Today's WSJ 'Heard on the Street' column...
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HEARD ON THE STREET
HP Internal Documents Suggest
Proxy Fight Has Been Distraction
By PUI-WING TAM
Staff Reporter of THE WALL STREET JOURNAL
Hewlett-Packard Co. has repeatedly said that the battle to buy Compaq Computer Corp. hasn't distracted it from running its day-to-day operations. But internal company documents suggest the proxy contest may have had more of an effect on some H-P businesses than it previously let on.
For example: Some documents from H-P's business-customer organization, which is responsible for peddling products to corporations, show that the unit's sales of computer-related hardware last month were 19% below those of the year-earlier period. The revenue of $1.29 billion resulted in an operating loss in February for that unit's computer-hardware segment of $108.3 million, down nearly 68% from the same month a year ago, according to the documents.
H-P's business-customer organization, which also sells supplies and services to corporate customers, doesn't break out its performance in the company's financial results. For H-P'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 year-earlier 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 H-P's shareholders were to vote to determine the outcome of the company's $19.33 billion bid to buy Compaq. The message that H-P 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, H-P 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 H-P 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 business-customer organization comes on the heels of an internal memo from another H-P unit that was disclosed last week by Dow Jones Newswires. The other memo described below-expectation 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 H-P'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 H-P's total revenue.
Webb McKinney, president of H-P's business-customer 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 H-P hasn't changed its financial guidance for the current quarter, and adds that he is "very proud" of the work the business-customer 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 end-of-quarter 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 H-P 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. "H-P is already going to be fairly distracted at the end of this quarter," he cautions.
Wednesday, H-P'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 H-P's stock remains well off its 52-week high of $34. At 4 p.m. Wednesday in New York Stock Exchange composite trading, H-P shares were down 31 cents to $17.77.
To be sure, with more than a month to go before the end of H-P's fiscal second quarter, the internal documents don't paint a full picture of the company's different businesses. H-P, 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 first-quarter results, more than tripling its net income from a year earlier.
In addition, Wall Street already expects H-P's revenue to fall in the current quarter, as a result of seasonal spending patterns. H-P 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 H-P 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 H-P "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 H-P's transaction with Compaq, adds, "If H-P doesn't execute, then there's going to be a problem." He intends to closely monitor how H-P's businesses perform as the company begins combining with Compaq, adding that he's willing to give H-P "the benefit of the doubt" for the first few months.
Other investors say that, given the nastiness of the proxy battle, performance hiccups at H-P wouldn't surprise them. "The proxy fight was a big distraction for H-P management, so we're not surprised that there is some near-term 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 H-P 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. |
