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Léo Apotheker's legacy continues to haunt troubled PC maker

It's been a hard fall from grace for troubled personal computer giant Hewlett-Packard Comp. (HPQ).  After the board booted successful CEO Mark Hurd for an illicit office affair with a marketing contractor-cum-ex-adult film star, it made the disastrous decision to hire Léo Apotheker, an executive with a troubled past and little experience in the America market.

I. Léo Apotheker: The Disaster That Keeps on Giving

Even as current CEO Meg Whitman (formerly CEO of eBay, Inc. (EBAY) during its formative years) tries to right the ship with record layoffs, HP has shaken investor confidence with a dire Q1 earnings forecast, a forecast that once more dredges up the ugly legacy of Mr. Apotheker.

Mr. Apotheker came to HP shortly after being essentially fired from German enterprise software giant SAP AG (ETR:SAP).  He was fired after only a year as CEO on allegations that he turned a blind eye to software theft, was belligerent to trade unions, and generally mismanaged the company's finances.

Nonetheless, HP -- perhaps eyeing Mr. Apotheker's more successful years at SAP before his ascent to its top post -- took the plunge, recruiting the ousted German CEO, setting aside the large culture gap and his poor track record.  The board then watched idly as Mr. Apotheker made plans to spin off HP's core consumer PC business and acquire UK software giant Autonomy Corp. plc. for $10.3B USD in 2011.  Mr. Apotheker also triggered HP's exit from the mobile device market, shuttering the product line of the recently acquired Palm unit.

Meg Whitman
Meg Whitman has been unable to salvage HP's bottom line, thus far.
[Image Source: Fortune MPW]

Those decisions led one former board chairman to suggest HP was trying to "commit corporate suicide" and led to a lawsuit from outraged shareholders.  The criticism eventually moved the sluggish board to react; Mr. Apotheker was outed from the CEO spot at a major tech company for the second time in two years.

II. A $8.8B Hit on "Improprieties"

But his legacy lives on.

In its earnings guidance HP announced that it expects to take a massive $8.8B USD write-down due to "accounting improprieties".  The guidance reads:

The charge relates to serious accounting improprieties, disclosure failures and outright misrepresentations at Autonomy that occurred prior to HP's acquisition of Autonomy and the trading value of HP stock during the period preceding the recording of the charge. In the third quarter of fiscal 2012, HP recorded an impairment charge for the goodwill associated with its Services segment following an impairment review driven by, among other things, the trading value of HP stock during the period preceding the recording of the charge, market conditions and business trends within that segment.

Analysts had been expecting around $0.87 USD/share earnings.  With the massive write-down, EPS are expected to dip to between $0.68 and $0.71 USD/share.

Autonomy poster
This Autonomy poster seems rather ironic in retrospect, considering the software company is alleged to have duped HP out of billions via bad accounting. [Image Source: Autonomy]

As the company approaches its fiscal Q1 2013, the holidays bring little joy to HP.  The company looks set to lose its top spot to the Hong Kong-based Lenovo Group, Ltd. (HKG:0992).  Gartner Inc.'s (IT) numbers indicated that Lenovo already passed HP last quarter, although the other major reporting agency, the IDC Group claimed HP clung to a narrow lead.  Given the trends, though, it is expected Lenovo will be well ahead of HP in unit sales for calendar Q4 2012 (fiscal Q1 2013 for HP).

HP shares have plunged 10 percent in pre-market trading.  Analysts were already pessimistic, as the previous earnings guidance was consider weak.  If that one was consider weak, though, this one can only be regarded as an utter disaster for the Palo Alto-based hardware veteran.

Source: HP on MarketWire

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In a peaceful pasture somewhere...
By havoti97 on 11/20/2012 11:04:12 AM , Rating: 5
Hewlett and Packard are turning in their graves. These "improprieties" sound like fishy criminal activities to me. How come no one is being held accountable. At the minimum, some fraud charges should be filed and somebody needs to do hard time. There is just no deterrence for things like this to repeat.

By drycrust3 on 11/20/2012 6:02:38 PM , Rating: 3
These "improprieties" sound like fishy criminal activities to me.

The problem here being the improprieties were plainly obvious. Who's fault is it if you buy something that plainly isn't what the sales person says it is?

Apparently Lynch (Autonomy CEO) had gone to Oracle to see if they wanted to buy Autonomy.
Dailytech did an article about the war of words that erupted over this:
A "pre-meeting" Powerpoint had been sent to Larry Ellison (Oracle CEO) for him to look at. Oracle posted it on line because Lynch kept saying he had never tried to sell Autonomy to Oracle, and Ellison says he did. I'm guessing the Powerpoint was similar to the one that was used to sell Autonomy to the HP Board of Directors. The link is here:
This is what one commenter said about at that time regarding that Powerpoint presentation:

Looking at Autonony's presentation: Graphs showing the quarterly income as a percentage and the whole year doesn't add up to 100? Graphs without scales? Graphs showing Oracle (and, interestingly, HP) as having poor strategic vision? A graph showing Google as performing poorly in the search engine market? Graphs with undefined terms? Using "$MM" for millions of dollars is confusing and looks like obsolete terminology.
Ellison and Hurd are the type of people who would have known a whole lot about Autonomy before Lynch and co walked into their office, so when they did their presentation they weren't so much selling the company as the ability of Autonomy's senior management to be trusted. Why would you put percentages in that obviously don't add up to 100 right under the nose of one of the smartest business people in America?

The Dailytech article quotes Larry Ellison as saying "Autonomy was shopped to us... We looked at the price and thought it was absurdly high."
Wikipedia says last year Autonomy's net profit was in the $200M to $300M range, which I don't think is what one would expect from a $10B company, nor from an $8.8B company. My guess is you can expect more write downs.
I can't help but feel that HP's Board of Directors have only themselves to blame.

"Spreading the rumors, it's very easy because the people who write about Apple want that story, and you can claim its credible because you spoke to someone at Apple." -- Investment guru Jim Cramer

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