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HP's EDS write-off hides deeper problems

Analysis Servers, networking and even ink sales are down
Thu Aug 23 2012, 16:34
hplogo

HP HAS TRADITIONALLY made a pretty penny from flogging expensive printer ink, but even its vast inkwell wasn't enough to hide a very worrying set of financial results.

hplogoHP reported a loss of $8.9bn for its third quarter and, rather handily for its CEO, Meg Whitman, almost all of that astounding figure came from the write-off of its purchase of Electronic Data Systems (EDS) from General Motors in 2008. Whitman was lucky with the EDS write-off because it took the focus away from what was a far more worrying statistic, that all but one of HP's business units saw a decline in revenue.

HP's write-down of EDS might have resulted in just a paper loss - the firm didn't actually lose $9bn in cash - but it provides an insight into how a decade of mismanagement has left HP in a bad situation. The fact is that HP cannot lay the blame on diminishing PC sales because its enterprise business, printing and services divisions all reported losses, too.

For HP to write down the purchase of EDS, a company it paid $13.9bn for just four years ago, strongly suggests that those who were at the helm of HP in the run-up to that acquisition simply had no clue as to how much EDS was really worth and how to incorporate the company into HP. The value of any company can go down over time - just look at AOL, Microsoft or Yahoo - but for an established business such as EDS to be overvalued by almost $10bn just four years after being acquired is nothing short of gross incompetance by HP in both the purchase and the subsequent handling of the firm once it became a part of HP.

Aside from HP's multi-billion dollar balls-up with EDS, there are more worrying signs in HP's latest earnings report. The firm's Enterprise Servers, Storage and Networking (ESSN) business unit should be of greatest concern, as a four percent drop in revenues in a business unit where HP has made some agressive moves in the recent past suggests that there are deep rooted problems.

HP's high-profile purchases of 3Com and 3Par fall into its ESSN business and were used as evidence of HP pushing into the lucrative enterprise and datacentre markets. After all the stall in PC market growth was forecast many years ago. Going through HP's figures for the ESSN division, year-on-year quarterly revenues are down for the past three quarters, and while the fourth quarter has traditionally been strong, the smart money has to be on yet another decline in revenues from 2011 figures.

Whitman told journalists that turning around ESSN is not something that can be done quickly, and obviously a company the size of HP needs a few quarters to first stop the rot and then turn things around. But it's hard to see just how HP will set ESSN back on the right track, with specific businesses such as the Business Critical Systems, home to HP's Itanium business, posting sales that were down by 16 percent.

As HP and just about every server and network vendor bangs on about the cloud in the hope that increased cloud adoption will lead to increased server and networking equipment sales, the truth is that server vendors are becoming like PC vendors, unable to differentiate themselves from the crowd. In the past firms such as IBM and HP were able to generate server business on the back of decades of branding that promoted a sense of reliability, but clouds are all about abstracting out unreliability by using vast numbers of nondescript servers, so that the software and ultimately the hardware - much less the company that supplies them - don't matter as much as they used to.

As for HP's PC business, which reported a 10 percent drop in revenue, there seems to be an acceptance that just because growth in the PC industry has stalled it is perfectly acceptable to see revenues fall. The fact is that Lenovo has shown up rivals such as Acer, Dell and HP by producing quality products and has not relied on cheap and nasty designs and low prices to flog units, and thus is set to overtake HP as the largest PC vendor while posting impressive profits.

HP's PC business was effectively crippled by former HP CEO Leo Apotheker. His announcement that HP would be spinning off or selling its PC business might have been reversed by Whitman but the damage was already done by that stage and the results are shrinking revenue and market share in what is still a huge market and will be for many years.

For HP, the only ray of light was its software business, to which Apotheker added the British based Autonomy. Given that many thought that HP had overpaid for Autonomy when it shelled out over $10bn last year for a company that barely makes $250m in profit a year, there could well be another write-down in the future unless HP does a better job of integrating the firm than it did with EDS.

Luckily for Whitman, the heat isn't on her just yet. In many ways she is in a "can't lose" position for the next few quarters as the trail of destruction she has inherited gives her a few quarters of breathing space before results are expected.

Whitman has followed a number of HP CEOs that have left the staff at HP and people outside it shaking their heads at how low a company once seen as a bastion of research and development has fallen. Carly Fiorina, Mark Hurd and Leo Apotheker are all names that many HP insiders wish had never set foot in the HP CEO office. While Fiorina and Hurd had years of mismanagement to grind down HP, Apotheker deserves extra recognition for doing so much damage in such a short time.

HP and Whitman can't afford many more quarters where all but one business unit post falling revenues, because multi-billion dollar write-downs can only mask serious problems for so long. µ

 

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