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Waiting for HP's Next Shoe to Drop

By Evan Niu, CFA - Oct 1, 2012 at 5:00PM

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Any other questionable multi-billion dollar deals needing to be written down?

Iconic PC giant Hewlett-Packard (HPQ 0.37%) has already had massive indigestion within the past year thanks to two botched acquisitions. CEO Meg Whitman is in a tough spot because these past missteps were ultimately the decisions of her predecessors. Is another shoe just waiting to drop?

An expensive trip down memory lane
Way back in 2008, then-CEO Mark Hurd decided to acquire Electronic Data Systems for a whopping $13.9 billion to bolster HP's presence in the realm of enterprise IT, second only to IBM (IBM 0.52%) at the time. The deal earned a 33% premium for EDS shareholders over the stock's closing price the day prior. It was but one of many acquisitions at the time that Hurd had pursued in order to grow HP's software and services business in an effort to tap into data center growth.

It was also on Hurd's watch that HP would acquire struggling mobile gadget vendor Palm in 2010 for $1.2 billion, a move made in recognition of how significant smartphones and tablets would be in the future of computing. webOS had failed to gain traction in the consumer market, despite pundit praise and some innovative features. Hurd clearly thought that the operating system would fare better under HP's flag.

Hurd's hurt
Of course, Hurd would be ousted just later that year in a high-profile scandal befitting a Spanish soap opera. There was sex (harassment allegations), lies (falsified expense reports), and rock and roll. It had it all. Wait -- there was no rock and roll. It had everything else, though.

He wouldn't be around to fully see through these ambitious acquisitions, and Leo Apotheker was named his successor. Apotheker would proceed to axe the entire webOS and Palm hardware division, and damn near the PC business also. His reign didn't last long, and Meg Whitman was given the keys to the ship, inheriting quite a mess.

One after another
One of the first things to happen on Whitman's watch was that HP would incur $3.3 billion in after-tax costs related to winding down the webOS device business, along with goodwill and intangible asset impairments and other restructuring charges. That's nearly three times as much as HP spent on Palm in the first place.

Just last quarter, HP wrote down another $10.8 billion related to the aforementioned EDS acquisition, similarly including impairment charges for goodwill and intangible assets. At the time, I figured that fortunately, HP "hasn't made any other questionable multi-billion-dollar deals recently, just waiting to get written down ... Oh, wait. Nevermind."

It's an allusion, Michael
That was an unsubtle reference to the $10 billion acquisition of British software maker Autonomy, one of Apotheker's moves shortly before he was axed. It appears that I'm not alone, as Jefferies analyst Peter Misek was out recently warning investors that another hefty writedown was on its way for HP.

He estimates that HP will end up eating another $3 billion impairment related to Autonomy, which is realistic when you consider that HP paid a 64% premium for the company at the time. That premium's going to land somewhere.

Blame it on the other guys
Whitman is in a tough spot since none of these acquisitions were her decisions. They were all made by her predecessors and haven't played out profitably for various reasons. EDS, Palm, and Autonomy are all problems that she has inherited but is tasked with fixing (along with the rest of the company).

Dell (DELL.DL) has capitalized on its mistakes and tried to poach enterprise customers while similarly transitioning to becoming an IT player. Even though HP has now made webOS open source, it's betting big on Microsoft (MSFT -1.05%) Windows 8 for its next tablet push, and maybe even its next smartphone attempt.  Misek also happens to doubt HP's renewed push into mobile devices. 

Whitman won't be blamed for it, but the Autonomy shoe will likely drop on her watch.


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