Arik Hesseldahl

Recent Posts by Arik Hesseldahl

HP Is Done Shopping for Acquisitions — Or Is It?

On yesterday’s quarterly earnings conference call with analysts, Meg Whitman, making her first appearance on an earnings call as CEO, sent what at first seemed an unambiguous signal about HP’s plans in 2012: There will be no more big acquisitions.

This, of course, comes on the heels of HP’s controversial and expensive $11.7 billion takeover of the British software firm Autonomy, in a deal — initiated by HP’s prior CEO Léo Apotheker — that officially closed on Oct. 3.

In her extensive opening comments, which you can read at SeekingAlpha, Whitman planted the flag in the “no acquisitions” territory, telling analysts, “you should assume in 2012 that HP will be rebuilding its balance sheet and will not be doing any large M&A.”

Rebuilding is a good word. As The Wall Street Journal pointed out yesterday, among the many choppy waters HP is facing, one of them is capital allocation and its use of cash and debt. Having ended July with $13 billion in the bank, its cash reserve has since dropped to $8 billion. Meanwhile, as the year ends, HP’s long-term debt has swelled to $22.5 billion, from $19 billion in July and less than $8 billion in 2008.

Clearly, we won’t be seeing any deals from HP of the size and scale of Autonomy, 3Par or ArcSight in the near future. Does that mean that HP isn’t looking to buy more companies?

Not exactly. Whitman sent some conflicting signals during the Q&A section of the conference call. Pressed on the point by Brian Alexander, an analyst with Raymond James, Whitman said that HP might do some small deals to enhance its software portfolio, but reiterated that there would be no “large” deals in 2012.

Asked to define “large,” Whitman said, “certainly nothing near the size of Autonomy,” and went on:

“Let me put it that way. I would say these are going to be more acquisitions, in the sub-$500 million range would be my guess. We might get to $1 billion, but I doubt it.”

The problem with that is spurring HP to reliable growth. Companies grow fundamentally in two ways: They sell more products or services, better control their costs and improve their efficiency along the way; or they buy other companies, adding products and services to the portfolio.

And here’s the catch-22 that HP finds itself in: If it’s not going to do large M&A deals, then it’s going to have to rely on uncertain organic growth. Sales in numerous key lines of business, PCs, printers and servers are all down, amid a macroeconomic environment that can only charitably be described as “uncertain.”

So where will the growth come from? By raising investments in research and development, thus boosting operating expenses. Additionally, by taking itself affirmatively out of the M&A game, HP essentially cedes the deal-making ground to rivals Oracle and IBM.

Asked about that by Mark Moskowitz of JP Morgan, Whitman said that HP “cannot continue to rely on acquisitions alone.” A true statement, yet she hedged her bet a bit:

Software would be the one area that I think there maybe some assets that are ready to move in 2012, and we would want to be there. But again we have to deal with the situation in which we’re in and we made a big acquisition last year, which by the way, we haven’t talked about Autonomy. I’m excited about that acquisition. We can talk more about it. So there may be two or three acquisitions that we want to take a look at in the Software space, and now I know I’m going to be held to. If it’s less than $500 million, we want to do it. Let me reframe that. If there is a great acquisition that’s in the $1 billion range, maybe we will take a look at it. But we’ve got to be sure it fills a hole, that we don’t pay too much for it and that we are financially disciplined about it. So that’s a caveat I’ll give to you. Listen, I have a history of, to some degree, using acquisitions to grow companies. I’m in favor of acquisitions, but I will tell you we cannot continue to rely on acquisitions alone at Hewlett-Packard. It’s just the wrong thing to do. We have tremendous R&D capability here. And that’s how you really do be, what I would call, required evolutionary innovation. For the completely disruptive revolutionary innovation, certainly, we can look outside but we got a lot of runway with our own internal R&D capability if we run it right and invest in it right.

The shift away from M&A is a big one. HP has been a $35 billion deal-making machine during the last decade or so, absorbing companies as large as EDS, 3Com, 3Par and Mercury Interactive.

In a note to clients this morning, Brian Marshall, an analyst with ISI, compared the shift to a return to the garage where Bill Hewlett and David Packard started it all in 1939. “We believe HP has the talent and resources to turn itself around and it now comes down to leadership and execution.”

The one weakness, Marshall concedes, will be in software, which amounts to about 2.5 percent of sales, despite all those enormous software deals. If, as Whitman admits, certain software companies are “ready to move” in 2012, and cash-rich rivals are ready to pounce — Oracle has about $32 billion in combined cash and short-term investments; IBM $11.3 billion — the temptation may be strong to turn the deal-making machinery back on.

Meanwhile, investors are pretty clear in what they think: HP shares are down 4 percent this morning.


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