Hewlett-Packard and the M&A scoop

By Felix Salmon
August 19, 2011
death of the M&A scoop is going to happen slowly, but frankly it should happen as quickly as possible -- and the past 24 hours in the history of Hewlett-Packard is an excellent indicator of why.

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The death of the M&A scoop is going to happen slowly, but frankly it should happen as quickly as possible — and the past 24 hours in the history of Hewlett-Packard is an excellent indicator of why.

Yesterday, just after noon, Bloomberg found itself in possession of some market-moving news about HP: it was engaging in a major strategic shakeup, closing its WebOS division, buying UK company Autonomy for about $10 billion, and putting its PC business up for sale. (Bloomberg has since updated its story to reflect HP’s formal announcement, so I can’t link to the scoop itself.)

The markets, suffering through a massive down day, loved the news, in its leaked-to-Bloomberg form. HP shares were trading about $29.85 before the news came out; a few minutes later they were as high as $34. That’s a rise of 14%, or, to put it another way, an increase in market capitalization of some $8.5 billion.

One blogger, at least, was unimpressed. Zero Hedge, in an astonishingly prescient post entitled “Hewlett Packard Leaks Good News Early, To Mask Bad News Later,” explained exactly what was going on:

With less than 5 hours until the company’s official earnings release, Hewlett Packard just leaked to by Bloomberg that it would spin off its PC business and purchase British software developer Autonomy PLC. This is the oldest trick in the book to get a stock to drop from a higher level in the hopes that staggered releases of news, first good, then bad offsets each other, instead of having the good news be overwhelmed by the bad… We very much doubt this surge will sustain itself for more than a few minutes after the scam is understood. We also very much doubt that today’s earnings release will have anything good to say about the future.

By the end of the day, HP was back to its pre-report levels, in anticipation of a weak earnings report. But no one guessed just how weak the earnings would be.

HP was still spinning, though: its official news release was headlined “HP Confirms Discussions with Autonomy Corporation plc Regarding Possible Business Combination; Makes Other Announcements.” Among those “other announcements”:

FY11 GAAP diluted EPS is expected to be in the range of $3.59 to $3.70, down from its previous estimate of at least $4.27.

In English? “We’ve been telling shareholders to expect earnings of at least $4.27 per share this year. But actually we’re not going to come close. In fact, we’re not going to make more than $3.70, and we might make as little as $3.59.”

The drop from $4.27 to $3.59 is a whopping 16% — a huge miss, given that we’re already more than three quarters of the way through Hewlett Packard’s fiscal year. HP didn’t even attempt to guess what 2012 might hold in stock, perhaps because it’s likely to take most of that year to slough off the PC business it poured so much money into back in 2002.

And so when HP shares opened for trading today, they fell sharply — just as Zero Hedge predicted they would. They’re now trading at less than $24 per share — a 20% fall from the closing price yesterday and a whopping 31% fall from the post-leak knee-jerk exuberance levels of about 12:15pm or so yesterday.

We still live in a world, sadly, where it’s considered good journalism to get a scoop like Bloomberg’s and to move the market by publishing it — in the world of financial journalism, moving markets like this is the gold standard of what editors and proprietors are looking for. Even if you move them in what turns out to have been entirely the wrong direction, with a one-sided story which leaves out the most important news of the day.

It’s clear today that HP’s strategy is failing, that the big strategic moves are something of a hail-Mary pass, and that it’s massively overpaying for Autonomy. We got there in the end. But the M&A scoop which kicked off the news cycle looks like an attempt by HP to manage media coverage and to distract attention from its dreadful earnings guidance. And, at least for a few short minutes, it actually worked.


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sadly zerohedge is akin to The Ancient Mariner and stoppeth only one in three.

Posted by ottorock | Report as abusive

Great spot Felix… that zero hedge call was one of the best I’ve ever seen in 15 years!

HP is such a mess and they so badly mishandled this release of bad news that it looks like they are a ship with no one at the helm.

Wallstreet is IN LOVE with spin-offs right now. MRO, COP, FO, KFT… all well received by the market. Instead of spinning off the unloved PC division they decide they are going to sell it. SELL IT TO WHO…

Can anyone ever remember even ONE TIME where a #1 marketshare industry leader sold themselves?

Do they think GE is going to say? HUMMM HP thinks there is no money and no future in the PC businss, funny I seem to remember IBM saying that like 10 years ago… Let’s go buy us some of that?

I’ve never seen such a well managed well run company fall down a flight of stairs so quickly after a management change.

This could get sooooo interesting. I bet Ellison and Icahan are licking their chops…. could you imagine the drama of Hurd leading the barbarians at the gates smashing his way back into the HP board room by force. Remember that this guy invented pretexting and phone hacking like 10 years ago going after HP’s own disfunctional directors some of which were so stupid as to be leaking confidential information after board meetings.

This could be a movie… I mean a real go to the theater and pay your $9.95 and buy your $7 popcorn movie. I whish I was a screenwriter.

Hurd to HP board: “You push me out? No no no… I push you out. I brought this stock from $26 to $52 cutting fat, growing sales, getting closer to our customers… we’re talking about 50,000,000,000 in 12 months… and you fire me over a WOMAN… A WOMAN… I DESERVE A COMPANY BROTHEL FOR THE MONEY I MADE YOU!!! Instead you throw me out and drive my company into the ground? You pick a fight with Cisco, pick a fight with Oracle, Pick a fight with Apple…. Well now you got a fight with ME… lets see what the shareholders think.”

I mean this could be better than the 1st Walstreet or Other People’s Money. I’m thinking Pacino plays Hurd. I’ll be watching this story with great interest.

Posted by y2kurtus | Report as abusive

Well done. Buy on the rumor, sell on the news.

I actually like this new trend towards desperation buy outs. A failing company with a big pile of cash, and don’t they all have big piles of cash, decides it needs some eclat, so it overpays for Motorola or Autonomy or something with a convincing sounding “synergy” story. Since the economy isn’t going to pick up until the top marginal rates are raised, the only way for some companies to survive is to merge and pray. The trick for us investors, I suppose, is figuring out the desperation buy.

Posted by Kaleberg | Report as abusive

“I’ve never seen such a well managed well run company fall down a flight of stairs so quickly after a management change.”

Quality management is proven over a period of years… Fiorina saddled HP with a low-margin PC business, at a time when well-managed companies like IBM were getting out. Hurd slept with the help, while the board was playing footsie under the table. Apotheker may be taking the company in the right direction, but does he have the vision to make it work?

The management of HP has been generally abysmal for a decade, yet they have leading positions in servers and printers/copiers, and have a decent chance of establishing themselves in services. The Autonomy purchase is probably overpriced — but it is a profitable and growing business. Even bad management ought to be able to turn a profit on that mix!

As for selling their PC division, I wonder if Microsoft could be interested? They certainly have the cash to do so, and the demise of HP/Compaq would be the death knell for their Windows franchise. If Google saw synergies in the integration of their software with Motorola’s hardware, might Microsoft grasp at the same straws?

Posted by TFF | Report as abusive