November 21, 2012

Hewlett-Packard - Duped Long Before Autonomy


Here are some very interesting facts dating back to Leo Apotheker's 11th month on the job as Hewlett-Packard's CEO, when he was summarily fired. The quote is from CNN Money.

"Leo Apotheker will leave HP a wealthy man: He has already taken home most of his $1.2 million annual salary, a $4 million signing bonus, and an additional $4.6 million awarded for relocation assistance and to offset payments that he forfeited from his previous employer, SAP. Apotheker was ousted on Thursday, but he'll collect more money on his way out the door. The former CEO will take home $7.2 million in cash as severance, plus $18 million more in stock."

That adds up to $25 million dollars HP paid out for essentially allowing itself to be trashed by a truly incompetent CEO – the very same CEO who insisted that Autonomy was the deal of the century for HP.

The very same CEO who now claims HP's due diligence was "meticulous" and who shelled out millions upon millions of dollars to investment banks and advisors (at least seven of them by our count) to ensure that the due diligence was both meticulous and unerringly accurate.

Little did we know that what this meant was little more than a "garbage in, garbage out" effort. Let us take that back – the entire world outside of HP always knew that the Autonomy deal was a bad one, and that the meticulous due diligence of HP's advisors was nothing more than an expensive rubber stamping of the CEO's desires.

Now we have the reality finally uncovered in hard numbers and hard dollars. Is there any doubt what so ever that the very magnitude of the "duping" by definition is the exact opposite of "meticulous due diligence?" Absolutely not!

HP is one of those great American companies – those we look to both historically and with an eye to the future to help us define what a great American company is. Huge on invention, huge on business acumen, huge on driving growth, huge on being a top 10 place to work and huge on defining a successful work ethic.

Everyone among us should be truly furious about what HP has done to itself over the last decade (dating back exactly to when HP acquired Compaq and Carly Fiorina entered the picture) for this key reason. It has not only harmed itself, but it has hugely harmed the world view of American business at the highest levels.

We all need to be mad about this breach. HP investors may be in shock, and most of them are already furious. But the breach goes well beyond them to all of us.

Don't Shoot the Messenger, Shoot the Old HP Boards

The HP board (in its various incarnations over the last 10 years) of course deserves much of the credit for this stellar performance. It began when it allowed Fiorina to transform herself into a media star who lost sight of being a real CEO (and whose celebrity status rapidly faded). Mark Hurd spent most of his time undoing the harm Fiorina's lack of supervision had caused. He wasn't much on vision but knew and successfully managed getting HP back on the move. Then the board came in and in a move totally disproportional to the crime, turned Hurd's social faux pas into a pseudo-scandal of unimaginable proportions.

And let's not forget the board's own "spying" indiscretions at the time.

Then the last nail on the coffin was the hiring of Apotheker, who had previously headed up SAP (which last we checked had its headquarters in Germany, not the U.S.). Here is what we can say about SAP at that time – Apotheker left the company pretty much creaking on the foundations of already old and rapidly aging software. SAP was poised to flounder and give up its business edge to Oracle. It made perfect sense then to bring Apotheker into HP, following the board's no doubt highly meticulous due diligence (translation: more rubber stamping of what certain board members wanted).

SAP recruited dynamic new CEO blood and is now doing exceedingly well with entirely new technologies in hand.

Apotheker rapidly began to make moves to turn HP into an old, aging and creaking "software services" player. A leopard's spots never change the saying goes! And so finally, we have the end results of the "meticulously scoped out" Autonomy deal.

Just to be complete here, we will note that Hurd collected $12.1 million on his exit, and Fiorina collected $42.5 million ($21.4 million in cash and $21.1 million in stock grants) on her exit. That brings the grand total over the last decade to exit pay for CEOs of an amazing $83.3 million for three firings!

Is Autonomy's CEO guilty of illegal behavior? We truly doubt it. The Autonomy management team merely played its hand extraordinarily well and fed HP what it already knew HP's CEO wanted to hear. Is there any M&A deal where this doesn't happen? That's why companies continue to shell out billions of dollars to investment bankers for due diligence.

It may seem like a "poker player bluffing" reference would be appropriate here, but in fact it boils down to who plays the better game of Charades.

Bring us Back to the Land of State of the Art Hardware

We're not going to go into all the hoary details of HP's current financials here; that has already been done to death in numerous other places. But we do want to make sure we point out that HP's write offs totaled $8.3 billion yesterday – Autonomy only accounted for $5 billion of that, leaving $3.3 billion more to explain away outside of Autonomy.

We often speak of Research in Motion CEO Thorsten Heins having been dealt a bad hand by his CEO co-predecessors. But the hand HP's Meg Whitman was dealt makes Heins' hand look entirely playable (and he has played it well).

What Meg Whitman needs to do is to ensure that all of HP's software services efforts play out in meaningful ways. But this is strictly and merely table stakes. What HP also MUST do, in a way that drives it back into a huge leadership position, is to tackle the issue of hardware – on every conceivable level.

This isn't going to be easy to accomplish, and it may even prove impossible at this point.

Here is our absolutely free advice to the company on the perfect first move it needs to make: Buy Nokia today at its hugely discounted price (discounted based on its potential future worth working in concert with HP), and get into and drive state of the art mobile hardware TODAY, not in 2014!




Edited by Braden Becker



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