Saturday, November 24, 2012

More Than $5 Billion Write-Off for Autonomy : Seo Safety

On Nov. 20, 2012, Hewlett-Packard announced that it had taken an accounting charge of more than $5 billion, after discovering “serious accounting improprieties” and “outright misrepresentations” at Autonomy, a British software maker that H.P. bought for $11.1 billion last year.

The news was a major setback for H.P., which has been struggling to turn around its operations and remake its business.

The charge essentially wiped out its profit. In the latest quarter, H.P. reported a net loss of $6.9 billion, compared with a $200 million profit in the period a year earlier. The company said the improprieties and misrepresentations took place just before the acquisition, and accounted for the majority of the charges in the quarter, more than $5 billion.

The alarm bells started ringing less than a year after the technology company bought Autonomy in the summer of 2011. Unhappy with the business’s sagging performance, H.P. ousted the software company’s mercurial Cambridge-educated founder and sent a team to England to review its books last May. It was then that a senior finance official at the British company stepped forward, raising questions about the accuracy of the numbers.

H.P. bought Autonomy in an attempt to bolster its presence in the enterprise software market and catch up with rivals like I.B.M. The takeover was the brainchild of Léo Apotheker, H.P.’s chief executive at the time, and was criticized within Silicon Valley as a hugely expensive blunder.

Mr. Apotheker resigned a month later. Since then, H.P. has tried to revive the company and to move past the controversies. Last year, Meg Whitman, a former head of eBay, took over as chief executive and began rethinking the product lineup and global marketing strategy.

But the efforts have been slow to take hold. In its last fiscal quarter, the company reported a $6.9 billion loss, dragged down by the Autonomy mess and continuing problems in the business that resulted in an overall charge of $8.8 billion.

Ms. Whitman told Wall Street analysts in October 2012 that revenue and profit would be significantly lower, adding that it would take several years to complete a turnaround.


Hewlett-Packard is one of the first technology companies in Silicon Valley, and its culture helped to define the business structure of future start-ups. Its founders, David Packard and William Hewlett, were Stanford University graduates whose professor, Fredrick E. Terman, urged them to start a business. They did so, in 1939, in a garage next to Mr. Packard’s rented home on Addison Avenue in Palo Alto, Calif.

Later, as the company added employees, the two founders insisted on an informal, non-hierarchical culture. They famously allowed access to tools and parts bins after hours so engineers could tinker on whatever they wanted in their spare time.

The men codified what they called “The H.P. Way”:

“A great company entrusts all its people, from top to bottom, to do the work that they were assigned, to take responsibility for their actions, and to speak for and represent the company as if they are the owners (which they are) and the founders themselves.”

The company’s first product was an audio oscillator. The two men sold it to the Walt Disney Company, which was working on the full-length animated film “Fantasia.”

History of Management Turmoil

For decades, H.P. was one of the defining companies of Silicon Valley, but in recent years the company has been rocked by management turmoil.

In mid-1999, the board selected Carleton S. Fiorina as its chief executive. Her bold efforts to merge the company with Compaq led to a proxy fight with the children of one of H.P.’s founders. It also brought Ms. Fiorina into conflict with the board, which fired her in February 2005.

The company was rocked again in 2006 when it was revealed that Patricia Dunn, the chairman, had instituted a program to plug leaks from the board by using private detectives to spy on directors, employees and journalists who covered the company. The scandal resulted in the ouster of Ms. Dunn and the firing of several employees. Ms. Dunn died in December 2011.

Mark Hurd followed Ms. Fiorina as chief executive in 2005, and Ms. Dunn as chairman in 2006. The events surrounding Mr. Hurd’s ouster in 2010 put an unsavory end to one of the great executive runs in recent American business history. Under Mr. Hurd, H.P. had surged past I.B.M. as the largest technology power, with its sales increasing to $115 billion a year, from $80 billion. Wall Street rewarded his performance with a surge in the company’s stock. From January 2005 to June 2008, the share price climbed nearly 140 percent, compared to 20-percent growth in the Standard & Poor’s 500-stock index during the same period.

