Hewlett-Packard Might Buy Organovo? Where's The Punchline?

Ever since Hewlett-Packard (NYSE: HPQ  ) CEO Meg Whitman announced last month that HP would enter the 3-D printing market by mid-2014, there's been some wild speculation about buyouts. Investors need to be especially wary when this buzz involves very small companies such as tissue engineering, or  "3-D bioprinting," company Organovo  (NYSEMKT: ONVO  ) . Here's what you should know about the situation in general, and Organovo in particular, to help protect yourself from being caught up in the frenzy. 

It doesn't take much to significantly move the stock prices of companies with small market caps and/or relatively low trading volume. And while that might sound great when the stock's heading up, things aren't so hunky-dory when the usually inevitable downturn comes. Small stocks that have turbocharged rises on no relevant news often have drops that are just as torrid, leaving many individual investors who bought on the way up with whiplash, in addition to a loss. 

Submitted for your consideration...
While it's unlikely that HP would be interested in one of the smaller publicly traded industrial-focused 3-D printers, speculation involving those buyouts at least falls within the realm of possibilities, however remote. The buzz about Hewlett-Packard possibly being interested in buying Organovo, on the other hand, crosses the line into the Twilight Zone. 

Granted, Organovo uses 3-D printing, or bioprinting, to "print" human tissues from cells. However, it's a biotechnology company. It's nothing like the other 3-D printing companies -- such as 3D Systems, Stratasys, and ExOne -- which make printers that have consumer, commercial, and/or industrial uses. Hewlett-Packard is involved in the consumer and business technology space, not in biotechnology or life sciences, and it has no expertise in these complex fields.  

The financial considerations
I'd imagine HP's board of directors would be thrown into a tizzy if Whitman announced she wanted to make a bid for Organovo. Let's play this out:

Whitman: "We'll need to spend about $850 million, as the company's market cap is $684 million [it had been approaching $1 billion before its recent big drop], plus we'll need to offer about a 25% premium [according to one article I read]."

Board: "How much money can we expect this company to add to our revenue and earnings?"

Whitman: "Ummm … well … it generated $23,000 in revenue last quarter and $693,000 over the last year, and its operating cash flow was negative $11 million over the trailing-12-month period."

Board: "And who are its customers?"

Whitman: "Organovo doesn't have any yet. Its revenue came entirely from partnerships with pharmaceutical and other companies interested in giving its technology a trial run, so to speak. The first commercial products – liver tissue assays – are expected to come to market in late 2014."

Board: "So, we can't count on any specific amount of revenue, let alone earnings, right? And we'd likely have to sink money into this business for awhile?"

Whitman: "Right. But it's neat-o technology, and it could have huge potential down the road … maybe five or seven years."

Board: "Meg, we're a turnaround company, remember? We need to generate some solid revenue and earnings growth soon, or we'll all be out of these cushy jobs. Furthermore, we don't have any expertise in life sciences or biotechnology, and we'd have to spend huge sums of money trying to catch up to deep-pocketed companies that have lots of experience in these fields. If you want neat-o, go drop close to a billion dollars of your own money on a custom yacht or something."

Back to reality
Those of you following HP's turnaround story likely know that one of Whitman's initial goals was strengthening HP's balance sheet, and she's made solid progress on this front. Spending big money -- close to $1 billion is a sizable chunk, even for HP -- to buy a company that would not only add zilch to HP's bottom line, but would almost surely subtract from its bottom line for at least several years, would undo much of Whitman's recent work.

If HP does acquire a company to enter the 3-D printing space, it will likely be one that has the potential to positively contribute to HP's revenue and earnings relatively quickly.

In short, while there might be valid reasons to invest in Organovo, a buyout by Hewlett-Packard is not one of them.  

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Read/Post Comments (9) | Recommend This Article (3)

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 24, 2013, at 3:00 PM, AndyZaa wrote:

    I'll respectfully disagree that HP is "not in biotechnology or life sciences, and it has no expertise in these complex fields". I've been in life science laboratory automation for about 30 years, and HP has made several forays into the life sciences. In the '80s they were building robotic systems for drug discovery, which they did abandon after about ten years. Also, in the past HP had an extensive line of GC/Mass Spec instruments which spun out into Agilent in 2000. Currently they have the DS300 Dispenser which sells into the life science area. It's certainly not a core area for HP but in my opinion they have been interested in life sciences enough to dip their toes several times. Thanks for a great article.

  • Report this Comment On November 24, 2013, at 5:34 PM, minerboy wrote:

    Your hard number analysis is right on the money but, you missed the biggest selling point of ONVO.

    This company's technology is nothing short of being as significant to the field of medicine as penicillin, anesthesia and antiseptics.

    Yes, it is several years out and it will cost money to get there. But, this, even in its infancy, is nothing short of miraculous.

