Interesting FWIW
Hewlett-Packard Reviews its Map to Success
By Eric Moskowitz
Staff Reporter
It was the middle of 1997 and Hewlett-Packard (HWP:NYSE) was trying to
decide which direction the company should go in next. Amid all the
discussions, Richard Belluzzo, H-P CEO Lew Platt's second in command, came
up with a plan to "get some of the fat out of the company's bloated
infrastructure," says an H-P executive, who requested anonymity.
In the end, Platt decided to do very little. If anything, more emphasis was
placed on remaining among the top tier of PC giants that were pulling away
from the rest of the industry. H-P was by then a top-five player in PCs for
the first time, and its stock was flying. The thinking was: If it ain't
broke, don't fix it. From 1991 to mid-1997, investors had seen the
company's stock rise more than 800%. In that time, the Palo Alto,
Calif.-based company, thanks to its dominant position in the fast-growing
printer business, had become the envy of the Street.
Fast forward to a year and a half later, and it looks like Belluzzo may
have foreseen signs of a slowdown: H-P has lost the earnings and revenue
momentum it had for much of this decade. Its once-buoyant stock is down 12%
since July 1997. Belluzzo, the man responsible for H-P's fast-growing
computer division, left the company in February to become head of Silicon
Graphics (SGI:NYSE). Belluzzo wasn't available for comment.
This week, H-P finally acknowledged its growing problems and said it has
begun reviewing its business operations. The last time the company was in
trouble, co-founder David Packard came out of retirement in 1990 to
successfully re-energize the company.
H-P is far from being on its deathbed. It has a loyal employee base and
still enjoys a reputation as perhaps the premier global technology company.
And despite a more competitive printer landscape, H-P is still in a
dominant position. Although its stock has been bouncing around this year,
Platt has had some success with cutting costs, although he has introduced
an idea that is anathema to H-P traditionalists: cut employees.
H-P recently offered a voluntary severance package to employees, and 1,850
of them took it. "I'm leaving in a week, but I still think it's a great
company," says Kirk Lindstrom, an H-P employee for 20 years who works in
H-P's semiconductor division. Lindstrom says there is no panic within the
company because employees still have faith in H-P's long-term stock
performance. "If I thought H-P's problems were serious or unfixable, I
would have sold off all my stock by now," he says. Lindstrom estimates that
employees on average have 50% to 75% of their equity in H-P stock.
Now that's loyalty, especially for a company that still hasn't discovered a
way to stop declining revenues. Revenue growth has fallen to 10% a year,
less than half of what it was two years ago. Last week in a conference call
with analysts, H-P's CFO Bob Wayman led the Street lower on revenue
projections for the next fiscal year from 15% to a range of 8% to 10%. A
number of analysts lowered their H-P ratings and pushed the company's stock
from 65 to 58 last week. The stock rebounded on news of H-P restructuring
and closed at 63 Tuesday.
H-P will need to do more than talk to turn things around. "David Packard
came in and kicked ass when he came back, and it needs someone to do this
again," says Mark Specker, an analyst with Soundview Financial, who rates
the stock a hold. "This restructuring talk may have been in the works for
awhile, but I don't see the change agent that was there the last time
around in the early 1990s." Soundview has not done any recent underwriting
for H-P.
Specker sees the company getting more directly involved in providing better
business services to clients. H-P has the massive sales force needed to do
this, points out Specker, but it continues to lose business -- and market
share -- to IBM (IBM:NYSE) and Sun Microsystems (SUNW:Nasdaq) in places
such as server business. The reason? H-P may be even more reliant on its
"indirect" resellers than Compaq (CPQ:NYSE). Once it gets a business
contract, H-P hires a reseller to deliver the product, says Paul McGuckin,
Gartner Group's lead analyst on H-P.
"This is a source of frustration for a lot of H-P customers I have talked
with," says McGuckin, who notes this method is a more expensive way to do
business in today's economy. "Customers like to work with one business
provider, and other companies are adapting to this way of thinking faster."
H-P's Ann Livermore, as the head of the newly created Enterprise Computing
Solutions division, "will hopefully be able to make a big push" for
services, adds McGuckin.
Other H-P watchers believe the company, which traditionally promotes from
within, needs to bring in some new blood. "It would be very interesting if
H-P decided to bring in someone from the outside," says Craig Johnson, a
principal of the PITA Group consulting firm. Gartner's McGuckin warns that
it would be too much of a clash of cultures if someone from the new tech
world replaced Platt, who has been with the company since 1966. Instead, an
outsider as a deputy to Platt could work. "I think it wouldn't be such a
bad idea to bring a No. 2 that could get Wall Street's attention like a
Michael Dell or Larry Ellison," he said.
The chances of Platt -- who introduced such successful PC products as the
HP Pavillion for home users and the HP Omnibook laptop -- getting pushed
out by H-P's board is remote. "If Platt gets knocked out, you may not be
covering this company anymore," says Randy Befumo, an analyst with Legg
Mason Fund Adviser. Befumo believes that one of the three major indirect PC
sellers -- H-P, Compaq and IBM -- may not be in the PC business in the next
three years.
H-P's PC business, which makes up 19% of revenues, has become too big a
part of the company's revenue mix, says Befumo, who notes H-P spends too
much on PC capital spending, considering the company outsources its PC
manufacturing to resellers. H-P's return of capital in PCs "isn't anywhere
near where it should be," Befumo says. "Look at the company's free cash
flow; H-P is nowhere near Dell in this department." In terms of free
cash-flow margin, Dell's is 10% while H-P's is only 6%. (Free cash-flow
margin is a company's free cash flow divided by its total revenues.)
H-P is too good a company not to figure out how to tinker with some of
these balance-sheet discrepancies. "I think there will be a reorganization;
I just don't think it will go all the way to the top," says a Wall Street
analyst, who requested anonymity.
Analysts and investors will get a chance to find out what Platt is thinking
on Tuesday, when H-P has its annual meeting with Wall Street. |
