least until Google and IBM do a much better job with their online clones – and Oracle tries with its database and application software.

To make its money, HP has to play the volume game, working twice as hard peddling its commodity wares and taking whatever little monopoly money it can get from HP-UX, NonStop, OpenVMS, and printer ink.

Wall Street and private equity firms don't have the patience for this. In fact, like HP itself, they want the company of Bill Hewlett and Dave Packard to be something it is not: in essence, IBM, but a Big Blue that kept printers and PCs.

Former HP president and CEO Carly Fiorina came up with the strategy of building up HP to look like IBM – she wanted Pricewaterhouse Coopers first, and then Compaq, remember. And she had a very short honeymoon with Wall Street after calling HP's numbers wrong early on for a couple of quarters.

The glomming of HP

While it's hard to argue that the HP-Compaq-EDS collective has played out to be as profitable as Fiorina and her successor, Mark Hurd (now co-president at Oracle), had hoped, it's easy to realize that HP, Compaq, and EDS would have been increasingly marginalized had they not been glommed together. As large mergers and acquisitions go, these two are among the few successes. But that doesn't mean they are yielding as much value as HP or its investors would like.

If Fiorina had a relatively short honeymoon after she took over, new HP president and CEO Léo Apotheker, who was let go as co-CEO of software giant SAP two years back, only got a long Poconos weekend in beautiful Mount Airy Lodge. And not the suite with the heart-shaped tub.

Apotheker also has to contend with the fact that his immediate predecessor, Hurd, executed on Fiorina's plan. Despite slashing research and development too far and burdening employees with deep job cuts to help pay for the EDS acquisition, Hurd generally hit the numbers he told Wall Street he would. For whatever that's worth.

Like Fiorina, Apotheker missed his numbers for the first two quarters he's been in charge, and already Wall Street is calling for the company to come up with a more radical strategy. Not for HP's sake, necessarily, but surely for the Street's.

'Spread too thin'

And so, predictably, the Wall Street moneymen are calling for HP to be carved up like some succulent pig on a spit with an tablet apple in its mouth.

On Thursday, a Reuters report said that private equity firms Blackstone Group, Kohlberg Kravis Roberts, and TPG Capital are calling for HP to break itself up because it is "spread too thin". Investors were excited by this chatter, of course, and HP's stock rose nearly 5 per cent, the biggest run it has had all year, and added another 1.5 points on Friday.

Breaking up HP doesn't make any more sense than breaking up IBM would have two decades ago. Ironically, it doesn't make any less sense, either. You could argue it either way, and of course HP would like to be able to jettison its least-profitable businesses and only keep its most profitable ones.

But that's not how the IT supply chain works, and it's not how to keep your products and your brands in the hands and data centers of customers. The PC is a loss leader for a printer, server, or storage array – and maybe a cloud slice – and the sooner Wall Street gets used to that idea, the happier Wall Street will be.

HP is a people-intensive business that yields half the profits of Apple and IBM, and that's just the way it is. If you don't like it, don't buy HP stock. ®

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