August 18, 2011 11:47 pm

Apotheker engineers promised overhaul

Léo Apotheker has taken less than a year to engineer the total overhaul of Hewlett-Packard, by announcing the largest software acquisition in the technology company’s history and predicting it would shed its world-leading personal computer business.

In so doing, he is giving investors unhappy with the company’s declining share price two things they have long agitated for: a way out of the razor-thin margins in the PC industry and a bigger presence in the fat-margin software world.

One of the founding companies of Silicon Valley, HP has agreed to pay about $11bn, funded with offshore cash and debt, for Autonomy, the UK’s biggest tech company, and has said it plans to explore spinning off its PC unit, which has been responsible for about 30 per cent of group revenues this year.

Yet the intitial investor reaction was cruel. HP shares fell 6 per cent as word about the Autonomy and PC moves leaked out, hitting their lowest level since early 2009. Following HP’s quarterly earnings report and a reduced outlook, they plunged 9 per cent in after-hours trading.

HP said it was giving up on its effort to challenge Apple in the burgeoning 18-month-old market for tablet computers, shutting down the TouchPad and smartphone lines after poor initial sales. Those devices were based on the webOS operating system HP acquired when it bought Palm.

Mr Apotheker told the Financial Times that the disappointing TouchPad sales were a factor in his decision to leave the broader PC market, abandoning a plan launched earlier this year to use webOS to bring the same applications and services to home devices and corporate machines.

“You have got to do this job with an open mind and open eyes. We would have had to invest significant additional capital to try to be really successful in the pure device business.”

He said that HP would continue to explore possibilities for the critically praised webOS, including licensing it to computer makers, other technology providers and big customers.

Given Apple’s head-start and continuing dominance, HP decided to spend its money elsewhere, in software aimed at large companies. Mr Apotheker knows that part of the field well from his career at SAP, the European software group. Autonomy specialises in making so-called unstructured data more discoverable.

Investors have periodically pushed for HP to abandon PCs, even before then-CEO Carly Fiorina went in the opposite direction and acquired rival Compaq Computer in 2002 to displace Dell as the largest manufacturer.

Ms Fiorina’s successors, including Mr Apotheker, continued to argue until now that PCs gave HP a better chance to sell big customers servers, software and services as well. But that stance has become less true as Asian manufacturers have offered lower prices and Apple has attracted better-off consumers and professionals. In addition, many companies have no problem taking PCs from one supplier while getting servers and storage from others.

“Customers are more than happy being heterogeneous,” said Mark Margevicius, PC industry analyst at Gartner. “The PC market has very much commoditised and [manufacturers’] ability to differentiate at a product level is almost nonexistent.”

The most likely outcome for HP’s PC business is a spin-off, which would be tax-free for shareholders, but the company is leaving the door open in case another manufacturer, such as Lenovo or Acer, or a financial buyer emerges.

In some ways, the PC exit echoes IBM’s move years ago as it decided to focus on services and more complex computers. Mr Apotheker said the new HP that would emerge would be more oriented than IBM toward cloud services and data analytics.

HP slightly exceeded Wall Street expectations in its third-quarter results on Thursday but reduced guidance for the rest of the fiscal year. Profits rose from $1.8bn, or 75 cents a share, to $1.9bn, or 93 cents, as sales increased from $30.7bn to $31.2bn. HP said charges including $1bn to close the webOS device business would cut fourth-quarter profit to 44-55 cents a share.

In a conference call with investors, Mr Apotheker talked of other issues that will take several quarters to work through, including: the effects of the Japanese earthquake on printer components; slack consumer demand in the US; and an ongoing investment in HP’s services business that is depressing margins there.

Chief financial officer Cathie Lesjak also cited a “deteriorating” macroeconomic environment and said HP would continue to shed under-performing business lines and add higher-margin business.

For HP, Barclays Capital is acting as joint financial adviser and corporate broker. Perella Weinberg Partners is acting as joint financial adviser. Skadden, Gibson and Freshfields are the legal advisers.

Qatalyst Partners is acting as lead financial adviser to Autonomy. Autonomy has also received financial advice from Citigroup Global Markets, Goldman Sachs International, Merrill Lynch International, UBS and JPMorgan. UBS is acting as corporate broker. Slaughter & May is legal adviser.

Additional reporting by Helen Thomas in New York

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