HP and Whitman : Why I am not taking a position

Hewlett Packard, that icon of American technology, is now trading at between 5-7 times earnings. This is cheap, extremely cheap, especially for a large cap. Will new CEO Meg Whitman be able to turn things around? Sadly, I believe that the answer is : no.

Whitman, of course, led another technological icon eBay from 1998-2008. I had analyzed eBay previously back when I had a position in the stock a couple of years ago, so I had learnt something about Whitman’s management style. In short, Whitman is a visionary CEO, good at making grand strategic moves, but not good at the nuts and bolts of operations. In terms of strategy, Whitman is actually a passable CEO. She acquired two companies during her eBay stint, Paypal and Skype. The former acquisition is widely regarded as a success, and the latter a failure. However, the thinking behind both acquisitions was sound. Paypal was certainly a natural fit for eBay, and Paypal usage was probably boosted by its association with eBay. Skype can also arguably be regarded as complementary to eBay. After all, trust is important in online auctions, and a person-to-person conversation can do a lot to alleviate trust issues. However, Whitman overlooked a key operational detail during the Skype acquisition. She left the Skype’s key intellectual property in the hands of a separate company owned by Skype’s founders. Eventually, this allowed the Skype founders to continually blackmail eBay for more money, turning a marginally expensive acquisition into an incredibly expensive one. The greedy behavior of Skype’s founders was viewed with such disgust by the eBay management team that they did all they could to prevent Skype’s success, never incorporating Skype features into the eBay marketplace. While Whitman was busy with these transformative acquisitions, eBay experienced enormous organic growth due largely to the natural monopoly characteristics of the online auction business model. However, this growth was largely unmonitored and unguided by management, and eBay was widely criticized for its sale of stolen and illegal goods, the prevalence of fraudulent buyers and sellers, the clunky user interface and the widespread use of bidding robots. My impression was that nothing rose to the attention of eBay management until it has become widely reported by the media and threatened to become a legal issue. Contrast this with other online companies which has experienced exponential growth (Netflix, Amazon, Blizzard), where management proactively solved issues and generally kept its users happy despite massive growth in user base. In contrast, Whitman’s management team was almost solely focused on growth, especially growth overseas and through acquisitions, with little regard to the amount of money spent on acquiring growth. Post-eBay, Whitman campaigned to become California’s governor in much the same style, focusing on grand gestures and new directions while throwing money around with abandon. Whitman’s campaign was not successful, but is one of the most profligate campaigns of all time, spending nearly $45 per vote.

Of course, both vision and operational excellence are required for a company’s success. Every Steve Jobs needs his Tim Cook. My preference is that the Chairman takes on the strategic role, while the CEO concentrates on operations, but having a visionary CEO and a good COO is also fine by me. But tellingly, HP’s management team has no chief operations officer. This was inconsequential under Mark Hurd, since Hurd is himself an ops guy, but Whitman definitely needs a COO. While Whitman is no doubt trying to come up with some new magical acquisition or strategy that will fix everything, the underlying business is falling apart. Businesses and consumers are choosing Dell and Lenovo instead of HP for fear that HP will stop being in the hardware business soon. And if customers don’t trust HP with their hardware, where HP is a solid brand, I don’t think they will flock to HP enterprise software offerings any time soon.

HP does not have a transient difficulty due to the business cycle or a one-time mistake. It has an underlying management problem, one which I don’t see getting fixed. It is human nature to believe in oneself; few people are able to proactively acknowledge their weaknesses and seek help, and this is doubly true for someone as prone to grandiosity as Whitman. Yes, HP is an American icon. But no thanks, I think I’ll give this icon a miss.

Disclosure : No position in HP.