Technology Focus: Will HP’s $5B Bath Do The Trick?

Last week, the latest CEO of Hewlett-Packard Co. (NYSE: HPQ), the No. 1 computer company, administered a dose of medicine: The problems at HP are so bad, they’ll take another four years to fix, Margaret (Meg) Whitman said.

After laying out an indictment of confusion that included prior mistakes made by the last three CEOs (all outsiders like herself), not enough customer relationship management software, dozens of duplicate printers, a dearth of cloud applications, and products that hadn’t been refreshed in years, Whitman handed the stage over to her CFO to deliver the coup de grace.

HP’s net income next year will be far less than expected, CFO Cathie Lesjak announced. Diluted net income after all charges, including layoffs, will be only $2.10 to $2.30 a share, she said.

HP, of Palo Alto, Calif., is in the last four weeks of fiscal 2012, for which analysts expect net income to be the same on revenue of $121.2 billion, compared with last year’s $3.32 a share on revenue of $127.2 billion.

Because Lesjak addressed analysts while the market was still open, shares of HP plunged 13 percent to close at $14.91 Wednesday, wiping out about $5 billion in market capitalization. On Thursday, Moody’s (NYSE: MDY) said it placed HP’s long-term credit rating under review for a possible downgrade.

By Friday’s close, HP shares had slumped to $14.73, down 14 percent for the week and lowering its market capitalization to a puny $29 billion. By contrast, its biggest rival, International Business Machines Corp. (NYSE: IBM), has a market capitalization of $240 billion.

Apple (Nasdaq: AAPL), the world's most valuable company, has a market capitalization of $611 billion. When he was 12, Apple co-founder Steve Jobs called up HP co-founder Bill Hewlett to ask for parts to build a frequency counter.

Now, Apple has cleaned HP’s clock in the tablet sector, as Whitman acknowledged, as she praised the ElitePad 900 for business, which HP won’t ship until next year.

Two years ago, Whitman, 56, spent about $140 million of her own fortune -- much of it resulting from her leadership of eBay Inc. (Nasdaq: EBAY), the No. 1 online auction site -- to be the Republican nominee for governor. She lost to Democrat Jerry Brown and got the HP director’s seat as a consolation prize.

Her rival for the seat of Sen. Barbara Boxer, a Democrat, was Carly Fiorina, the first outsider ever picked to run HP. Fiorina was fired from HP in 2005. She lost the election badly, too.

Whitman’s senior managers -- notably Todd Bradley, head of the combined printing and personal systems group, the No. 1 maker of PCs and printers; Dave Donatellei of the enterprise group; and COO Bill Veghte -- gave optimistic forecasts about the move to the cloud, using HP’s already proven server technology and customers.

The tools are there, they said, but the knack will be in knitting together the building blocks of technology, especially as the sector moves to mobility, the cloud and analytical software.

Huge computer makers have turned around before: Surely Whitman has studied how outsiders CEO Louis V. Gerstner and CFO Jerry York refloated IBM in 1993 with massive writeoffs, exits from unprofitable consumer businesses and putting a new focus on software and services.

Since then, shares of the Armonk, N.Y., company have gained nearly 1,800 percent, not including the dividends that attracted Berkshire Hathaway’s (NYSE: BRK/A) Warren E. Buffett last year. Now, he’s IBM’s biggest shareholder.

If the industry and the markets give Whitman enough time, she could be a big hero. But analysts are skeptical. “There’s still no clear strategy,” said Peter Misek of Jefferies. Steven Milunovich of UBS maintained his “sell” rating.

The alternative could be that at its sharply reduced value, HP could become a target. Or rivals like IBM; Oracle (Nasdaq: ORCL), the No. 1 database developer; Apple; Google (Nasdaq: GOOG), the No. 1 search engine; or Microsoft (Nasdaq: MSFT), the world's biggest software company, could eye units of the company.

If she’d been elected governor, Whitman’s term in office would have been four years. She’s given herself five to execute the HP turnaround.