Thursday, February 10, 2005

HP: Too big? Wall Street observers were quick to pounce on the dismissal of Carly Fiorina from Hewlett-Packard as further proof of the received notion that big mergers and acquisitions never work - except when they do. Whenever a big merger goes bust - most spectacularly the AOL-Time-Warner deal and the merger of phone company Qwest with US West, there are a smattering of articles declaring that mergers don't work. These are the same voices that always declare that Company X has paid too much to acquire Company Y. A Wall Street Journal article ("Too Big: Learning From Mistakes", 2/10/2005) is at pains to point out, as the kicker proclaims "reminds companies of the risks during the current merger boom." Well, duh! I suspect that such risks are already well understood. What acquisition critics rarely point out is the risks of not making a merger when it is available and appropriate. Running a big corporation in an uncertain economic climate, with threats from globalism and competition matrix shifts, making a decision to stand pat is as risky as any other. That's not to say that panicking companies and egotistical CEOs have not made outrageous blunders. But the distance between a blunder (Vivendi's buyout of Universal, Daimler Benz's Chrysler acquisition) is not always that readily apparent as some good moves (Bank of America's acquisition of Fleet Bank). On the whole, HP's $19 billion acquisition of Compaq was not necessarily such a bad idea. HP's PC business was getting hammered by Dell and Compaq, so one solution was to lessen the competition. HP could have dwindled into a printer-only business, which would be more profitable, but would make it much smaller and run the risk that competitors like Samsung, Lexmark, and Epson might eat away at its margins with lower prices and increasing market share. Printers are a commodity, and an increasingly cheap commodity at that. HP's are quite good, but not notably better (and rarely as inexpensive) than the competition's. So HP was in a box. There was no real way, as I see it, that stock value could increase or even hold if it had stayed the course. The general thinking in the computer industry was that the money is in services not boxes, based on IBM's self-transformation over the past decade. But providing services is a highly amorphous market which requires a very different attitude and reputation from selling hardware. HP has not been able to build its reputation and the trust of the big clients fast enough. Also, there are limits to the number of clients who want the integration services HP wants to offer, and a dozen other companies are clamoring that they are IT service providers. The WSJ article does point out that some companies are getting better at mergers. On the whole, companies and their advisers say they have learned plenty from the mistakes of the last merger frenzy. They are focused on industries they are already in, rather than leap-frogging into entirely new businesses. Managements at target companies say they are more willing to accept lower premiums for their stock, rather than extracting huge prices that kill the acquiring company's shares. And corporate boards have thrown away their rubber stamps. The article also points out that the stock of acquiring companies has done much better since 2002 compared to the stock of those who acquired in the period from 1999-2001. But of course, that was the height of the era of "irrational exuberance." Corporate boards have gotten a little more cautious. On the whole, the WSJ reported don't make much of point, circling round the key arguments about whether companies should merge or not. But in its best passage, the article quotes University of Iowa finance professor Anand Vijh as saying "Companies in declining industries have no alternative," … Those deals may do poorly, he says, "but not as badly as if they didn't merge." That, to my mind, describes HP perfectly. 11:09:19 AM

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