How Meg Whitman Plans to Revive Hewlett-Packard

Learn why Hewlett-Packard is firing 16,000 people.

May 27, 2014 at 11:30PM

After trading down in the after-hours session on May 22, shares of legendary PC company Hewlett-Packard (NYSE:HPQ) gained 6.1% on May 23 as investors viewed the company's announcement of job cuts as a positive. However, since 2007 Hewlett-Packard has been challenged by a shrinking PC industry and the rise of Chinese manufacturers such as Lenovo (NASDAQOTH:LNVGY), which employs aggressive pricing strategies and efficient production cycles to gain market share.

To improve efficiency, Hewlett-Packard's CEO, Meg Whitman, said on the earnings call that the company would eliminate 16,000 jobs on top of 34,000 previously announced cuts. Whitman, who has been earning a salary of $1 since she joined the company in 2011, is trying to revive Hewlett-Packard by implementing a five-year plan. Will she succeed?


Source: Hewlett-Packard

Earnings review
Results were pretty much inline. The company reported earnings per share of $0.88 with $0.88 expected on revenue of $27.3 billion with $27.4 billion expected.

Although this was the 11th straight quarter of declining sales for the company, it was still able to generate $3 billion in cash flow from operations and returned $1.1 billion to shareholders through dividends and buybacks. 

The plan
The company also announced that it would cut an additional 11,000 to 16,000 jobs, bringing the total number of job losses to 50,000 under Whitman's restructuring plan. 

The job cuts are just one part of Whitman's plan to revive Hewlett-Packard. Whitman, who is well-known for urging employees to take Hewlett-Packard's setbacks personally, wants to make the company into a major player in the corporate-technology segment, along with IBM and Cisco.

Whitman is also very famous for her focus on efficiency. The layoffs that were announced on the earnings call account for between 3% and 5% of the company's overall workforce, and the company expects to save $1 billion in operating costs by 2016 because of them. This should help the company continue to generate positive cash flow despite a shrinking PC industry. Also, since more than a third of the cash the company generates each quarter goes to financing shareholder returns, the dividend and buybacks look safe for the time being.

The future
That being said, there may be more clever ways for the company to use the cash. It's great to hear about dividends and buybacks in the short run, but in the long run the company needs to find new revenue sources in order to survive.

Creating a new line of products is a very hard, though not impossible task. In the past, Apple -- which once upon a time had a minimal share of the PC market -- used innovation to create superb products, such as the iPod, iPhone, and the iPad. To produce innovation, Hewlett-Packard could start by increasing its expenses related to research and development, or R&D. At the moment, the company has one of the lowest R&D budgets in the industry.

Finally, the company still has plenty of things to learn from competitor Lenovo, which took the market-share lead from Hewlett-Packard in 2013. The Chinese company bought IBM's PC division when the market for the PC had already matured. By buying a well-recognized brand, moving its production to China, and installing a highly efficient cost structure, Lenovo became famous for its aggressive pricing and high quality standards. It now plans to use the same trick with Google's Motorola brand and IBM's server business.

Hewlett-Packard, which already owns a famous brand, could adopt a similar strategy by acquiring promising and scalable start-ups and bringing their products to the mass market using an efficient production cycle.

Final Foolish takeaway
It's too early to know if Meg Whitman's plans to revive Hewlett-Packard will work. That being said, the recent announcement that the company will fire 16,000 people could be seen as a positive, as Hewlett-Packard may be too big and bureaucratic. Finally, the company should not only focus on efficiency, but also on innovation, which it could achieve by spending more on research and development or identifying and acquiring promising start-ups.

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Victoria Zhang has no position in any stocks mentioned. The Motley Fool recommends Apple, Cisco Systems, and Google (C shares). The Motley Fool owns shares of Apple, Google (C shares), and International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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