The Hewlett-Packard board found that Mr. Hurd had violated the company’s code of conduct relating to expense reports connected to his meetings with Jodie Fisher, a former erotic actress turned marketing consultant, with whom Mr. Hurd had what the company called a “close personal relationship.’' He resigned in August 2010.

Mr. Hurd was succeeded by Léo Apotheker, who in less than a year as chief executive tried to reinvent the company more than once. In March 2011, he announced a new strategy that emphasized cloud computing and software, including WebOS, the highly regarded operating system H.P. gained when it acquired Palm Inc. under Mr. Hurd. The strategy relied heavily on a new consumer tablet, the TouchPad, which used WebOS.

Then, four months later, Mr. Apotheker announced that H.P. was scrapping the TouchPad tablet computer; that it was exploring “strategic alternatives” and might sell or spin off its dominant personal computer business; and that it would acquire a British software concern, Autonomy, for $10.3 billion, sharply refocusing the company on business services and products.

Mr. Apotheker resigned in September 2011 and was replaced by Ms. Whitman, the former head of eBay.

Focus on Rebuilding

In contrast to the ambition of her two immediate predecessors, Ms. Whitman indicated that H.P. would focus on internal development of its businesses. There would most likely be no large-scale acquisitions, she said. Instead, H.P. would work to rebuild a company damaged by big purchases and excessive budget-cutting in areas like research and development.

Rebuilding may indeed be what H.P. needs after the tumult of the 18 months that preceded Ms. Whitman. She took over as chief executive of H.P. from Mr. Apotheker, who in less than a year roiled the company, and its stock price. Mr. Apotheker had succeeded Mark V. Hurd, who wielded a sharp pencil on costs, but resigned from the company when the directors questioned his accounting of expenses involving a female contractor.

Ms. Whitman kept expectations low. She said that initially “we will grow at G.D.P.-type growth rates, maybe faster,” and indicated that economic growth, particularly in Europe, would probably be sluggish. Profitability, she said, would rise through superior management of H.P.’s internal assets.

A History of Bad Deals

H.P. has had no problem spending money on deals. But making money on them? That’s the rub.

In August 2012, H.P. disclosed that it would have to take an $8 billion charge related to the acquisition of Electronic Data Systems, a $13.9 billion purchase it made four years previously. It was just the most recent setback for the struggling computer maker, where a string of acquisitions have fallen flat.

Over the last decade, H.P. has aggressively spent on deal-making, paying billions of dollars for businesses like E.D.S., Palm, Compaq and, more recently, Autonomy, the enterprise software company. According to data compiled by Jayson Noland, a Robert W. Baird & Company analyst, H.P. has spent more than $67 billion on acquisitions since 2001. That’s almost double H.P.’s current market value of $38 billion.

In part, H.P.’s recent M.&A. blunders are linked to its management shuffles, which have whipsawed the company in multiple directions. In the last three years, H.P. has been led by three different chief executives: Mr. Hurd, who presided over the Palm and E.D.S. acquisition; Mr. Apotheker, who led the $10 billion deal for Autonomy; and Ms. Whitman, who reversed Mr. Apotheker’s direction by deciding to keep H.P.’s personal computer business.

So far, Ms. Whitman, the former eBay chief executive, has spent more time on cost-cutting than deal-making. But she is considered a very active dealmaker. During her tenure at the online auction house, she completed 40 acquisitions worth nearly $10 billion.

Then again, H.P. — after a long shopping spree — may not have the money to do a lot more. Its cash has dwindled to about $8 billion, from $13 billion in 2009.

Unlikely to Abandon Its Major Businessess

Ms. Whitman’s H.P. seems unlikely to abandon any of its major businesses, which besides PCs and printers includes computer servers and data storage systems, consulting, and providing low-end services like managing call centers.

Ms. Whitman has said that owning so many large businesses enables H.P. to acquire components cheaply through one of the largest supply chains in high technology, and to provide a one-stop shop for corporate tech. Critics charge it encumbers H.P., particularly at a time of rapid change.

