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.

HP's Entry Into Web-TV Integration

This past weekend's Wall Street Journal featured Mark Hurd, H-P CEO, as its customary interview.

It's a nice piece, and Hurd seems like a fine CEO. But what really drew my attention was this little passage,

...Hurd points to H-P's new MediaSmart HDTV, which can receive entertainment directly from a PC, as a glimpse of where the company is headed: "to integrate content across the home, whether it's emanating from the Web, from satellites, from cable, or the PC, and bring that to the consumer's touch."

Then Hurd reportedly said that he'd 'probably just told you more than I should have...'

This pretty clearly positions H-P to be in the running, with Apple and TiVo, to market the missing link in video content for the home. That is, the server with wireless access to high-speed cable, et.al., and wired delivery of downloaded and stored content onto home video devices, such as television screens.

In this respect, H-P is certainly morphing itself from a collection of old, force-fit computing platforms (DEC, Compaq), into a competitively-positioned, modern technology-producing device manufacturer. H-P will probably never be the Windows-based equivalent of Apple when it comes to novel and beautifully-designed digital devices, but it seems to be heading toward that ideal under Hurd.

This is great news for consumers, and uncertain news for investors. Were Apple to have had the AppleTV space all to itself for an extended period of time, its investors would probably be ecstatic. The way things are shaping up, though, it looks as though at least TiVo and H-P are going to be joining in, with who knows how many other solution providers on their collective heels.

Does this not bode well for: rapid technological advancement in the product space, falling prices, and ever-wider distribution points for the devices? Perhaps they will be the coming years' equivalent of large, flat-screen TVs for the big box electronics retailers?

Time will, of course, tell all. But personally, I'm excited to see so many technological resources being poured into this rather obvious 'missing link' device space. It should speed the demise of cable companies, push the creaky old media video content owners into a final solution, and provide, at last, a nearly seamless way of acquiring, storing and viewing/consuming digital video content.

Seeing as how I mentioned the cable companies' upcoming dilemma, and noting today's Wall Street Journal piece concerning Time Warner's deliberations on that business, I will write about that tomorrow.

H-P's New Direction: Software

Last Tuesday's Wall Street Journal reported that H-P is planning to boost growth by bundling its various software offerings, including those of Mercury Interactive, and Bristol Technology.

The software in question is corporate-oriented systems management software. Allegedly, the effort didn't work well prior to this because it was not sufficiently important to merit H-P's full support.

Now, H-P has hired Thomas Hogan, former CEO of Vignette, a software firm, to lead the new effort. Focus is being placed on sales force training and compensation, to facilitate the success of the new endeavor.

Even with all this, I doubt this effort will re-ignite H-P to be a firm with consistently superior total return performance over several years.

First, while Mark Hurd has led H-P through a recovery from its malaise under Carly Fiorina, I don't think that the firm has, by any means, locked up the consumer laptop and personal computer market. It has enjoyed a short-term bounce in its stock price thus far, but I'm not sure it is poised to continue that consistently going forward.

Second, the Journal article notes that corporate customers are already migrating to online, "on-demand" software services, rather than the traditional type that H-P envisions selling.

Third, H-P is coming to the corporate software market long after many competent competitors have already settled in, such as IBM.

Fourth, there is the issue of credibility. I would think that commitment to a software vendor is a very serious issue, and H-P isn't really much of a presence yet in that world. This could take quite some time to pay off.

Overall, I think this new direction probably won't change the fortunes of H-P, which are heavily wedded to selling commodity computing and related hardware- laptops, printers, etc. Hurd has fixed some of the firm's earlier problems, but I do not think this necessarily presages a return to H-P's former days. As the Yahoo-sourced chart on the left depicts (click on it to see the larger version), over 40 years, the company has had some runs of clearly consistently superior returns. For much of the 1990s, and the early 1980s, the firm appears to have outperformed the S&P500. However, beginning in the mid-1990s, H-P's performance began to revert to average and/or inconsistency.

Over the past 5 years, as shown in the chart on the left, H-P hasn't really outperformed the index until the last 20 months or so. Hardly a long-term return to consistent superiority. Based upon my proprietary research findings, H-P's recent performance is far from sufficient to merit ascribing to it long-term outperformance of the index. Even three years of relatively high total returns is no solid predictor of consistent outperformance of the S&P.

So, I think it remains to be seen whether H-P can even be a high-growth, long-term consistently superior total return company again, going forward. As I have written in prior posts, creating a successful second act for a technology company is a nearly-impossible task to achieve.