HP Down, But Not Out

Focus: STOCKS

This grand old tech stock has seen better days, and its recent acquisition imbroglio spotlights some of the company's recent transition challenges, but there's at least a bounce worth playing here, notes Paul McWilliams of Next Inning Technology Research.

I have received quite a few e-mails from readers today expressing appreciation for my call to avoid Hewlett-Packard (HPQ) ahead of its quarterly report. However, with the cat now out of the bag, it's now time to reevaluate the company.

HPQ announced it took an $8.8 billion writeoff associated with its purchase of UK-based Autonomy. Evidently, HPQ has discovered some very serious fraud and misrepresentations associated with the Autonomy purchase, and is now pushing for a criminal investigation in both the US and UK. HPQ will also file a civil suit in an attempt to collect damages.

HPQ announced its intent to purchase Autonomy during the summer of 2011 for $10 billion in cash, which as I noted then, equated to a price-to-sales ratio over 11. Following this news, I wrote that the price was not only far too high, but also that the acquisition strays from HPQ's core competency, and what I viewed as the appropriate business model for HPQ to leverage going forward.

However, given the many other bad decisions then current HPQ CEO Leo Apotheker was making, the decision to buy Autonomy wasn't surprising. To say I was critical of Apotheker during his short tenure as CEO was be a gross understatement.

When Meg Whitman was hired to take over as CEO, my first suggestion was that she cancel the pending acquisition of Autonomy and pay what would have been a modest penalty.