    HPQ would be very wise to buy it now for pennies and sink some money into it. The future earnings from the pharma industry alone makes this worth the shot.

  • Report this Comment On November 24, 2013, at 6:16 PM, TMFMcKenna wrote:

    @AndyZaa,

    You're certainly correct that HP previously was quite involved in the bioanalytics field and other related ones -- and that they spun off those businesses into Agilent in 1999. That's 14 years, though, so I'd not imagine they still have folks left at corporate or HP Labs with expertise in those fields.

    In retrospect, perhaps I should have added a line stating such. Thanks for the comment.

    @minerboy,

    Organovo may or may not be on the brink of something huge. I just think it's extremely unlikely that HP, given its current turnaround situation, would have an interest in a money-losing business quite outside its core competencies. Thanks for commenting.

  • Report this Comment On November 24, 2013, at 7:22 PM, IveGotTheNUTS wrote:

    I like how you turn this into a negative Organovo article. Organovo has signed with LAROCHE a 9 billion $ profit company. It has also signed with Loreal a 3 billion $ profit company. It is working with also working with the Knight Institution.

    Anyone in upper management would see that those to companies are no fly by nighters. Hoffman Roche is one of the WORLDs largest drug manufacturer. And Loreal is also a top 3 player in the cosmetic industry. This author do not do much digging on potential profits fro,m ORGANOVO. This company has been around 6 years and is just starting to reap the FRUIT of its hard labour.

  • Report this Comment On November 24, 2013, at 8:47 PM, TMFMcKenna wrote:

    @Ivegothenuts,

    This is in no way a negative piece on Organovo. Whether or not Organovo has great potential or not is irrelevant to this piece. The premise of the piece is that it simply is not a good fit as a "3D printing" buy for HP (as articles on other sites have suggested, by grouping it in with the other 3D printers), esp. given HP's current turnaround situation.

    Thanks for commenting,

  • Report this Comment On November 25, 2013, at 10:58 AM, Epdent wrote:

    I agree with you when you talk about small companies with small trading volumes. But ONVO volumes of 15, 20 000 000 I wouldn't call small.

    In addition, it's always makes me wander when someone is trying hard to make me and other sell my shares. I am long. Did not sell when everyone was and keep on buying

  • Report this Comment On November 25, 2013, at 11:15 AM, jaswade wrote:

    Your article presents a realistic perspective.

    I am a buy-and-hold guy, rarely a trader. I averaged into 2000 shares of ONVO this Spring at $3.91. When ONVO first listed on the NYSEMKT and spiked above $8 on July 18th, I thought it would form a new base at or near that level. Instead, it gave back virtually all of its gains. It then took 3-1/2 months to reach that level again, and when it did, it went parabolic.

    I hate paying short term capital gains taxes, and wanted desperately to hold these shares until next Spring (or even longer), but the mania was just too obvious. I sold at $12.81 and bought 40 contracts for Dec 21 2013 $12.50 puts for $1.81. Two days later, I sold those puts at $4.00.

    I like this stock. I will own this stock again in the future at $6 or below.

  • Report this Comment On November 25, 2013, at 1:06 PM, y2kate wrote:

    Hello,

    I follow this stock avidly, and in no forum I follow was anyone seriously discussing the possibility of HP buying ONVO. Clearly, their businesses are completely different. HP makes a lot more sense with DDD, the rumor going around a couple of weeks ago. So, we are presented with a rumor no one has actually heard, that, as the author points out, doesn't make sense...clearly. I don't think we've really learned anything new.

    Now, someone- if not HP- might well be interested in buying ONVO...who? Let's discuss more credible candidates. What about GOOG? The potential synergies between those companies could be fascinating, and may well be worth a Foolish, exploratory article!

    Thanks!

  • Report this Comment On December 12, 2013, at 9:16 PM, moneymog wrote:

    The reason HP brought Meg back was for the same reason most investors do not make gobs of money. Meg has gone into areas that are atypical for HP. Some in the past failed but enough broke new ground and added real heat to HP's fire. She is back and very savvy about the market potential and ONVO's commitment to the future of solids building systems, especially applied to the human anatomy. The ultimate desk top PC, body builder.

    I was part of the computer and machine structure in 1988 when AMP incorporated chose DDD and a CAD solids modeling system competing against IBMs CATIA (a mega-user of AMP connectors). There were several brilliant young people in that arena from HP and those folks are still at HP and thought of quite well. Meg thinks outside the box as many of you do not, no slight, just a fact. To me it is an even better fit today then in 1988. I am no insider. I have bought and continue to buy and hold ONVO. So keep selling so I can buy and remember what I wrote above and.... that she wanted to be a doctor and married a neurosurgeon. Childhood dreams do turn to reality.

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