--As H-P enters a new era, it has to contend with an
increasingly skeptical financial community.
--Hewlett-Packard hired Goldman Sachs to help defend itself
against potential moves by activist investors.
--Analysts such as Toni Sacconaghi note possibility of
shareholder activism.
By Benjamin Pimentel
An analyst at Bernstein Research was so disappointed with
Hewlett-Packard Co.'s (HPQ) deal to acquire Autonomy Corp. (AU.LN,
AUTNY) and by the idea that the personal-computer business could be
spun out that he fired off a stinging critique.
"Activists, time to sharpen your pencils," wrote Toni Sacconaghi
in an Aug. 19 note.
He also wasn't thrilled by the even more stunning announcement a
few weeks later that the H-P board had ousted Chief Executive Leo
Apotheker and replaced him with Meg Whitman. Not only did he
disagree with Apotheker's management, but also he thought that
Whitman was a poor choice.
"Snatching defeat from the jaws of victory," read his Sept. 23
note. "Investor exasperation now appears likely to be increasingly
directed at H-P's board. With all directors slated for re-election
in March, we wonder if we will see activists or major investors
push for fundamental change at the board level."
As H-P enters a new era under Whitman, the Palo Alto, Calif.,
powerhouse has to contend with an increasingly skeptical financial
community.
This was underscored Wednesday when The Wall Street Journal
reported that Hewlett-Packard hired Goldman Sachs Group Inc. (GS)
to help the PC and printing giant defend itself against potential
moves by activist investors.
What's more, rival Oracle Corp. (ORCL) appeared to add fuel to
shareholder discontent regarding H-P's $10 billion bid to buy
Autonomy by strongly suggesting that the deal was way overpriced.
In statements and in postings on its corporate website late
Wednesday, Oracle said it declined Autonomy's offer to sell itself.
Autonomy has disputed Oracle's assertions.
H-P's Wall Street problems also have been highlighted by some
analysts who appear to be more aggressive in suggesting drastic
shareholder action.
Sacconaghi has stood out for repeatedly noting the possibility
of activism erupting from the tumult. "Investor exasperation with
the company is the highest we have seen in 13 years following the
sector," his Sept. 13 note said. "Many have asked about the
potential for activist investors, indicating that they would
support active efforts to either try to stop the Autonomy deal
and/or displace existing leadership."
Then, following Apotheker's ouster, Sacconaghi wrote: "We see no
near-term catalysts for H-P's stock, other than the potential
nomination of new directors, an activist becoming involved or the
remote possibility that Oracle tries to acquire the acquire the
company."
H-P declined to comment for this story.
Other analysts have been highly critical of H-P, to the point of
highlighting the possibility of a shareholder revolt.
Asked if he would call for activism, Auriga USA LLC analyst
Kevin Hunt wrote in an email: "I'd say that if they don't get
things straightened out there soon, H-P would be a strong target
for an activist shareholder."
To be sure, analysts pushing for major changes in the companies
they cover is not new. In 2003, Merrill Lynch analyst Steven
Milunovich put out a note in the form of an open letter to Sun
Microsystems' board and its then-chief executive, Scott McNealy.
Milunovich warned the struggling server maker that it had to make
big changes, or it "will go farther downhill," adding: "The bottom
of the ravine is filled with carcasses." He was referring to
companies such as Compaq Computer and Digital Equipment, which
after falling behind were eventually acquired by bigger
players.
Sun downplayed the remarks. Seven years later, it would be
gobbled up by Oracle.
David Larcker, a professor at the Stanford Graduate School of
Business, said analysts taking a more vocal stance is an
"interesting twist" in the H-P saga, noting that they certainly
play a key role.
"It has got to be the case that spotting that kind of turmoil
ahead of time, or having a better assessment of the impact of
what's going on now is bound to be a highly valued skill for
shareholders, customers, suppliers and employees," he
commented.
"The analysts are really independent," Larcker added. "They
provide a very sophisticated voice...Obviously, you want to back it
up."
H-P is also no stranger to investor uprisings. About a decade
ago, the company and its chief executive at the time, Carly
Fiorina, were engulfed in a protracted proxy war with dissident
director Walter Hewlett, who rallied investors to oppose H-P's bid
to buy Compaq. The uprising failed to stop the merger, but it did
draw plenty of attention.
Yet despite the current tumult at H-P, Sterne Agee analyst Shaw
Wu said he didn't see a shareholder revolt taking place, even
though he agreed such an effort could be a positive catalyst for
the stock.
"Given the state of affairs right now, one of the things that
can cause the stock to rise is some shareholder activism," he
noted. But that's not likely to happen easily in a big corporation
like H-P, according to Wu. "It will have to be a very large
fund."
One H-P investor echoed this view.
Jerome Dodson, president and portfolio manager of Parnassus
Investments in San Francisco, which owns about 4 million shares of
H-P, said last week that he was "thinking of withholding our votes
for the board."
"We will be looking for alternatives," he added. "We will be
open-minded to that. I would like to see a higher quality of people
offer themselves."
When asked if any of H-P's current investors might take the lead
in trying to replace some, if not all, of the company's board
members, Dodson replied: "It's possible, but unlikely. Most of the
institutions who hold it are too conservative."
-Benjamin Pimentel; 415-439-6400; AskNewswires@dowjones.com