Watching mid-life crisis play out at HP

By Subraya Mallya - October 2011 | Topics - Technology

Check how the HP stock has done versus IBM in the last two years, starting at almost similar position it has gone in symmetrically opposite direction and consequently the enterprise value.

All through this journey HP has manfully stuck to its core strategy of  “Observe IBM and adopt their strategy 10 years later”. Case in point, IBM decided to shift its focus to services in Gerstner days and after it has had a significant lead, HP showed up adopting the same strategy. IBM then decided to abandon the PC business as soon the rumblings of “end of PC era” started surfacing and the timing could not have been better. HP in the meanwhile was still digesting the Compaq acquisition and was busy thumping its chest as the No 1 PC vendor only to come back after its 10 year wait-and-watch-IBM-period to announce it is abandoning the PC business.

The management starting with Fiorina, Hurd and Apotheker, have not bothered to communicate what the vision for the company is. After abandoning the PC business and with the printer business waning, it seems like now HP will focus on becoming a software company (no prizes for guessing where they got the inspiration). In their efforts of beefing up their software portfolio (comprising of Mercury Interactive, Opsware), they have in the last 12-16 months, acquired Fortify, ArcSight, Palm only to turn around and write off Palm (a mere $1.2 Billion + acquisition expenses). To top it of they recently announced their intent to acquire Autonomy (a whopping $10B – what’s between a billion here and 10 there) to the portfolio.

So now with HP intending to become a me-too software company, what are the chances that HP can make something out of its strategy.

First off, the choice of Apotheker to lead the company was a wrong one. If the strategy was to become a predominantly software based company then you need a software technologist to be the CEO. There are only a handful of companies that have succeeded otherwise. HP does a whole gamut of things – services, servers, printing hosting and now software. A sales executive is definitely not a right fit. On the operations front, you can always get executives to run the company but if you want to be a software company you need a technologist to drive the vision. Just acquiring your way to becoming a software company is a mirage especially when you don’t have the culture of innovation. Printers aside, HP has been a margins player on the commodity stuff. There has been no innovation.

Then the whole strategy around acquisitions. You can read people/analysts saying HP should look at some really smart startups and acquire them to get a head-start. To me that is wrong strategy. HP does not have the DNA of a software company. Startups need nurturing and care-and-feeding besides the financial muscle HP brings. Doing that within a big company is akin to guaranteeing great childhood for  children in a foster home. Not going to happen. If the competition does not kill them bureaucracy inside HP certainly will. To be fair it is not just HP, it would be the case in any big company where most things happen top-down. Given that, I think the best chance for HP to become a software company would be acquire some established companies. Even better acquire and let them run as separate companies.

— Intermission —-

And there I was thinking I will write about HP and few days later HP has more drama unfolding.

Uncle Leo is gone, in comes Aunt Meg. Seems like HP board has changed but their exceptional ability to mess up has not. They again go and pick another CEO who has no background in running a technology company, much less a would-be software company. Meg Whitman has been great in getting eBay from a small flea market to a multi-billion dollar company. Even if she did have the motivation to steer this ship (HP) in distress to safety, it is difficult to see why she was a good fit given that she has never run a professional services or hardware technology company.

First course of action for Meg would be to assess the two big (and only) decisions made by Apotheker – divesting of PC division and acquisition of Autonomy. I hope she reverses both those decisions as both of them were done under duress what with Uncle Larry poking his nose constantly into their business and then IBM having great quarter-over-quarter as HP slow-but-surely slides down the irrelevancy curve.

My take

It is absolutely absurd that for the 4th time in a row the board has gone out of the company and brought in a CEO, each one being worst match than the previous one. What does this tell about the executives in HP? There is not a single one who is capable of taking over. While they are capable of running mammoth businesses inside HP the size of large companies themselves, they have no shot of becoming  a CEO. Absolutely stupid. It is a vicious cycle at work here. Bad boards select bad CEOs who in turn appoint bad members to the board. All self-serving. Since they have not been third time lucky at managing this behemoth of a company, the best thing for them to do is split it into multiple businesses and let their heads become CEOs – PC company, Printer company, Services company and a Enterprise Hardware company or some combos of them. This will let them focus on each of the businesses without the baggage of the other bothering them and if HP does intend to become a software company they can have a separate company from all the companies they have already acquired. Also it seems like Ray Lane is trying to fulfill his ambitions of being a CEO by remote controlling here without having to bear the burden.

Now as for some unsolicited advice on tactical steps HP can take

  1. WebOS has been rumored to be of interest to Amazon and/or Facebook. I would work with either/both and explore the possibility of getting those companies (who have things going for them on multiple fronts) side with you. The innovation that those two companies can bring in can create a fourth viable alternative to iOS, Android and Windows. Any lethargy on this front and you will see Amazon and Facebook – forking Android. They are probably waiting for Oracle and Google to strike a peace deal on Android and then fork.
  2. Put a bigger stake in the ground around Cloud. While HP has been a so-so Cloud infrastructure provider, I would go ahead and acquire Rackspace, the second biggest Cloud infrastructure provider and with it overnight HP becomes house to lots of great startups and stays relevant in the days to come.
  3. As for becoming a software company, given the complete lack of history around innovation in HP, I would go after some of the established SaaS  companies that need less grooming and can swim on their own. Avoid acquiring stuck-in-the-middle-of-the-road incumbents who have tagged Cloud around their offerings like Autonomy, Callidus, Tibco etc.   HP should instead look  at companies data management companies like Actuate,  and Cloud automation companies like RightScale, Gigaspaces. To make it all work find someone who has run software business to run the entire software portfolio.
  4. If you have to acquire large companies, go after someone like Citrix which has some really good networking technology portfolio and the crown jewel the Xen virtualization that powers most of the Cloud. Citrix will be a slightly larger acquisition than Autonomy but twice the revenue (2.02B versus 800M for Autonomy)
  5. And the most important one – find the right CEO with technology creed.  Meg Whitman is at best an operational executive not a technology leader. Cannot imagine her defining and sharing a vision for the company anytime soon.
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  • Atul Tiwary

    I dont quite understand your references to Autonomy. Your article seems to suggest that HP still has a choice between acquiring Autonomy and some other company. I know the acquisition is not complete but I’m quite certain they are not going to stop the acquisition process and bay the break-up fee!

  • Atul Tiwary

    I dont quite understand your references to Autonomy. Your article seems to suggest that HP still has a choice between acquiring Autonomy and some other company. I know the acquisition is not complete but I’m quite certain they are not going to stop the acquisition process and bay the break-up fee!

  • Atul,
    Thanks for your comment. While I started writing this post the Autonomy acquisition was not a done deal. Yes now it seems like they are going through with the deal even though it is a bad deal for HP. Given that Meg Whitman has not come out and told us that she is going to go ahead, I am putting my thoughts out there to say – a Citrix acquisition would be a better one for HP.

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