I was listening to Bloomberg radio the other day and Carly Fiorina was on as a guest. Carly is the former CEO of Hewlett Packard. She led a controversial acquisition of Compaq that turned HP into the world’s largest PC maker. Carly was on to talk about Hewlett Packard’s recently announced decision to exit the PC business and move deeper into software with a $10-billion acquisition of Autonomy Corp. HP’s decision came as a surprise to investors—an unpleasant surprise. The stock plummeted 20% on the news.
As I listened to the Bloomberg interview I was struck by how often Ms. Fiorina used the word “bet” to describe HP’s decision to exit PCs and move into software. So I pulled up the Bloomberg transcript and counted. She used the word “bet” six times and “doubling down” twice. All in reference to HP’s supposed “strategic decision.”
Hewlett Packard is one of the world’s largest companies. It has an enterprise value of $65 billion, and it’s a blue chip—a Dow 30 company. Could HP’s board and executives really be making a $65-billion bet with stakeholder capital?
Carly is the former CEO of HP. She is somebody with intimate knowledge of the industry and the company. If she is referring to HP’s decision as a bet, there is no reason to believe it is anything other than that.
Check out some of what she had to say about HP’s decision in the Bloomberg interview.
“And now they’re making a bet. They’re making a choice. They’re saying, “We’re going to double down in the enterprise space. And we think the PC business can continue to succeed outside of HP’s parentage.”
“What a CEO should be focused on is how do I create long-term, sustainable shareholder value? And sometimes you have to make some big bets to do that.”
“And I don’t think this is a particularly new direction on the company’s behalf, although this is one of the biggest bets they’ve ever made in software for sure.”
“But it is fair to say that they are making a big bet on software and they are doubling down in the enterprise space.”
This is some frightening language. Carly is telling shareholders that the success of their HP investment depends on the outcome of a bet. A bet with unknown odds. At least in Vegas they tell you the odds and feed you free drinks while you gamble.
My intention isn’t to single out HP here. HP’s CEO may be brilliant and the board may be making the right decision, but that doesn’t detract from the fact that HP is making a bet. As Warren Buffett once said, “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.” The problem here isn’t HP’s leadership; it is the economics of the business. Technology is a fiercely competitive industry with high risk of obsolescence and unpredictable product cycles. Making big bets are a precondition to succeeding in the technology business, but that doesn’t mean investors should participate in those bets.
Technology stocks are best left to traders and speculators. We advise conservative investors and those in or nearing retirement to invest in good businesses with strong balance sheets and big dividend yields.
Jeremy Jones, CFA
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