HP: Here we go again

The Boardroom

by Steve Evans| 28 June 2012

It may be one of the biggest and most iconic firms in Silicon Valley, but the past few years have been unkind to HP, with boardroom unrest, falling sales, a lack of a clear identity and huge question marks hanging over its acquisition of Autonomy. Steve Evans looks at the latest developments

Meg Whitman HP
Meg Whitman, HP CEO

During a recent whistle-stop visit to the UK, HP's latest CEO Meg Whitman addressed a room full of journalists, analysts and HP employees, partners and customers. The former CEO of online auction site eBay admitted that the recent boardroom strife had been "tough" on everyone connected with the company but rejected suggestions that it had lost its way when it comes to innovation.

That's just one of the many unflattering accusations levelled at HP over the past few years as it lurches from one crisis to the next. In fact, it feels like just yesterday CBR featured an in-depth look at the company following Mark Hurd's departure as CEO (it was actually October 2010).

Once Hurd was pushed out (or resigned, depending on how official you want to be) after allegedly falsifying expenses documents, he was replaced by Leo Apotheker, who had previously worked as the CEO of German software giant SAP.

After a few months of settling in, Apotheker announced a huge change in direction at HP. Gone was the TouchPad tablet, dumped after a brief yet underwhelming period on the market. Along with that went the webOS mobile operating system, which had been acquired along with Palm for $1.2bn just a year or so before.

But much more significant was the suggestion that HP would look at "strategic alternatives" for its Personal Systems Group (PSG) division - its PC hardware business. Along with the $10.7bn acquisition of UK search technology firm Autonomy, the decision signalled a change in direction for HP - out of the low-margin PC hardware business and into the highly profitable software and services space.

It was a move that had served IBM so well when it did the same back in 2004. Although the announcement was greeted with shock it was perhaps not surprising given Apotheker's software background. However, shareholders were appalled at the plans and Apotheker followed Hurd out of the door, leaving the role open for Whitman's arrival.

Speaking in London recently, she acknowledged that boardroom issues had negatively impacted HP but added that she wants to return the company to its innovative roots.

"Drama in the boardroom can be tough for customers, for workers, for everyone involved with a company," she said, before adding that innovation was alive and well at HP. "We spent $3.2bn on R&D in 2011, up from $2.9bn the year before," she said. "It is my objective to dramatically increase that over the next few years. We are certainly not falling behind in innovation, but perhaps we don't market it very well."

Whitman also outlined what HP thinks are the three biggest trends shaking the tech world at the moment. "There is a new generation of technology taking charge in the enterprise: cloud computing, security and information optimisation," she said.

However, despite listing information optimisation as a future trend, Whitman's speech only referenced Autonomy once by name. Perhaps that was a sign that things were not going well with the acquisition.

HP's second-quarter results were released at the end of May 2012, not long after that speech. During the announcement Whitman revealed the company plans to cut 27,000 workers - nearly 8% of its workforce - as it looks to save $3.5bn a year. The cuts are a reaction to a 30% slump in profit and a 3% decline in revenue.

Mike Lynch Autonomy
Autonomy's Mike Lynch

One of the casualties is Autonomy founder Mike Lynch, who is leaving less than a year after the acquisition took place. Whitman blamed Autonomy's poor performance during the quarter, particularly a decline in license revenue, for the change. In an interview with tech website AllThingsD, she suggested that the company was struggling to scale as it grew.

"In my view, this is the classic case of scaling a business from start-up to grown-up," she said. "Going through that barrier of a billion dollars in sales is not easy because you can't run the organisation at $1.5bn the same way you did at $500m. You just can't. And for many entrepreneurs, processes and discipline are dirty words, and you have to have those things, especially within the context of HP."

HP wants someone in charge that is capable of taking the company to the next level. Specifically, Autonomy was struggling to close big deals, Whitman explained. "HP fed Autonomy a huge number of deals, but Autonomy didn't have a system for accepting those deals and closing them. And understand, when you're working with big companies, there are processes."

Certainly, the financial breakdown of HP's last quarter suggests Whitman is right about Autonomy struggling to bring in the big deals. Revenue in the HP Software division was $970m, up nearly 22% from $797m a year before, but that figure includes revenue generated by Autonomy. HP does not break out Autonomy's revenue figure, but before the purchase Lynch's company was regularly doing around $250m a quarter and had not missed its earnings for approaching 50 consecutive quarters.

HP's figures suggest Autonomy did something in the region of $173m in revenue during the quarter, well down on its usual figure and which HP was clearly unhappy with, as the removal of Lynch shows. But who is to blame here?

HP says it was Autonomy's inability to scale up to working within a company of HP's size that caused the problems, hence Whitman's comments about Autonomy not following "processes". However, there are other mitigating circumstances.

It has emerged that Lynch is not the only senior management figure to leave Autonomy following the takeover. Sources close to the matter have confirmed to CBR that president Sushovan Hussain, chief research officer Peter Menell, COO Andrew Kanter, CFO Steve Chamberlain, chief marketing officer Nicole Eagan and Aurasma head Martina King have all either left the company or are currently working their notice.

While HP blamed Autonomy's poor performance, an insider has told CBR that the company was finding it difficult to execute its strategy, which is unsurprising given that a huge chunk of its management has departed.

Autonomy confirmed to CBR that "all these people have left or resigned", but offered no further details. As we went to press, only Steve Chamberlain of the people listed had publicly announced his departure, joining digital radio designer Sepura as CFO.

"Around 20% of the senior management has gone because they simply couldn't work with HP," our insider says. "How can you close deals when people are leaving? When big deals are being closed, you want the head sales guy or someone senior there. It's very difficult to deliver with a disintegrated management board."

This chimes with comments from Cathie Lesjak, HP's finance director, when she spoke to analysts about HP's results. She said: "License revenue was disappointing, sales execution was a challenge and big deals were taking longer to close."

It is, of course, possible that Autonomy has plateaued, and that Lynch saw that and decided now is a good time to get out. Maybe he has taken the company as far as he can. The ugly spat with Oracle over a possible sale, when Larry Ellison's firm accused Lynch of lying when he denied claims he tried to sell Autonomy to Oracle before the HP deal, suggests he thought a sale was perhaps the best exit strategy for his company.

What next for Lynch? His entrepreneur's spirit means it's a safe bet he'll be back before too long, either with a start-up of his own or as an investor. That could in fact be a blessing in disguise for the UK tech scene - it was estimated Lynch earned $800m from the sale of Autonomy and if some of that is ploughed back into the tech start-up scene here, the UK will certainly be healthier for it.

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