The Investors Chronicle (IC) published an article last week entitled “What does Buffett see in HP?”. I read it with interest as I used to do a lot of business with HP and its customers before I retired from a proper job. But I think the article might have confused more people than it enlightened.
The article referred to the acquisition of a “large stake in printer manufacturer and software company Hewlett Packard (US:HPE)” by Berkshire Hathaway. But the latter actually acquired a stake in HP Inc (US:HPQ).
The Hewlett Packard company split into two companies in 2015 these being HP Inc (HPQ) focussed on printers and PCs, and HP Enterprise (HPE) focussed on software and services. The latter made the disastrous acquisition of Autonomy although they did win a legal case on the issue of misleading accounts in January this year.
The printer/PC business was seen as being slower growth and of course as being in a highly competitive sector and hence achieved a relatively low market rating. It’s now on a historic P/E of 7 but as the IC article indicated the free cash flow of HPQ has been improving greatly. Return on assets has improved to 17% as well so one can see why Buffett might be attracted to this business.
The IC article also talked about the management in-fighting at HP not prevented by weak management at the top of the company. In fact the company want through a series of top management changes after the founders departed and the worst of them was the appointment of Carly Fiorina as CEO. To quote from Wikipedia “Fiorina’s predecessor at HP had pushed for an outsider to replace him because he believed that the company had become complacent and that consensus-driven decision making was inhibiting the company’s growth. Fiorina instituted three major changes shortly after her arrival: replacing profit sharing with bonuses awarded if the company met financial expectations, a reduction in operating units from 83 to 12, and consolidating back-office functions. Fiorina faced a backlash among HP employees and the tech community for her leading role in the demise of HP’s egalitarian “The HP Way” work culture and guiding philosophy which she felt hindered innovation. Because of changes to HP’s culture, and requests for voluntary pay cuts to prevent layoffs (subsequently followed by the largest layoffs in HP’s history), employee satisfaction surveys at HP—previously among the highest in America—revealed widespread unhappiness and distrust, and Fiorina was sometimes booed at company meetings and attacked on HP’s electronic bulletin board.”
The company’s record of investing in software was also abysmal when hardware was becoming ever cheaper and generic. This cumulated in the disastrous acquisition of Autonomy.
But the fact that the company has survived (albeit it in two parts) is no doubt due to its strong historic reputation for well-engineered quality products and strong brand name.
But there are two key lessons to learn from the history of HP: 1) Changing the culture of an organisation is always exceedingly difficult and is likely to fail unless done very sensitively; and 2) Management incompetence can damage even the most admired businesses, as Hewlett Packard used to be.
To quote from my book Business Perspective Investing: “One of the key factors that affect the outcome of any investment is the competence of the management and how much they can be trusted to look after your interests rather than their own. Incompetent or inexperienced management can screw up a good business in no time at all, although the bigger the company, the less likely it is that one person will have an immediate impact. But Fred Goodwin allegedly managed to turn the Royal Bank of Scotland (RBS), at one time the largest bank in the world, into a basket case that required a major Government bail-out in just a few years”.
At Hewlett Packard it was not quite so disastrous and the company certainly faced challenges as the computer technology market changed but the damage done to a once great company was unhappy to see.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
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