HP's New Strategy: A Trifecta of Questionable Decisions

By Jessica Davis

HP’s (NYSE:HPQ) recent strategy revelations – dumping its TouchPad tablet and smartphones and webOS, exploring the sale of its PC business, and acquiring software vendor Autonomy for $10 billion – failed to gain widespread support among analysts, stockholders or industry observers.

For instance, HP’s share price declined by 20 percent on Friday, the day after the company revealed its plans. What’s more, analysts expressed strong concerns about the wisdom of HP’s decisions.

"We view HP’s poor results and guidance and its strategic announcements as a trifecta of bad news," wrote Toni Sacconaghi, senior research analyst at Bernstein Research in a report looking at HP’s earnings and the company’s host of strategic announcements.

"First, we see the decision to purchase Autonomy as value-destroying; second, we worry about continued poor operational control at HP, particularly in services; and third, we believe that HP’s decision to publicly announce that it is exploring strategic options for the PC business risks is questionable, given that it could undermine the business going forward."

Specifically, Sacconaghi points out, "The decision to purchase Autonomy at greater than 10 times revenues rather than repurchase company shares at less than 0.5 times revenues strikes us as a materially value-destroying capital allocation decision."

As for the potential PC spin-off, Bernstein said that the transaction could lower total earnings due to "dis-synergies, but [we] see the opportunity for incremental value creation to HP shareholders."

Some are speculating that Leo Apotheker, ex-SAP CEO and now CEO of HP wants a rematch against SAP rival Oracle and is remaking HP to compete with the enterprise applications and database company head-to-head to fulfill his personal vendetta.

Others are saying that HP’s moves reveal the company is panicking, discontinuing its TouchPad just over a month into its release. The day before the announcement, the company was still sending out email newsletters touting the platform’s superiority. 

And less than a week later, the TouchPad devices are flying off the shelves at fire sale prices of $99. As one publication noted, the lesson learned here is that tablets cost too much.  If you are looking to compete with an established leader such as Apple’s iPad, you need to gain some momentum in the marketplace by starting out by selling on price. That’s what Microsoft did when it bundled its Hyper-V hypervisor for free (to beat VMware’s sizeable lead in the server virtualization market). 

Certainly, selling a hardware device is different than selling software. But as carriers have shown, it makes sense to subsidize the hardware in order to gain the longer-term service contract.

Channel partners have pointed out that by abandoning its $1.2 billion webOS investment and killing the TouchPad, HP is hobbling its end-to-end stack value proposition which previously encompassed all from the device to the cloud. 

Meanwhile, it remained unclear what would happen to two of the channel’s favorite HP executives, Todd Bradley, executive vice president of the Personal Systems Group at HP, and Stephen DiFranco who until recently served as HP’s channel chief. The Personal Systems Group is the PC division that HP is looking to sell. Bradley reportedly had no idea about HP's plans for WebOS until a week ago.  DiFranco last month was appointed to senior vice president and general manager for the Americas region of HP’s Personal Systems Group and was in the process of searching for and hiring someone to replace him as channel chief. That new channel chief was to report into DiFranco and the Personal Systems Group.

In a letter to partners DiFranco said: "I can tell you on behalf of Todd Bradley and the entire HP leadership team that HP remains committed – now more than ever – to the health and growth of its PC business. We also remain deeply committed to our channel partners, who, as an extension of our HP organization, will continue to play a critical and strategic role in our PC business now and in the future. That will not change during this period of transformation."

DiFranco’s July promotion moved him into the position previously held by Stephen DeWitt who had been named senior vice president and general manager of the WebOS global business unit. Whoops. 

This article was originally published on 2011-08-22