Michael Dell Zings HP Over PC Exit, Bad Capital Allocation

I've got to hand it to Twitter: They've single-handedly revolutionized The Art of Ribbing and Comebacks. Whereas before, CEOs and politicians would only ordain their opinion in yawn-inducing press releases and near-scripted interviews, Twitter has created an avenue for the most visceral of reactions to break free.

And Dell's (Nasdaq: DELL) eponymous leader, Michael Dell, gave a Twitter reaction to Hewlett-Packard's (NYSE: HPQ) PC market exit that was no exception: “If HP spins off their PC business ... maybe they will call it Compaq?”

Oh-No-He-Didn't.

Dell was referring to HP's $25 billion acquisition of Compaq during the Carly Fiorina era. The acquisition was widely contentious at the time and, as HP's announcement this week confirms, it wasn't successful in saving HP's computer business.

And Dell is right to mock HP right now. If Carly Fiorina hadn't blown $25 billion on Compaq back in 2001, here's what Hewlett-Packard could have done with that money today:

1. Purchase all of Dell, after net cash. Dell's entire market cap is only $26 billion, and after net cash is only $19 billion (the enterprise value). With $25 billion, HP could purchase all of Dell's operating business.
2. Pay HP shareholders a whopping 50% special dividend. HP's market cap is about $50 billion, so a $25 billion dividend would be worth 50% of today's share price.
3. Repurchase 50% of the entire company. See above. With $25 billion in the bank, HP could repurchase half the company today. Of course, it's highly likely that HP's market cap would be $75 billion -- and not $50 billion -- if they had not wasted the $25 billion, making a buyback less appealing.
4. Purchase all of Research In Motion (Nasdaq: RIMM) with lots of change to spare. RIM's market cap of $14 billion and enterprise value of $11.52 billion would be easy to swallow. The irony is that instead, HP wasted money acquiring Palm and developing WebOS devices, which the company is also scuttling.

HP's past behavior shows what bad capital allocation can do. Fortunately, the company seems willing to fix past mistakes instead of continuing to have good money chase after bad. We'll see if management can regain shareholders' trust in the years to come.

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