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HP Leadership Seen Lacking for Turnaround After Writedown

By Adam Satariano
November 21, 2012 12:02 PM EST 33 Comments
Meg Whitman, chief executive officer of Hewlett-Packard Co.
Photographer: Tony Avelar/Bloomberg
Meg Whitman, chief executive officer of Hewlett-Packard Co.

Hewlett-Packard Co. (HPQ)’s $8.8 billion writedown tied to the purchase of software maker Autonomy Corp. (AU/) is fueling concern that Chief Executive Officer Meg Whitman and her board aren’t up to the task of engineering a turnaround.

Whitman joined Chairman Ray Lane and other directors in unanimously supporting the deal pushed by then-CEO Leo Apotheker in August 2011. It then took Hewlett-Packard 15 months to go public with allegations of accounting improprieties, saying a probe began after an Autonomy executive came forward in May.

The Autonomy charge is the latest blow for leadership at a company that has suffered through years of botched deals, management tumult and strategic missteps. Hewlett-Packard has plunged 75 percent since it ousted CEO Mark Hurd in August 2010 and it has a market value one-tenth the size of International Business Machines Corp. and one-sixth Oracle Corp. (ORCL)’s.

“They have been a model of incompetence for the past several years,” said Michael Cusumano, a professor at Massachusetts Institute of Technology’s Sloan School of Management. “It reflects a broader lack of attention and competence in HP’s management and board.”

The allegations about Autonomy come just three months after Hewlett-Packard announced an $8 billion writedown related to an earlier acquisition, and it follows years of strategy shifts and management missteps that Whitman has yet to rectify. Management’s credibility is in doubt, said Michael Obuchowski, a portfolio manager at North Shore Asset Management.

Investors’ Questions

“I’m not going to believe what they are saying until they prove it to me,” said Obuchowski, who has sold his Hewlett- Packard holdings. “There will be a lot more questions from investors about HP and how well the company is being run in terms of not just the management, but also controls and accounting.”

More than $5 billion of the total charge is due to inaccurate financial reports, Hewlett-Packard said yesterday. About $200 million of Autonomy’s revenue had been recorded prematurely or improperly, Hewlett-Packard’s general counsel said. The company referred the matter to U.S. and U.K. securities regulators, all of which declined to comment.

Hewlett-Packard also said it plans to pursue civil litigation. Autonomy managers denied the allegations, and former CEO Mike Lynch said Hewlett-Packard is using the writedown to paper over its own management shortcomings.

“HP is looking for scapegoats, and I’m afraid I’m not going to be one of those,” Lynch said in an interview today.

Lynch said he hasn’t heard from regulators and that Hewlett-Packard hasn’t contacted him to detail its accounting concerns. He hasn’t hired a lawyer, and doesn’t plan to do so until he gets more information from Hewlett-Packard.

‘Being Ambushed’

“After being ambushed by all this yesterday, I’ve had a chance to look at some of the things they’re saying,” Lynch said. “It just doesn’t add up. They talk about it being a $200 million effect. It doesn’t change the profit line at all.”

The financial performance of software companies such as Autonomy are historically difficult to measure, so Hewlett- Packard’s board should have been more skeptical during the acquisitions process, Cusumano said. Autonomy’s finances had been questioned even before Hewlett-Packard considered a purchase, he said.

The FBI, responding to an inquiry by the U.S. Securities and Exchange Commission, is looking into Hewlett-Packard’s allegations of accounting improprieties, a person familiar with the matter said. Whenever a company reports such a matter, it will be examined and it wasn’t known if any action will result from it, said the person, who asked not to be identified because the matter wasn’t public.

‘Structural Pressure’

Autonomy’s woes compound an already long list of challenges, including diminished demand for personal computers, which make up almost one-third of sales. Whitman has yet to chart a clear course for helping the company rebound from five quarters of falling sales and withstand competition in the mobile market led by Apple Inc. (AAPL)

“They probably need change,” said Shaw Wu, an analyst at Sterne Agee & Leach Inc. “A lot of the business remains under secular structural pressure, where Steve Jobs’s whole mobile revolution is still occurring, and it’s not going away.”

Hewlett-Packard’s shares plunged to a 10-year low after the writedown announcement, extending a slide that has wiped out more than $100 billion in market value in five years.

“Investors stand to demand more change inside HP,” said Mark Moskowitz, an analyst JPMorgan Chase & Co (JPM).

Moskowitz, along with counterparts at Deutsche Bank AG (DBK), ISI Group, Raymond James and Mizuho Securities USA Inc., were among the Wall Street analysts who lowered ratings, results estimates or stock-price predictions yesterday.

Lenovo, Samsung

Hewlett-Packard’s core personal-computer business is shrinking because of competition from lower-priced rivals such as China’s Lenovo Group Ltd. (992) and demand for mobile devices made by companies including Apple and Samsung Electronics Co. (005930) Hewlett-Packard’s enterprise business also is being undermined as companies look for more Internet-based cloud services.

The release of Microsoft Corp. (MSFT)’s new Windows 8 operating system also isn’t providing the boost that some investors projected, Wu said. The company should sell its PC and printing business to focus more on business customers, Moskowitz said.

CEO for more than a year, Whitman has embarked on a multiyear campaign to reverse the fortunes of 73-year-old Hewlett Packard. The company’s third CEO since 2010, she reversed a move by Apotheker to shed the PC business. She’s cutting 29,000 jobs by the end of fiscal 2014 to save as much as $3.5 billion a year.

Board Missteps

Criticism of Hewlett-Packard’s board dates back more than a decade, to its purchase of Compaq in 2001. Director Thomas J. Perkins resigned in 2006 in protest over the handling of a company probe into leaks to the news media, an investigation that included improperly obtaining telephone records of directors, employees and reporters. That turmoil led to the ouster of Chairwoman Patricia Dunn.

The company announced another board shake-up in January 2011 after it faced criticism for not exerting enough oversight of Hurd. The board then ousted his replacement, Apotheker, after less than a year as CEO, putting Whitman in charge.

To contact the reporter on this story: Adam Satariano in San Francisco at asatariano1@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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