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HP has made the bizarre decision to try to forfeit its position as the world's largest PC maker.  (Source: AP)

New CEO Léo Apotheker is trying yet again to outdo IBM and Oracle, something he failed at with his previous employer.  (Source: Reuters)

HP killed its webOS TouchPad tablet after only a month on the market.  (Source: HP)
"I didn't know there was such a thing as corporate suicide, but now we know that there is."

Tom Perkins knows a thing or two about Hewlett-Packard Comp. (HPQ).  Mr. Perkins worked as the head of research at HP and served three years on the company's board of directors, including serving as the board's director in 2006.  Despite resigning from that position as an ethical protest against the company's decision to spy on the phone records of his fellow board members to ferret out leaks to journalists (Mr. Perkins was never implicated in these leaks, but was upset about what he felt were unethical tactics by HP), he has remained very interested in the company.

I. HP's Baffling Direction

When it comes to new CEO Léo Apotheker plan to exit the consumer electronics market [
1][2], he's unequivocal -- "I didn't know there was such a thing as corporate suicide, but now we know that there is.  It's just astonishing."

HP's stock has sunk approximately 44 percent since July 2011.

Other electronics industry figures share Mr. Perkins' dismay at HP's implosion.  Comments one executive to The New York Times, "H.P. was the epicenter of Silicon Valley, geographically, culturally and historically. Is there any analogy for an institution so respected that has fallen so far so fast? I can’t think of one."

The electronics giant's decision to pick Mr. Apotheker 
baffled many as he had virtually no hardware experience.  Further, while CEO at German enterprise software giant SAP AG (ETR:SAP) his company was implicated in a plot to steal Oracle Corp.'s (ORCL) software, which ended up costing it $1.3B USD.  To make matters worse, under his tenure SAP failed to gain ground in the enterprise software market on International Business Machines, Inc. (IBM) and Oracle -- in fact, SAP had dropped him for this.

More amazing than his appointment, though, has been the willingness of the board and fellow executives to support Mr. Apotheker in retrying the same tactic that failed him at SAP -- an all-out push into enterprise software in an attempt to rival Oracle and IBM.

It's somewhat understandable why the board might back such a plan.  The enterprise software market has much higher profit margins than HP's consumer hardware market, and HP already has a decent foothold in this tempting marketplace.  But as Mr. Apotheker's own history shows, gaining market share in the cutthroat realm of business software sounds a lot easier on paper than it is in practice.

The board's willingness is even easier to understand, however, when you consider that Mr. Apotheker supervised a committee to appoint five new board members, a move that was blasted by the shareholder watchdog group Institutional Shareholder Services.  (Mr. Apotheker serves as director of HP's 14-member board.

II. Company Looks to Quit What It's Best At

While the friendly board has his back, analysts and fellow executives are appalled at 
HP's enormous bid for enterprise software firm Autonomy Corporation Plc. (LON:AU).  HP is offering $11.7B USD -- 11 times the Autonomy's annual revenue.  An executive comments, "Autonomy had been shopped everywhere. No one would pay 11 times revenue.""

A. M. Sacconaghi Jr., Bernstein Research’s senior analyst, commented, "It's a fantastically high price. It’s a very poor capital allocation decision. From our perspective, it's value-destroying."

HP's decision to kill its TouchPad project after only a month on the market and to ditch its steady consumer PC base -- which is 
number one in global and U.S. sales -- prompted an inglorious comparison from one executive.  They remark, "It was as if Alan Mulally left Boeing to join Ford as C.E.O., and announced six months later that Ford would be making airplane." (Instead, Mr. Mulally -- CEO of Boeing from 2001-2006 -- stuck with Ford's expertise -- making automobiles.)

III. Downhill Slide Started With Mark Hurd's Exit

The wild ride for HP began in 2010 when CEO Mark Hurd, a respected leader, was caught allegedly obfuscating from the board 
a relationship with a contractor (who happened to be a former adult actress to boot) and the ensuing sexual harassment suit.  Despite his steady performance at HP, the board wasted no time in giving Mr. Hurd the boot.  People close to the decision recall one board member telling Mr. Hurd, "We don’t need you."

Two board members actively resisted the ouster, but were overruled.  They resigned in protest.

Meanwhile Mr. Hurd 
jumped shipped to Oracle, which was headed by his long-time friend Larry Ellison.  Serving as one of two co-presidents, Mr. Hurd now appears to have a bright future at the wildly successful enterprise computing giant.

Mr. Ellison admonished HP for letting their veteran leader go, stating, "The H.P. board just made the worst personnel decision since the idiots on the Apple board fired Steve Jobs many years ago. That decision nearly destroyed Apple and would have if Steve hadn’t come back and saved them."

