HP and the Fine Art of Setting Money Ablaze

It takes skill and determination to produce the numbers Hewlett-Packard (NYSE: HPQ  ) has put up in the past six years. And I don't mean that in a good way. If you put 10 smart people in a room and tasked them with destroying shareholder value, they'd struggle to match HP's six-year run.

Consider this: Since 2006, HP has taken $26.1 billion in "restructuring charges, goodwill writedowns, and merger-related expenses," according to Rolfe Winkler of The Wall Street Journal. The company's current market cap is $23.5 billion. So in six years flat, more money was destroyed on overpriced, ill-conceived acquisitions than the entire 73-year-old company is worth today.

It gets worse. As Winkler notes, "Despite spending $38 billion in cash on acquisitions since 2006, free cash flow in the fiscal year that just ended was $6.9 billion, compared with $8.8 billion in fiscal 2006." HP's total free cash flow since 2006 is about $59 billion, so 64% of all shareholder earnings were spent with little to show for it.

It's safe to say: The only people who have gotten rich off HP in the past six years are lawyers, bankers, and shareholders of companies it has acquired.

But it gets even worse. HP spent a lot of cash on acquisitions, but it has also accumulated about $20 billion of debt since 2006. Where'd the rest of the cash go? Share buybacks, which totaled $51 billion from 2006 to 2011. The average repurchase price during that period was $40.80, or more than three times the current share price. That's another $36 billion blown.

So add another group to the list of people who have gotten rich off HP: anyone selling its stock.

The latest in the company's quest to destroy shareholder value was an $8 billion writedown tied to the $11 billion acquisition of Autonomy, made barely a year ago. HP says Autonomy's former executives "used accounting improprieties, misrepresentations, and disclosure failures to inflate the underlying financial metrics of the company, prior to Autonomy's acquisition by HP."

Apparently HP's management, its bankers, and its auditors had no idea there was any accounting funny business going on at Autonomy. We'll give them the benefit of the doubt. But at least one person saw Autonomy's trickery all along: short seller and accounting sleuth Jim Chanos.

"We had been short Autonomy in our European fund in 2010 and 2011 and watched in horror as it was taken out at a big premium by Hewlett-Packard," Chanos told CNBC this week. "There was all sorts of cookie-jar accounting ... that appeared to be going on, and it was hard to miss." He used two words to describe HP's oversight of the accounting tricks: "willful blindness."

Who was in charge of HP at the time it bought Autonomy?

Let's back up for a moment.

In late 2010, former CEO Mark Hurd was canned for allegedly abusing $20,000 in expenses. Never a group for numbers, the board of directors showed him the door with a $12 million severance package.

As a replacement, the board selected Leo Apotheker, who had recently been ousted as head of European tech giant SAP after less than a year on the job. James Stewart in The New York Times describes how botched the process of hiring Apotheker was:

[W]hen the search committee of four directors narrowed the candidates to three finalists, no one else on the board was willing to interview them. And when the committee finally chose Mr. Apotheker and again suggested that other directors meet him, no one did. Remarkably, when the 12-member board voted to name Mr. Apotheker as the successor ... most board members had never met Mr. Apotheker.

Just 357 days later, Apotheker himself was fired. After HP shares fell 46% and Apotheker oversaw the phony-accounting Autonomy deal that has cost shareholders billions, the board of directors sent him home with a $25 million job-well-done present.

So add another group to the list of people who have gotten rich off HP: the people directly in charge of its downfall.

It turns out a lot of people have gotten rich off HP. Everyone, it seems, but its shareholders.

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Read/Post Comments (13) | Recommend This Article (44)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 27, 2012, at 5:03 PM, AnsgarJohn wrote:

    Hi Morgan, you wrote "The company's current market cap is $23.5 billion. So in six years flat, more money was destroyed on overpriced, ill-conceived acquisitions than the entire 73-year-old company is worth today." The market price of a HPQ share today is equal to its value? Is that a coincidence or do you believe in the efficient market hypothesis? If not at what price would you buy HPQ today?

  • Report this Comment On November 27, 2012, at 6:43 PM, flinthef wrote:

    HP was built on the fact that it was a Test and Measurement company that provided excellent products with long term, well-priced, service agreements backing those products. HP is being destroyed by professional managers, or should I say people who talk well at board meetings, who are using a trusted brand name to sell shoddy consumer electronics. It is not sustainable and HP will fail. Sell your shares, cut your losses. This company is doomed because it is no longer a company of engineers building engineering excellence for fellow professionals, but a badge engineered 99c consumer electronics manufacturer.

