During the Great Depression, Stanford engineers Bill Hewlett and Dave Packard
launched a startup in a Palo Alto, Calif., garage. Based on a coin flip, they
named the company Hewlett-Packard (NYSE: HPQ ). But the tremendous success of
the company certainly was more than luck. Bill and Dave were visionaries who
helped to build Silicon Valley. Unfortunately, things have not gone so well for
the past decade or so. As seen last week, Wall Street is extremely concerned
about HP's new strategic direction. The company plans to spin off its PC
business, spend $10 billion for Autonomy (a U.K. software company) and kill its
tablet business. HP's stock price is down 43.47% for the year. In fact, the
average annual return is 17.42% for the past three years. Yet as seen with
companies like IBM (NYSE: IBM ) and Apple (NASDAQ: AAPL ), there certainly are
cases of strong tech turnarounds. So can the same happen with HP? Well, let's
take a look at the pros and cons: Pros Enterprise offerings. HP has a wide array
of technologies for servers, storage and business applications. The business has
healthy margins and should see long-term growth. One key driver is the move
toward cloud computing, which requires lots of infrastructure technologies. At
the same time, the growth in mobile technology should provide an infrastructure
boost, as well. Services. This has become critical for large businesses. And
with its EDS arm, HP is a top player in information technology services.
Essentially, this segment helps to build customer loyalty and provide
opportunities to upsell technologies. It's a model that has worked quite well
for companies like IBM. Printer business. This is a gem. Of course, the company
has a recurring revenue stream from ink purchases. HP also has been effective in
building services around the business, such as with its photo site Snapfish.
Cons PC business. This has been a huge drag on HP as the industry sports low
margins and has little growth prospects. After all, Apple's iPad is eating
into market share. So while it is a good move to spin off the PC business, it
really is too late (keep mind that IBM did this back in 2005). In light of the
uncertainty, the deterioration is likely to accelerate. And competitors like
Dell (NASDAQ: DELL ) will capitalize on the situation. Acquisitions. All in all,
HP has demonstrated a terrible track record with its dealmaking. The purchase of
3Com was a dud. So was the deal for Palm within less than two months, HP
already has abandoned its mobile strategy. Now HP wants to spend $10 billion for
Autonomy. True, the company is in the data analytics market, which is growing
nicely. But the valuation comes at over 10 times revenues. And integration
issues probably will be messy. Morale. It must be tough for most employees at
HP. No doubt, there will be layoffs. Also, the strategy still is unclear. With
top engineers getting lush pay packages from Google (NASDAQ: GOOG ), Facebook
and Zynga, a brain drain might be looming. Verdict As seen above, HP faces huge
challenges. A turnaround is likely to take several years, and it is far from
clear whether the company will enjoy any measure of success. Also, there are no
signs HP will get back its focus on innovation. Instead, it looks like the
company is committed to pursuing financial engineering. Thus, for investors, the
cons outweigh the pros on the stock. Tom Taulli is the author of various books,
including "All About Commodities." He does not own a position in any of the
stocks named here.
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