The statement, which at the time was dismissed as simply more brash remarks from the outspoken CEO, now seems somewhat prophetic.  

Some hold out hope that HP will see the light and decline dropping its "slow-growth"/"low margin" businesses.  States Mr. Sacconaghi, "[HP is] not rotten at the core. It's in a series of businesses with strong competitive positions albeit in slow-growth markets. It's the single cheapest technology stock in the S.& P. 500. At some point something has to go right: improved performance, successful spinouts or a change in leadership."

In other words HP may be near the edge, but it hasn't driven off quite yet.



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Odd thought...
By Motoman on 8/29/2011 7:27:57 PM , Rating: 1
...it has occurred to me that with the wildfire gobbling up of Touchpads once HP priced them down to $100/150, how crazy would it be for HP to just keep making the things and flood the market with WebOS?

Sure...they'd lose money on each one. But at $100 a pop, it seems like anyone and everyone would buy one - and then HP would own the tablet market.

Dropping the PC business all together does seem moronic...but as noted margins there are paper thin. HP was already, I believe, the 3rd or 4th largest software company in the world, though...




RE: Odd thought...
By rudy on 8/29/2011 10:47:19 PM , Rating: 2
As you said it was moronic you were effectively the king of PCs and now you are not going to make them at all? When IBM exited no one was surprised they were not at the top of the food chain. But HP is, and even if their consumer devices are low profit they will help give them the volume to keep them competitive in the enterprise space where profit margins are higher.
Everyone complains about profit margins but that is the way most busineses have worked you make very little money off your main product and you make alot of money off of the frills. That is no reason to exit the business. If it was we would not have consoles, gas stations, printers and the list goes on and on.


RE: Odd thought...
By augiem on 8/30/2011 3:38:12 AM , Rating: 2
I saw somewhere the BOM for a Touchpad was something like $320 for the 16GB. I also saw 500k to 1M were made. So they're losing somewhere around $160-$320M on materials alone in this fiasco not including other manufacturing, labor, shipping, marketing, etc. I wouldn't be surprised if this cost them more like $1B when all's said and done (not including R&D). To catch up to iPad's 28M units (wikipedia) in an attempt to "own the tablet market" would bankrupt the company or at least consume all of their $8B+ profits and then some.

Definitely not the way to make a killing.


RE: Odd thought...
By Solandri on 8/30/2011 4:58:16 AM , Rating: 2
$296 for the 16GB version, $318 for the 32GB version. Excluding R&D, assembly labor, and software/licensing. (board is messing up the link by inserting an extra space)
www.isuppli.com/Teardowns/News/Pages/HP-TouchPad- Carries-$318-Bill-of-Materials.aspx

Given how quickly they sold out at $99 and $149 price points, it seems a price reduction to $200 or even $300 would have been much more prudent.

The whole thing caught me by surprise because of this. Normally there's a slow reduction in prices to recoup as much of the production cost they can. Instead, they immediately jumped to a fire-sale close-out price guaranteed to clear their inventory in a matter of days. (Though it did demonstrate the complete lack understanding of how the retail market works by certain Apple fans.)
http://www.dailytech.com/article.aspx?newsid=22485...

It makes me suspect the decision to kill the Touchpad line was partly due to internal politics, not simply lack of market demand. Someone wanted it dead, and wanted it to leave such a black mark on HP's finances that there would be absolutely zero possibility for a comeback.


RE: Odd thought...
By MozeeToby on 8/30/2011 1:06:00 PM , Rating: 2
The saddest thing? The Touchpad as it came stock was indeed laggy, jerky, and slow. Turn off high level logging, low level logging, dropped packet logging and there's a huge speed boost. Install a user developed patch and the jerkiness disappears. Install a new kernel and, even without overclocking, switching between apps is even quicker.

Two hours of work applying open sourced, community developed tweaks took the Touchpad from not ready for prime time to something that, with a larger app catalog, could have competed with the iPad lineup. Someone, somewhere along the line dropped the ball badly when they approved the installed image for the Touchpads.


RE: Odd thought...
By Gungel on 8/30/2011 7:53:09 AM , Rating: 2
Well the losses are even higher since most buyers used a coupon code to lower the price to $90/$140 incl. shipping. I used an AMEX rewards card that took of another 5%. My finial cost for the 16GB one was $85.50 and the 32GB $133.00.


RE: Odd thought...
By mindless1 on 9/1/2011 10:13:56 PM , Rating: 2
BOM are very often over-inflated, suggesting that products we know are selling at a profit, would cost more to build than even their full MSRP.


"We shipped it on Saturday. Then on Sunday, we rested." -- Steve Jobs on the iPad launch

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