  • Report this Comment On November 27, 2012, at 7:38 PM, Eurobound wrote:

    Interesting... I audited a European SAP subsidiary while Apotheker was at the helm and it was horrible... SAP had very unrealistic targets with no effective controls in place to tame the overly aggressive revenue recognition issues... we never did sign off on the audit of that subsidiary but luckily it was way below materiality so it didn't affect the audit of the consolidated SAP financials.

  • Report this Comment On November 27, 2012, at 9:17 PM, dcgatlanta wrote:

    Great article!

  • Report this Comment On November 27, 2012, at 9:39 PM, HectorLemans wrote:

    Dave Barry said it best: "Every day there's news about large companies in other industries that, to judge from their losses, are setting fire to bales of cash in the parking lot."

  • Report this Comment On November 28, 2012, at 12:20 AM, Clint35 wrote:

    There's one more group that has made money. People that shorted HPQ. I had an under-perform pick on it on caps for a while. One of my best picks ever. Great article.

  • Report this Comment On November 28, 2012, at 12:23 AM, TheDumbMoney2 wrote:

    "There will be massive 2012 Tax-loss selling of the shares moving into year-end December. As I always do toward year end, I scoop-up bargains from desperate sellers."

    So smooth. I think HPQ is quite possibly THE tax-loss panic-selling buying opportunity of the Christmas season, in the same way that BAC was last year.

    I'm sitting on the sidelines as far as new investments/trades go (because I'm refinancing my house instead), but I am definitely gaming this one out for future psychological and experiential reference.

    In my fake money Google Finance portfolio I am looking to see if it takes further flack, and if it tanks another 10-15% in December I'll take a big swing at it there.

  • Report this Comment On November 28, 2012, at 4:59 AM, Leo120 wrote:

    Great article - thank you!

    Might Dell be headed in the same direction? See this article on Dell's M&A, http://seekingalpha.com/article/1031511-dell-s-m-a-10b-in-5-..., and in the comments there an article on Dell's buyback.

    Check out http://www.merjerz.com/ for M&A done right.

  • Report this Comment On November 28, 2012, at 8:34 AM, DCUDFlyer wrote:

    Morgan -- Great article, keep up the good work. Would be interested to hear your thoughts about HP moving forward...

    DCUDFlyer

  • Report this Comment On November 28, 2012, at 10:10 AM, sikiliza wrote:

    It's safe to say that HPQ is due for a break-up where the valuable position remains on board and all the dogs get sold. Also, since the problem with the company is endemic and far-reaching, a top down shake-up is probably due any time now.

  • Report this Comment On November 30, 2012, at 11:40 AM, lowellmk wrote:

    The problem with Win8 reflects the problem MSFT has had for a decade. The leadership is lost and directionless. They are chasing markets and copying success stories...and not very well, either.

    Ballmer needs to go....should have been forced out after the anti-trust disaster. MSFT needs innovative leadership. The company may be best served if it were spun off into 2-4 smaller companies.

    I've owned the stock for many years and am just sick over how badly this company is managed.

  • Report this Comment On November 30, 2012, at 5:21 PM, CEDUP wrote:

    HP is the next Sony, horrible management, the people hired are inept and fleecing it. From the Fiorina debacle, after she came from the beat Lucent, the TARDS at HP hire her, what a disaster followed by a few more loads, now teh current load, WOW, I wish I could make millions by destroying a well know used to be company. HP, Sony, Kodak, Panasonic, Apple shortly, all done.

    How come GE, Philips, Siemens keep on chugging for over 120+ years, doing all kinds of products, obviously the better people work there. All the experts hired at HP, are a joke. the con continues. the two founders are rattling in their graves,.

  • Report this Comment On February 01, 2013, at 10:30 AM, steveluannj wrote:

    The first question is: Why would anyone do this. Incompetence alone does not begin to explain the magnitude of the destruction. I spent my entire career at HP, and saw the company change from a technology company run by engineers, to a consumer products company run by marketers, to finally a aimless company run by financial engineers. This last group used the balance sheet to finance a mirage of earnings growth.

    The second question is: Why is this so obvious now, but invisible a few billion ago? No analyst seemed to think that the exchange of cash for goodwill was noteworthy enough to mention in a research bulletin.

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