HP's Real Big Gamble

Yesterday, Hewlett Packard had a no good, mixed up, horrible, very bad day.  First of all, HP had to admit that its foray into coolness - the TouchPad - was a massive flop.  There are over 200,000 unsold TouchPads sitting in warehouses at Best Buy waiting to be euthanized.  The parts are probably worth more melted down than the finished product, which lacks apps, customers, and friends.  This means that the slick webOS operating system that came to HP as a result of its $1.2 billion acquisition of Palm is an orphan, too.  Perhaps the development team can go hang out with the guys who are resurrecting the Commodore Amiga. 

But, wait, there's more.  HP is "exploring a spin-out" of its PC business, which is their way of putting a big, flashing/honking for sale sign that reads, "Take my PCs, please."  The PC business is pretty much an Asian thing now with the exception of Dell and HP (for the time being).  Most PCs either come from Asian up-and-comers, like Lenovo, Asus, and Acer, or are designed and built Asian Original Design Manufacturers, like Han Hoi Limited, also known as Foxconn.  More than likely, one of the Asian leaders or a company that wants a big market entry, like Samsung, will make a play for the business.  This is a good thing for HP since it's going to need all the cash it can get its hands on.

The third, most important, and least remarked on HP news from yesterday was their stated intention to purchase Autonomy - the UK-based provider of software products to manage massive amounts of unstructured data. Autonomy has been "cooking with gas" over the last few years - generating annual sales approaching $1 billion and net income of about 25 percent.  HP, which has an enterprise software business that it badly wants to grow, needs better software products, and Autonomy is - hands down - the leader in its market, which is big and growing fast.  This all sounds good except that HP will be using $10 billion of its $12.7 billion in cash reserves to purchase Autonomy.  That's a 70 percent premium over Autonomy's current market cap and 10x Autonomy's current revenues.  It better be worth it, because, unless HP sells that PC business for a really good price, it won't be doing any more big transactions for a while.  

At the end of day, HP hopes to look a lot like IBM and Oracle with software, services, and enterprise-level hardware targeted an enterprise-level customers for enterprise-level prices.  IBM has pursued this strategy since 2005 when it sold its PC business to Lenovo.  IBM has added IT security, business intelligence, and development tools software companies and seems to be on the lookout for more.  Oracle has pursued a similar strategy - buying up big competitors with great maintenance streams, like PeopleSoft and Siebel, vertical market software leaders in finance, healthcare, and manufacturing, and then capping their shopping spree with Sun Microsystems, which brought hardware and world-class J2EE knowledge and products.  While HP is spending most of its cash on one acquisition, IBM and Oracle are flush with cash.  Oracle has $16 billion sitting around and IBM, about $12 billion, which means both can take a run at just about anything that looks good.  

So here are the questions for HP:

• Is HP up to the task of competing 100 percent across the board with IBM and Oracle - given that it is five years behind the curve?
• Autonomy is dominant in one, fast-growing market, but one market doesn't create an enterprise software leader or even a strong challenger.  What are the next target markets and companies for HP, and can HP afford to play against its well-funded direct competitors?
• Is HP sure it will find a high value buyer for its PC business to help replenish its stash of cash?
• Is it Leo Apotheker's dream to add SAP AG, his former employer, as the crown jewel of HP's software business?  How could HP ever afford that?

At the moment, HP isn't answering most of these questions.  In the coming months, it will have to.