By PuiWing Tam Staff Reporter of The Wall Street Journal
HewlettPackard Co. has repeatedly said that the battle to buy Compaq Computer Corp. hasn't distracted it from running its daytoday operations. But internal company documents suggest the proxy contest may have had more of an effect on some HP businesses than it previously let on.
For example: Some documents from HP's businesscustomer organization, which is responsible for peddling products to corporations, show that the unit's sales of computerrelated hardware last month were 19% below those of the yearearlier period. The revenue of $1.29 billion resulted in an operating loss in February for that unit's computerhardware segment of $108.3 million, down nearly 68% from the same month a year ago, according to the documents.
HP's businesscustomer organization, which also sells supplies and services to corporate customers, doesn't break out its performance in the company's financial results. For HP's current fiscal second quarter, which ends April 30, analysts estimate the company will deliver revenue of about $11.1 billion, according to Thomson Financial/First Call. In the yearearlier quarter, the company's net income totaled $319 million.
One of the internal finance documents is dated March 8; another is dated March 13, a week before HP's shareholders were to vote to determine the outcome of the company's $19.33 billion bid to buy Compaq. The message that HP could execute well even amid the disruption of a proxy battle helped the company win votes for its Compaq deal. At the March 19 shareholder meeting, HP Chief Executive Carly Fiorina declared the company had won a "slim but sufficient" majority of votes, giving her a tentative mandate to complete the acquisition. Still, her opponent, dissident HP director Walter Hewlett, hasn't conceded defeat, and an official count of shareholder votes could take several weeks.
The surfacing of the documents from the businesscustomer organization comes on the heels of an internal memo from another HP unit that was disclosed last week by Dow Jones Newswires. The other memo described belowexpectation sales activity for the services business, which provides consulting, outsourcing and customer support.
In the memo, dated March 18, the services business's president, Ann Livermore, wrote that her unit's revenue was "well below plan" so far for HP's fiscal second quarter. She added in the memo that the proxy battle to buy Compaq was having "an impact on employee productivity and customer decision making." During the 2001 fiscal year, revenue from the services business contributed 17% to HP's total revenue.
Webb McKinney, president of HP's businesscustomer organization, says his unit's internal finance documents don't "provide an indication for the quarter," noting that a large chunk of sales for the division typically arrives at the end of a quarter. Mr. McKinney also emphasizes that HP hasn't changed its financial guidance for the current quarter, and adds that he is "very proud" of the work the businesscustomer organization is doing.
Ms. Livermore, meanwhile, has said that her memo was part of a regular quarterly "rallying cry" to her managers. She also has cited the heavy role played by endofquarter sales.
Institutional investors and analysts say it isn't uncommon for the bulk of technology hardware and services sales to arrive at quarter's end. But Andy Neff, an analyst at Bear Stearns & Co., says it may be problematic for HP to rely on a rush of sales at the closing stages of this current quarter, since that may be about the time the company completes its deal with Compaq. "HP is already going to be fairly distracted at the end of this quarter," he cautions.
Yesterday, HP's Ms. Fiorina and Compaq Chief Executive Michael Capellas acknowledged in a joint memo that combining the two companies is a "complex undertaking" and that "we may stumble occasionally." The duo urged employees not to put work on hold, especially as "our competitors are trying to take advantage of our current situation to spread fear, uncertainty and doubt among our customers."
The flurry of internal documents has surfaced as HP's stock remains well off its 52week high of $34. At 4 p.m. yesterday in New York Stock Exchange composite trading, HP shares were down 31 cents to $17.77.
To be sure, with more than a month to go before the end of HP's fiscal second quarter, the internal documents don't paint a full picture of the company's different businesses. HP, based in Palo Alto, Calif., is a diversified tech company with a highly profitable printer and imaging division, as well as the services unit and other operations. Last month, the company reported robust firstquarter results, more than tripling its net income from a year earlier.
In addition, Wall Street already expects HP's revenue to fall in the current quarter, as a result of seasonal spending patterns. HP Chief Financial Officer Robert Wayman said last month that the company was projecting a modest revenue decline for its fiscal second quarter, noting that there tends to be a dip in tech spending between February and April.
Still, the internal documents may spook some HP investors. Indeed, the disclosure of Ms. Livermore's memo last week has generated concern. Steve Milunovich, an analyst at Merrill Lynch & Co. who supported the Compaq deal, says finding out about Ms. Livermore's memo was "a bit disconcerting." Though he has a buy recommendation on the stock, he says HP "is going to have to execute" before the shares rise to his projected range of $25 to $30.
Steve Salopek, a fund manager at Banc One Investment Advisors, which voted for HP's transaction with Compaq, adds, "If HP doesn't execute, then there's going to be a problem." He intends to closely monitor how HP's businesses perform as the company begins combining with Compaq, adding that he's willing to give HP "the benefit of the doubt" for the first few months.
Other investors say that, given the nastiness of the proxy battle, performance hiccups at HP wouldn't surprise them. "The proxy fight was a big distraction for HP management, so we're not surprised that there is some nearterm impact," says Sunil Reddy, a fund manager at Fifth Third Investment Advisors, which voted against the Compaq deal. He says he doesn't plan to buy any more HP stock for the time being, predicting that the shares will "bump along the bottom" for at least the next few months. "It's now a `show me' story," says Mr. Reddy.
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