HP Hints At Acquisition
Shares of Hewlett-Packard (NYSE:HPQ) traded lower on Thursday morning following a tough third quarter. Early in the session shares were down by more than 13 percent to $22. The company reported its earnings per share dropped to $0.86 from $1.00 a share in the third quarter of last year. On the top line revenues plummeted 8 percent on a year over year basis to $27.23 billion, from $29.67 billion. Analysts had expected the company to report earnings excluding items of $0.86 a share on $27.29 billion in revenue, however, increasing competition and weak demand set the company back.
In an attempt to ease shareholder pain, HP’s Chief Executive Officer, Meg Whitman, offered some clarity in a CNBC interview this morning. Despite decreasing revenues out of the majority of core operations, Meg Whitman remained upbeat and reassuring. In the interview she stated her company is on track for its five-year turnaround plan and outlined how acquisitions are part of her long-term strategy. At this point acquisitions seem a necessary step to ensuring revenue growth in the current environment. Whitman stated the company will be judicious, deliberate, and strategic when considering acquisition potential. In the past the company has struggled to correctly value acquisition targets.
A number of poor decisions including the acquisition of Autonomy for $11 billion have significantly diminished shareholder equity over the last few years. HP paid a 58 percent premium for shares of Autonomy only to find out the company greatly misrepresented its finances. The result, an $8.8 billion dollar write down to the value of the company. Whitman hinted that there are numerous acquisitions within her sights, adding that there will be acquisitions on a wide spectrum. There will be some within the $100 million to $300 million range, and “perhaps some up to $1.5 billion.” It seems the company may follow in the footsteps of its large cap technology counterparts with security acquisitions. The security space has been a hot bed for M&A this year, the need for greater internet security has caught the attention of everyone on Wall Street.
Acquisitions are to be expected from late stage technology companies. The days of high growth, sexy multiples, and analyst exuberance are no more. If the company wants to grow earnings, it must improve operating efficiency while searching for value. HP is set to release 29,000 from its workforce to cut costs and perhaps finance its acquisition pipeline. Year to date shares are up more than 75 percent, thus pullbacks are to be expected.
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