HP Implements a Transformational Strategy, Again and Again

question 93

Essay

HP Implements a Transformational Strategy, Again and Again

Failure to develop and implement a coherent business strategy often results in firms reacting to rather than anticipating changes in the marketplace.
Firms reacting to changing events often adopt strategies that imitate their competitors.
These “me too” strategies rarely provide any sustainable competitive advantage.
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Transformational, when applied to a firm’s business strategy, is a term often overused. Nevertheless, Hewlett-Packard (HP), with its share price at a six-year low and substantially underperforming such peers as Apple, IBM, and Dell, announced what was billed as a major strategic redirection for the firm on August 18, 2011. The firm was looking for a way to jumpstart its stock. Since Leo Apotheker took over as CEO in November 2010, HP had lost 44% of its market value through August 2011. A transformational announcement appeared to be in order.

HP, the world’s largest technology company by revenue, announced that, after an extensive review of its business portfolio, it had reached an agreement to buy British software maker Autonomy for $11.7 billion. The firm also put a for-sale sign on its personal computer business, with options ranging from divestiture to a spinoff to simply retaining the business. HP said the future of the PC unit, which accounted for more than $40 billion in annual revenue and about $2 billion in operating profit, would be decided over the next 12 months. Apotheker had put this business in jeopardy after he had announced that the WebOS-based TouchPad tablet would be discontinued due to poor sales. The announcement was transformational in that it would move the company away from the consumer electronics market.
Under the terms of the deal, HP will pay 25.50 British pounds, or $42.11, in cash for Autonomy. The price represented a 64% premium. With annual revenue of about $1 billion (only 1% of HP’s 2010 revenue), the purchase price represents a multiple of more than 10 times Autonomy’s annual revenues. HP’s then-CEO, Leo Apotheker, indicated that the acquisition would help change HP into a business software giant, along the lines of IBM or Oracle, shedding more of the company’s ties to lower-margin consumer products. Autonomy, which makes software that searches and keeps track of corporate and government data, would expedite this change. HP said that the acquisition of Autonomy will complement its existing enterprise offerings and give it valuable intellectual property.

Investors greeted the announcement by trashing HP stock, driving the share price down 20% in a single day, wiping out $16 billion in market value. While some investors may be sympathetic to moving away from the commodity-like PC business, others were deeply dismayed by the potentially “value-destroying” acquisition of Autonomy, the clumsy handling of the announcement of the wide range of options for the PC business, and HP’s disappointing earnings performance. By creating uncertainty among potential customers about the long-term outlook for the business, HP may have succeeded in scaring off potential customers.

With this announcement, HP once again appeared to be lagging well behind its major competitors in implementing a coherent business strategy. It agreed to buy Compaq in 2001 in what turned out to be widely viewed as a failed performance. In contrast, IBM transformed itself by selling its PC business to China’s Lenovo in late 2004 and establishing its dominance in the enterprise IT business. HP appears to be trying to replicate IBM’s strategy.

Heralded at the time as transformational, the 1997 $25 billion Compaq deal turned out to be hotly contested, marred by stiff opposition from shareholders and a bitter proxy contest led by the son of an HP cofounder. While the deal was eventually passed by shareholder vote, it is still considered controversial, because it increased the firm’s presence in the PC industry at a time when the growth rate was slowing and margins were declining, reflecting declining selling prices.

HP planned to move into the lucrative cellphone and tablet computer markets with the its 2010 purchase of Palm, in which it outbid three other companies to acquire the firm for $1.2 billion, ultimately paying a 23% premium. However, sales of webOS phones and the TouchPad have been disappointing, and the firm decided to discontinue making devices based on webOS, a smartphone operating system it had acquired when it bought Palm in late 2010.

In contrast to the mixed results of the Compaq and Palm acquisitions, HP’s purchase of Electronic Data Systems (EDS) for $13.9 billion in 2008 substantially boosted the firm’s software services business. IBM’s successful exit from the PC business early in 2004 and its ability to derive the bulk of its revenue from the more lucrative services business has been widely acclaimed by investors. Prospects seemed good for this HP acquisition. However, in an admission of the firm’s failure to realize EDS’s potential, HP in mid-2012 wrote off $8 billion of what it had paid for EDS.

HP has purchased 102 companies since 1989, but with the exceptions of its Compaq and its $1.3 billion purchase of VeriFone, it has not paid more than $500 million in any single deal. These deals were all completed under different management teams. Carly Fiorina was responsible for the Compaq deal, while Mark Hurd pushed for the acquisitions of EDS, Palm, and 3Par. Highly respected for his operational performance, Hurd was terminated in early 2010 on sexual harassment charges.

Under pressure from investors to jettison its current CEO, HP announced on September 22, 2011, that former eBay CEO, Meg Whitman, would replace Leo Apotheker as Chief Executive Officer. In yet another strategic flip-flop, HP announced on October 27, 2011, that it would retain the PC business. The firm’s internal analysis indicated that separating the PC business would have cost $1.5 billion in one-time expenses and another $1 billion in increased expenses annually. Citing the deep integration of the PC group in HP’s supply chain and procurement efforts, Whitman proclaimed the firm to be stronger with the PC business.

In mid-December 2011, HP announced that it would also reverse its earlier decision to discontinue supporting webOS and stated that it would make webOS available for free under an open-source license for anyone to use. The firm will continue to make enhancements to the webOS system and to build devices dependent on it. By moving to an open-source environment, HP hopes others will adopt the operating system, make improvements, and develop mobile devices using webOS to establish an installed user base. HP could then make additional webOS devices and applications that could be sold to this user base. This strategy is similar to Google’s when it made its Android mobile software available for cellphones under an open-source license.

HP’s share price plunged 11% on November 25, 2012, to $11.73 following its announcement that it had uncovered
“accounting irregularities” associated with its earlier acquisition of Autonomy. The revelation required the firm to write down its investment in Autonomy by $8.8 billion, about three-fourths of the purchase price. The charge contributed to a quarterly loss of $6.9 billion for HP. Confidence in both the firm’s management and board plummeted, further tarnishing the once-vaunted HP brand.
-To what do you attribute the inconsistent and incoherent strategic flip-flops at Hewlett-Packard during the last decade? Be specific.

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Definitions:

Increase in Crime

A phenomenon where there is a notable rise in the occurrence of criminal activities within a certain area or during a specific time period.

Joint-Stock Companies

Businesses owned by shareholders who invest money and share in the profits and losses, allowing for larger capital and risk distribution.

Liability

The state of being responsible for something, especially in terms of legal or financial obligations.

Investment in Trade

The allocation of resources, including money, into the buying and selling of goods and services between countries with the aim of generating profits.