Whither Mark Hurd's HP?

Mark Hurd became CEO of HP just over three years ago, In that time, he has undeniably improved the operating performance of the firm, as well as its total returns.

When he took over HP, Hurd had to finish making sense of the mess left by Carly Fiorina's acquisition of Compaq. The logical comparison for the firm at the time was Dell, the major direct PC seller.

After running somewhat similarly on a total return basis since 2003, Hurd's arrival at HP coincided with, if it didn't actually affect, Dell's steady negative total return performance for most of the years since. On that comparative basis, HP has clearly pulled ahead of its major PC manufacturing competitor.

Now, Hurd is buying EDS. Allegedly, he is fashioning HP into a firm capable of going after the likes of IBM and Accenture.

The trouble is, in my view, what the performance of IBM and EDS already appear to be. The nearby, Yahoo-sourced five-year price performance chart of HP, Accenture, IBM, EDS, Dell and the S&P500 Index tells a very revealing story.

Over five years, IBM's stock price is just even with the S&P, while EDS has been flat, while Dell has lost ground. So, from a performance standpoint, Mark Hurd has already done a better job for his investors than has IBM for its shareholders. And Hurd has clearly outperformed the still-struggling Dell.

HP has even outperformed Accenture (in the interest of full disclosure, a firm for which I once worked, when it was still Andersen Consulting) over the past five years, and since Hurd assumed command of HP.

So my question is,

"What does Mark Hurd intend for the EDS acquisition to do for HP shareholders?"

He's already outperforming current and future comparable firms- Dell, IBM and Accenture. And he's planning to acquire a firm whose own total return performance has been dismal.

From a Schumpeterian dynamics view, HP is bound, at some point, to meet, rather than exceed, investor expectations, and see its total returns flatten out. It might even be that this would occur within a few years.

The question is, will it have a better chance continuing to focus on excellence in its major businesses, which now feature personal computers, or does it need to risk diluting its focus by building up/entering the IT consulting services business?

In terms of competitive position, HP would seem to be at least temporarily advantaged in its current businesses. Consumer computing and the evolution thereof is going to continue to make the market leader serious money going forward. Whether the PC and laptop morph into new devices, or just get more involved, better, etc., HP could still seek to dominate this market.

By buying EDS and turning HP's attention to the business of cutthroat, big-contract consulting services, Hurd may well stumble into a hornet's nest of unrealized difficulty.

I don't know for certain, of course. But few business expansions of this type work out as well as the architects hope.

Mark Hurd has done a tremendous job truly 'turning around' HP after Carly Fiorina. He's brought it to a fine edge of dominance in its product markets, and in terms of shareholder return.

My proprietary research has shown that, on average, a company can outperform the S&P500 consistently for less than a decade. Things happen that eventually hinder its consistent, ongoing excellent total return performance- limits to growth, competition, regulation, or simply investor expectations catching up with the reality of the firm's performance.

The nearby 30+ year view of these same companies' equity price performances demonstrates, perhaps surprisingly, that Dell is actually still the best performer, despite flattening out for most of this decade. IBM and EDS, both around for decades, and the former, for more than the last decade, heavily into computer services and consulting, have nearly identical pre-dividend returns, slightly below the S&P.

Even allow for the maturity of the PC industry, I can't help but look at Dell's long term performance and wonder if HP's Hurd isn't unwisely taking his eye off of the more attractive segment, and potentially committing HP to a grueling, ugly slugging match in a business where differentiation is difficult, customers can be troublesome, and engagement costs can run amok.

Then there will be the internal management attention drawn away from the now-dominant PC business. And probably issues of succession as EDS takes on more importance in HP's fortunes going forward.

Mark Hurd has distinguished himself both at HP and with his former employer. His acquisition of EDS probably marks the largest risk he will have taken. Perhaps within a few years we'll see whether it has cost HP any ground in its consumer computer business, and whether Hurd has been able to prove the exception to Schumpeterian forces in business.