Ms. Whitman came to the helm promising to return money to shareholders, and then set H.P. on a course for growth. To date, she has raised H.P.’s stock dividend, and in March 2012 announced a corporate reorganization intended to consolidate operational efficiency, for example by merging the PC and printer businesses.

The company’s long-term success depends on the creation of new products. H.P. announced a series of lightweight laptops, called ultrabooks, which compete against similar machines from Apple.

A Host of New Competitors

While Hewlett-Packard is still among the world’s largest technology firms in terms of revenue, it faces a host of new competitors, including both Chinese PC makers and tablet players like Apple and Google, which have more cash. In August 2012, the company said it had $9.9 billion in cash, up from the previous two quarters but down from a year ago. Google has $34.5 billion, Microsoft $63 billion and Apple $116 billion.

Ms. Whitman either has to revive existing businesses or get newer businesses like networking and advanced data storage built up quickly.

Much of the pain H.P. has felt stems from a slowdown in worldwide demand for personal computers. The weak economy in Europe has also contributed.

The PC business has been particularly hard for H.P. In August 2011, Léo Apotheker, then the chief executive, said he might sell the company’s PC business, creating disarray with H.P.’s customers and sales force. Ms. Whitman replaced Mr. Apotheker in September 2011 and reversed his decision, but much of the damage was done.

According to the research firm IDC, in the second quarter of 2011, H.P.’s share of the 86.7 million PCs sold worldwide was 13.4 million units, or 15.5 percent of the market, down from 17.6 percent a year ago. China’s Lenovo was second, with a 14.9 percent share, up from 11.9 percent. World demand for PCs was basically flat, reflecting not only slow economic growth but a shift toward smartphones and tablets. H.P. failed in its attempt to enter the tablet market with its 2010 purchase of Palm for $1.2 billion.

The company now hopes to reignite interest in very lightweight, touch-screen-enabled laptop computers, called ultrabooks. A few of these computers have come on the market to lackluster sales, but many more are expected by the end of the year.

Whitman Predicts Trouble in the Next Few Years

Ms. Whitman told a meeting of Wall Street analysts on Oct. 3, 2012, that they should expect sharply lower revenue and profits. She also told them not to expect the company to fully right itself before 2016.

While the news was not completely unexpected, the vehemence of Ms. Whitman’s message drove shareholders to the exits. H.P.’s stock dropped about 8 percent while she was speaking and ended the day down nearly 13 percent on unusually high trading volume. The stock had not been that low in a decade.

The drubbing was probably what Ms. Whitman had in mind. Executives involved in her presentation, who requested anonymity because they were not authorized to speak publicly, said she wanted to get as much bad news as possible out at once, so the company could focus on rebuilding rather than having to explain one disappointing quarter after another.

Hewlett-Packard is still the world’s leader in sales of personal computers, printers and computer servers, with revenue in 2011 of $127 billion, but it forecast revenue for 2013 of 11 percent to 13 percent below fiscal 2012 levels. Analysts had assumed it would only decrease about 1 percent.

Operating profit margins, which have been about 7 percent, could evaporate completely or, at best, shrink to about 3 percent, the company said. Earnings per share were expected to fall by about 16 percent from what analysts had projected.

Ms. Whitman intends to shrink the number of products H.P. makes, and to move out of businesses that are in decline. For example, she said the company made more than 2,100 varieties of laser printers, causing excess costs in everything from parts to packaging requirements.

The new H.P. would most likely employ fewer workers, as well. Ms. Whitman has already announced a total of 29,000 layoffs. The company had 349,600 employees at the end of October 2011. Ms. Whitman said future profitability would depend in part on more automation, indicating even more job cuts.

While Ms. Whitman said H.P. must focus more closely on its top 14 markets and its main competitors, a continued low stock price may present other worries. The tech industry is facing a transition from traditional PCs and servers to mobile devices and cloud computing, and is consolidating. H.P. could become a target either for corporate raiders or for another tech company in a hostile takeover.

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