HP Investors Face a Lonelier Road Ahead

Now that its nemesis, Dell (DELL), is going private and bowing out of the quarterly earnings spotlight, Hewlett-Packard (HPQ) finds itself at the intersection of two clichés: Misery loves company (but) breaking up is hard to do.

Of course, there’s no public sign of weakness. Within minutes of Dell’s deal announcement, HP released a statement that said Dell faces “a very tough road ahead” as a privately held enterprise. “Leveraged buyouts,” the company argued, “tend to leave existing customers and innovation at the curb. Dell’s customers will now be eager to explore alternatives, and HP plans to take full advantage of that opportunity.”

The comments might have been revenge for Michael Dell’s having tweeted in the summer of 2011: “If H-P spins off their PC business, maybe they will call it Compaq?” when HP briefly considered jettisoning boxes and laptops. Both companies probably wish they’d done so long ago.

Dell’s demise is cold comfort for Hewlett-Packard, which—coming off its own era of really bad decisions—now faces a paucity of financial options. The tech company is a fraction of its former size, with its share price having tanked 65 percent since former Chief Executive Officer Mark Hurd was pushed out in August 2010.

“In our view, the board evaluating a possible break-up is standard fiduciary duty with the stock down nearly 50 percent in the last year,” wrote analyst Brian Marshall of ISI Group in a Feb. 5 note that conceded, “any break-up is at least 1-2 years away.”

“They are now atoning for their sins,” says Dave Novosel of research firm Gimme Credit. He notes that while HP has more than $11 billion in cash, that stash is overshadowed by its $28 billion debt load. What’s more, he says, the firm is still paying the tab for $18 billion in poorly timed share buybacks since 2010. (Compare those sums to HP’s present $32 billion market value). “There’s so much debt, they’re strategically confused, and the cash flow needs to grow,” Novosel says. “I’d find it hard to believe they could go private.”

Alas, Wall Street, which has never been much accused of seeing half-empty glasses, pegs an average target for HP that is 20 percent below its current $16 share price.

HP could, at least in theory, be a prime value-unlocking target for a band of hardy investor-agitators; David Einhorn, after all, is taking on Apple (AAPL), a rival multiples HP’s size that totes nearly $140 billion in cash. But HP has only so many stock-boosting levers to pull, given a balance sheet deep in deleveraging mode, adeclawed activist already on its board, and the widely held belief that the sprawling multinational’s wares sell better to companies when packaged together.

Just ask Carly Fiorina, the former HP CEO who assembled so much of what current management is trying to streamline. In a Feb. 6 interview with CNBC, Fiorina used the word “synergy,” sans irony, thrice in one minute.

BusinessWeek.com