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March 9th, 2024 
Awake Goy Part 1 – Billion dollar bungles
In February, The Sunday Times interviewed the CEO of Hewlett Packard Enterprises, Antonio Neri. The story highlights that HPE, once a Silicon Valley pioneer, is now a fallen giant, completely eclipsed by the likes of Google, Amazon and Meta.
Hewlett Packard was one of the very first Palo Alto companies. Indeed, the garage in which Bill Hewlett and Dave Packard began working together in the late 1930s is dubbed “the birthplace of Silicon Valley”. The two electrical engineering graduates from Stanford University initially produced sound equipment for Walt Disney Studios.
Fast forward to the end of the 1990s, Hewlett Packard was a global company, known primarily for its personal computers and printers. It employed over 80,000 people, generating $48bn in net revenues, and had a market capitalization in excess of $17 billion.
Yet in the first decade of the 21st century, things began to go badly wrong for HP. It went through four CEOs from 2005 – 2011. Its reputation and its share price took a battering to the extent that it has never recovered its standing.
In his interview, Mr Neri acknowledges that the company lost its direction and failed to capitalize on trends like cloud, IoT and infrastructure. Mr Neri’s first big move was to acquire a company called Juniper Networks, described by The Sunday Times as “audacious”. HPE’s stock has fallen 15 per cent in the weeks since the deal was announced. “It’s a defining moment for the company and for me as a leader,” says Mr Neri, HPE’s biggest deal since the Compaq merger of 2002.
The Juniper deal brings more than faint echoes of the ghosts of HP acquisitions past. A bullish leader keen to make a big strategic play coupled with investor skepticism has been a repeat story for the company.
HP’s track record in acquisitions over the last two decades makes for painful reading. From the early 2000s, the company’s history is pock-marked with bungled acquisitions. The purchases of Compaq, Electronic Data Systems, Palm and Autonomy completely failed, caused internal turmoil and provoked shareholder outrage.
It is worth revisiting these stories to show where HP went so badly wrong and to underline that Mr Neri would be wise not to gloss over the case history of his company’s failed M&A.
Let’s start with the Compaq deal in 2001.
At the time, Hewlett Packard under the leadership of Carly Fiorina, who had been in post since 1999. HP had entered a period of struggles, with stock in decline and failed attempts to grow its services business. In September 2001, it agreed to buy Compaq for US$24.2 billion. The aim was to create a giant capable of competing with IBM, Dell and Gateway.
The investment community did not react well, plainly unconvinced by Fiorina’s vision. In the two days after the announcement, HP’s share price dropped 21.5%. Analysts could not see the logic in a high-margin printer business purchasing a company that was barely eking out a profit in personal computers. The $24.2 billion price tag was thought to be far too high in any case.
Opposition spread to HP’s shareholders. Remarkably, the sons of the two founders personally fought against the deal. Walter Hewlett saw that personal computers were low-margin and posed a risk to HP. David W. Packard, meanwhile, voiced concern about the number of expected lay-offs – totalling 9,000. He thought such a move ran totally counter to HP’s long-established values and would have appalled his father and Bill Hewlett.
In the event, shareholders did agree to the deal, but only by a wafer-thin margin of 2.8%. Claims of vote-buying involving Deutsche Bank flew around immediately after the vote, which further sullied the Compaq purchase. The SEC later fined Deutsche Bank $750,000 for “failing to disclose a material conflict of interest in its voting of client proxies” during the deal.
The view in the aftermath was that HP did indeed pay far too much for Compaq. This article in the Inquirer from 2003 analyses the financial performance after the deal, summarising that the virtues of the deal that HP peddled had not, at that point, materialised in a meaningful way.
By 2005, a full three years after the deal, the promised profits and shareholder returns were still not there. HP’s stock was still lagging far behind IBM and Dell and so Carly Fiorina was ousted in February of that year. She herself admitted that “buying Compaq hasn’t paid off for HP’s investors. And there’s no easy way out.”
The acquisition of Palm in 2010 was another catastrophe.
HP’s then CEO, Mark Hurd, was hugely enthusiastic about the deal to buy Palm for $1.2 billion. At the time, Palm was already struggling to compete with emerging smartphone giants like Apple, which had released the iPhone in 2007.
HP’s press release about the deal stated it would make the company a player in a fast-growing segment “with Palm’s innovative webOS platform and family of smartphones”. Hurd saw it as a way to diversify from the printer business. However, CFO Cathie Lesjak didn’t share his view and HP never committed the amount of investment into Palm required to make its new products a success.
To make matters worse, in August 2010, mere months after the deal, Mark Hurd suddenly resigned amid misconduct allegations. Hurd was the primary advocate and driver for a thorough integration of Palm, in particular webOS, into the HP business. With him gone, the odds of the integration being carried out successfully were drastically cut.
The HP TouchPad – a tablet device that Hurd had wanted created with Palm’s technology – was released in 2011. It was a consumer flop of epic proportions. A review on The Verge said, “the stability and smoothness of the user experience is not up to par with the iPad… coupled with the minuscule number of quality apps available at launch make this a bit of a hard sell right now.”
It took only six weeks after the launch of the TouchPad for Hurd’s successor, Leo Apotheker, to kill it. The company discontinued the device and ripped up all plans for similar consumer hardware products.
In 2011, HP wrote down US$1.67bn following its decision to wind down the device business – $0.4bn more than it paid for Palm. As AllThingsDigital put it “that was $1.2 billion well spent…”
The story of the Electronic Data Systems (EDS) acquisition was primarily one of poor integration and bad management.
In May 2008, HP bought EDS for $13.9bn. The aim was to bolster HP’s IT services business.
HP’s major misstep was to lay off so many talented people who had worked at EDS. There was a culture clash, too. As one executive present during the integration told Computer Weekly years after the deal, “EDS had its problems… but their attitude was to deliver exceptional customer service. HP was of the attitude that ‘if we are big enough, we set the standard’.”
In the same piece, EDS’ former financial services division head said HP fixated on short-term revenues rather than building long-term customer relationships. The loss of EDS staff compounded this issue, as they held strong customer relationships built up over time. Another analyst told the FT that what happened to EDS was a “travesty”.
The conclusion of the EDS story was not a pretty one. In August 2012, HP announced it was taking an $8bn write-down of its services business, dominated by the former EDS. One analyst said: “the charge for EDS shows what a mess that acquisition was.”
EDS was a case of poor integration, but the acquisition of Autonomy was on another level. It highlights the violent lurches between hardware, software and services in HP’s strategy during the first few years of the 2000s. It underlines the weak position HP was in and the boardroom dramas that had become commonplace. And it proved to be the most controversial of all of HP’s ill-fated purchases, resulting in more than a decade of litigation.
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In the next article in the series, we’ll look at the origin of the deal and how it unravelled, causing the downfall of Leo Apotheker.
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