Aug. 18, 2011 may well turn out to be a pivotal day in the 72-year history of Hewlett-Packard Co., the world's largest IT provider.
The day boiled down to simple subtraction and addition-and not just in reference to the 2011 third-quarter financial report it delivered, which was the most dire one in recent years. A clear indicator is this: The stock closed Aug. 18 at $29.51 on the New York Stock Exchange, an all-time low in most valuation metrics for the company, because it's trading at only about six times earnings.
On the subtraction side, not only did CEO Leo Apotheker reveal that it is shutting down its webOS hardware division-meaning it is giving up on its relatively new tablets and smartphones-he also said that HP is seriously considering the divestiture of its personal computer businesses, much as IBM did in 2005 with its own sale to China's Lenovo. The HP board will have some serious decisions to make in the next few days and weeks.
Apotheker has said several times that he wants the company to expand its scope in software and services that deliver computing power via the cloud. On the hardware side, HP has been focusing more of its energies on servers and storage and lessening its attention on desktop and laptop PCs-largely because the market has stalled in the face of skyrocketing tablet sales.
On the addition side, HP clearly is changing its business model to one that embraces software over hardware. The company announced that it plans to acquire U.K.-based Autonomy, a 15-year-old company that was founded as a result of research and development at Cambridge University, for $10 billion and change.
Who is Autonomy?
Autonomy is a fast-growing, multifaceted IT provider that put itself on the global storage map by acquiring Iron Mountain's digital archiving, e-discovery and online backup business for $380 million in cash in May 2011. Apotheker described it as one of the "oldest and most established IT companies to compete successfully and profitably for new business in the cloud computing sector."
Finally, HP delivered a downer of a financial report Aug. 18, with all divisions except storage either flat or dropping a bit in revenue from 2010. Overall, net revenue of $31.2 billion was up 1 percent from the prior-year period as reported and down 2 percent when adjusted for the effects of currency.
When companies such as EMC, Oracle and others are making double-digit profits each quarter, this causes red flags at HP, which issued new downward guidance ahead of its next sales quarter.
Looking at the numbers, Autonomy stands to add a mere 1 percent to HP's overall revenue, at least at the outset. This deal, if completed, would cost HP a whopping 15 percent of its market cap. So the inevitable question was posed to Apotheker: Is this acquisition too expensive for HP at this time, considering the overall economy, current market pressures and the stock price?
Apotheker was ready for this and read a prepared statement. "Autonomy gives HP a great opportunity to accelerate our vision to decisively and profitably lead a new phase to the enterprise information management space," he told conference call listeners. "It also brings HP higher-value business solutions to help customers manage the explosion of information."