HP Will Move Past This Dark Cloud

A Friday after-hours press release with major news is the modern business equivalent of Corleone family consigliere Tom Hagen offering to make "trouble disappear." By Monday, the news will be stale and investors will be focusing on the next major story.

Bury the news
So when Hewlett-Packard (NYSE: HPQ  ) announced yesterday that CEO Mark Hurd would be stepping down amid sexual harassment allegations, the press release came promptly at 4:05 p.m. ET -- after trading had ended. It was a classic move from the public relations playbook.

But Hewlett-Packard took the practice to another level. It not only announced Hurd's departure, it bundled that news with preliminary third-quarter results. The company beat revenue estimates while topping analyst projections by a penny per share on the bottom line. It also raised full-year and fourth-quarter guidance, but the increased figure only put HP in line with current expectations. For technology firms reporting earnings, merely meeting guidance has been a recipe for investors to sell off shares.

I'll give credit where credit's due: HP took swift action and ousted Hurd when improprieties came to light. Yet the timing and style of the announcement leaves something to be desired. And while HP might hope that the bundled good/bad news shows its underlying financial strength, that's just smoke and mirrors.

I see this as simply burying all the bad news at once. Still, no matter how you feel about HP's actions, based on current after-hours trading, we're looking at more than $8 billion of shareholder wealth lost since Thursday's close.

Other than that, how was the play, Mrs. Lincoln?
Aside from PR shenanigans, what does the move mean for HP?

Mark Hurd has been the company's CEO since 2005. During his tenure, Hurd has been lauded for making HP leaner and for moving into high-margin areas that provide better returns for shareholders.

Time Frame

Sales (TTM)

Profit Margin (TTM)

Return on Equity (TTM)

When Mark Hurd Took Over HP

$83.3 billion

4.3%

9.3%

Today's HP

$120.4 billion

7.1%

20.3%

Data provided by Capital IQ, a division of Standard & Poor's. TTM = trailing 12 months.

In the past five years sales have soared, profit margin has steadily climbed, and return on equity has more than doubled. That's the kind of performance CEOs dream about.

Hurd deserves an immense amount of credit for those gains. His predecessor, Carly Fiorina, focused her energy on engineering a $25 billion deal to buy rival Compaq. The acquisition pushed HP further into the commoditized personal computer space, where intense competition from foreign rivals has pushed HP's operating margins down below 5%. HP's not alone in its struggles; rival Dell (Nasdaq: DELL  ) can barely even keep its head above the water. Dell's operating margin selling computers to consumers stands at less than 1%.

Hurd saw the folly of chasing computer prices to the bottom and emulated a light version of the IBM (NYSE: IBM  ) model. In 2008, he bought services firm EDS to bundle consulting and systems integration services with its hardware sales. Since then, HP's services revenue has risen to become the second-largest segment of the company. There's little doubt today that the EDS acquisition was a home run.

While Hurd might have steered the company in the right strategic direction, his reign at the top of HP is now over. Replacing him will be former CFO Catherine Lesjak. Don't look for Lesjak to become the next CEO, though; she's reportedly taken herself out of the running.

What major challenges does the next CEO have to face?
HP is at a crossroads in several strategic areas. On the consumer-facing front, it recently acquired Palm to power its mobile ambitions. While Palm developed its world-class webOS operating system, it never really caught on with either consumers or developers. Still, despite previous failures for webOS, HP is going full steam ahead with developing gadgets for its new operating system.

HP has publicly abandoned plans to develop a Microsoft (Nasdaq: MSFT  ) Windows 7 tablet, and is also reportedly moving away from tablets based on Google's (Nasdaq: GOOG  ) Android tablet. As consumers shift to spending more money on smartphones and tablets, relying on an unproven operating system with few applications is a dangerous position for whomever takes over HP.

On the enterprise side of things, Hurd's replacement will need to continue building services and software momentum. One of the more interesting "threats" facing HP is Cisco's (Nasdaq: CSCO  ) push into servers. In response, HP has beefed up its ProCurve line of networking gear. Whoever succeeds Hurd will need to decide how strongly HP wants to keep competing with the networking giant.

Final thoughts
I'm disappointed with the way HP broke this news. Getting rid of Hurd shortly after allegations came to light appears to be the right move, but a Friday after-market-close press release bundled with pre-released earnings is below the company -- no matter how HP spins the news.

That said, I think HP will be fine. While the company is missing out on gains from the smartphone boom, it's also seeing strong profits in its services, software, and printing units. Even with some struggles in its consumer business in coming years, HP is well-positioned for growth.

Mark Hurd will leave under a dark cloud, but HP is still on a better path than it was five years ago.

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Eric Bleeker owns shares of Cisco. Microsoft is a Motley Fool Inside Value pick. Google is a Motley Fool Rule Breakers choice. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Google. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (7)

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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 August 07, 2010, at 9:22 PM, FrankDip wrote:

    Not sure when you preferred HP to break the news. The resignation of the CEO is a material fact and as such must be reported by the company as soon as possible. Hurd's settlement package was not finalized until Friday & he resigned on Friday. It would have been improper for HP to hold this news & not report it ASAP. In fact had HP not reported this on Friday you would have probably written an article complaining HP witheld the info.

    Frank

  • Report this Comment On August 08, 2010, at 12:37 PM, saron1 wrote:

    My hunch - the board was looking for a reason to get rid of Hurd and he gave to them. Hurd extracted the value out of HP with acquisitions and cost management but didn't invest in the future. There is a deep bench of experienced "yes" men and women waiting to take over but no strategic value creator, at least not one that has the gravitas to keep the street and the board at bay. HP will have to be very lucky to get the right replacement.

  • Report this Comment On August 08, 2010, at 1:03 PM, plange01 wrote:

    a strong sell on hp.this company was a disaster for years and tried 3-4 ceo's before hurd took over.hurd made the differance he did a great job.forget hp watch to see where hurd moves next it wont take long. buy that company

  • Report this Comment On August 08, 2010, at 5:10 PM, srivatsan123 wrote:

    I beg to differ. HP's move into networking needs a strong executionist like Hurd. HP had a poor track record of CEOs before Hurd. I don't see any in the current crop matching to Palmisano or Chambers. Just wait and watch for a few quarters as to how IBM and CSCO retort!.

  • Report this Comment On August 09, 2010, at 2:13 PM, shesdangerous wrote:

    I work for HP as a systems administrator, I started before Hurd and I'm very excited to continue on now that he's no longer in charge. When Hurd stepped in my (and my colleague's) pay was cut and then cut again for an overall cut of 30%. Our benefits were slashed and bonuses no longer exist. Although Mr. Hurd was very shareholder friendly, he took millions and millions in salary, bonuses, and stock options while HP employees were struggling to make it through cuts while the economy continued on its decline. I have seen first hand the awful management practices that Hurd has implemented so I wish him the same misfortune we all suffered under his leadership. Good Riddens!!!

  • Report this Comment On August 09, 2010, at 3:26 PM, onepremise wrote:

    I don't buy into the hype with Mark Hurd and his "World Class Cost Cutting Measures". Hurd has completely destroyed this company internally. All technical talent has left as a result of his practices. Be prepared for the fallout of long-term debt from the results of his actions, acquiring companies with dead products and little consumer base. This is only the beginning. Sell your HPQ stocks before it's too late. Believe me, this is only the beginning.

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