Greenberg: Was HP Really That Good Under Hurd?
Investors loved Mark Hurd because he did one thing very well: he knew how to play to Wall Street.
But was Hewlett Packard really that good under his watch?
Depends on your definition of good.
If good is the stock roughly doubling, then he did exceedingly well.
But a closer look at the numbers suggests the stock did considerably better than the underlying company.
Consider that much of the growth under Hurd was through acquisitions, culminating with its 2008 acquisition of EDS and more recently such controversial deals as 3Com and Palm. Including those three deals, HP did more than 30 acquisitions under Hurd at a cost of more than $25 billion, or roughly half the company’s current market value (earlier post misstated the figure as $50 billion). That’s roughly double the prior five years, according to a listing of deals on HP's Web site.
But while the more than $25 billion may have helped push the stock higher, consider that:
- The companies HP acquired since 2005 generated revenue of around $25 billion (based on a rough calculation using publicly available data on the biggest deals since the end of fiscal 2004 – or around five months before Hurd arrived.)
- Total revenue increase during the same span was around $34.5 billion or an impressive 44 percent or around an average of 9 percent a year. Put another way, without the acquisitions revenue would be up just 9.5 billion or just 11 percent -- or barely an annual average of 2 percent a year.
Meanwhile, earnings per share during the Hurd era posted compounded average annual growth of 22.5 percent a year. But a chunk of that is related to:
- Merger-related cost-cutting.
- A decline in shares outstanding, thanks largely to buybacks.
- An 18 percent drop in research and development spending, not necessarily an admirable trend for a tech company.
But, wait, there's more:
- Sales at four of five operating units, including PCs and printers, have tumbled an average of 15 percent from pre-recessionary 2008 peaks. (The noticeable exception is the services business, whose revenue roughly doubled after the EDS acquisitions.)
- Profits at those same operating units fell an average of 18 percent during the same period.
- Finally – and this gets to the heart of our earnings quality question, which I focused on in a column here in June -- HP has conditioned Wall Street to view it on a non-GAAP (or other than Generally Accepted Accounting Principles) basis, and investors have gullibly gone along with the game.
Any why not? As Jeff Matthews pointed out a year ago not-so-admirably in his blog, HP had become a “beat the number” machine under Hurd.
"It was a quarterly earnings report in which the company had managed to earn exactly one penny per share more than Wall Street’s Finest were expecting, despite an aging business profile and an exceedingly complex operating entity."
In the case of HP, non-GAAP has been exclusive of acquisitions and other restructuring-related charges. It's one thing for a company that makes a single acquisition or goes through a one-time restructuring is viewed on a before-charges basis. But not for a serial acquirer/restructurer like HP.
Charges can become levers that are used to make or beat estimates. Consider that on Friday, in the same press release announcing Hurd’s departure, HP offered guidance that included:
- While raising charges-infused non-GAAP earnings guidance for the third and fourth quarters, HP took down GAAP guidance for the same periods.
- Full-year GAAP guidance was also reduced; this was the second time full-year guidance has been shaved in recent quarters, while Non-GAAP full-year guidance has been boosted.
My point is, Hurd’s expense reports weren’t the only thing padded at HP.