Should HP Follow Dell’s Footsteps?
Its market cap is about a quarter of its revenues; its share of the PC market is declining as the overall market contracts. It’s in the midst of a turnaround—which is expected to take another year or two to complete—and unsurprisingly, its stock price is battered and closer to its five-year low levels. Yes, this is about the troubled technology titan, Hewlett-Packard (HP).
In fact, another technology giant, Dell, is pretty much in the same boat. Only now it’s no longer a public-listed company.
This leads to an interesting question. Should HP follow Dell’s lead and go private too? There are enough similarities between the two to warrant this.
Consider this. When talks of Dell going private started around mid-January, it had a market cap of about $18 billion (about Rs 90,000 crore) on revenues of about $60 billion (about Rs 300,000 crore). HP has a market cap of around $32 billion (about Rs 160,000 crore) on revenues of about $120 billion (about Rs 600,000 crore).
Not too much of a difference in the ratio there. Both seem to have lost the confidence of the markets. Over a five-year period, Dell’s stock was down by 45 percent (before the ‘going private’ rumours started doing the rounds) and HP’s stock was down by 60 percent.
Also, both are in the midst of implementing a multi-year turnaround plan. Dell, after years of dominating the now declining PC market, is trying to turn itself into a vendor of choice for enterprises by providing potential clients with end-to-end hardware, software, and services. And to bolster its offerings, it has invested more than $12 billion (about Rs 60,000 crore) in acquiring companies such as Compellent Technologies, Force10 Networks, SonicWall, and Perot Systems. Both the company and analysts expect the turnaround to be complete by 2015.
HP has also adopted a similar strategy, though it admittedly had a larger portfolio to begin with. Over the last few years, it has spent billions of dollars in acquiring companies like 3Par, the infamous Autonomy—for reasons you might be aware of, but of no relevance here—EDS, and 3Com. And when does HP think its turnaround would be complete? By 2015.
“Turning HP around is going to be a multi-year journey and will not be linear. Fiscal 2013 is going to be a fix and re-build year for us, as critical changes to our organizational structure take hold. We expect to see real growth in each of our businesses in 2014.We expect that growth will accelerate as we enter FY '15 and beyond,” said HP CEO Meg Whitman in November last year.
There are differences, however.
HP, for one, is considerably bigger than Dell and so are its problems. HP’s revenues are twice that of Dell and its market cap is 50 percent higher. Also, HP has a substantially large printer business—a segment Dell is not present in.
Second, HP’s share holding pattern is diversified. While Michael Dell held about a 15 percent stake in his company, the case with HP is very different with the biggest owners being institutions like mutual and pension funds.
So, a buyout of HP would be considerably more difficult—as multiple institutions would have to be convinced to sell—and expensive (since Michael Dell is involved in taking his company private, he doesn’t have to buy his own stake). However, history has shown that investment banks are quite adept at handling difficult and complex buyout scenarios.
That leaves us with the question of it being a large buyout–an acquisition of HP would cost anywhere upwards of $35 billion (about Rs 175,000 crore) considering a premium over the current market price would have to be paid.
However, history has witnessed many such successful mega buyouts. For instance, private equity firm Kohlberg Kravis Roberts (KKR) bought First Data Corp for $29 billion (about Rs 145,000 crore) in 2007. If that is not big enough, Dallas-based energy company TXU Corp was acquired again by KKR along with Texas Pacific Group for a staggering $45 billion (about Rs 225,000 crore).
So, as long as some private equity firm is confident about HP’s turnaround potential and its ability to command a valuation similar to that of IBM—which incidentally has a market cap of $225 billion (about Rs 1,125,000 crore) on revenues of $105 billion (about Rs 525,000 crore)–it will be able to raise the required resources. Which brave soul will bet that the sharks in Wall Street aren’t already eyeing it?
HP, for one, is considerably bigger than Dell and so are its problems. HP’s revenues are twice that of Dell and its market cap is 50 percent higher.