Tuesday, January 27, 2009

Hurd's Palate Should Concern H-P Shareholders

From RealMoney.com

By Eric Jackson

1/26/2009 12:29 PM EST

You'd be hard-pressed to find a CEO who since arriving at the top spot has been as admired as Mark Hurd of Hewlett Packard (HPQ - commentary - Cramer's Take). The stock is up 80% since he was hired in March 2005, recovering from years of wilt under Carly "all flash, no substance" Fiorina. Over the same period, archrival IBM's (IBM - commentary - Cramer's Take) stock has declined 1% and the NASDAQ has fallen 26%.

Hurd has kept a low profile while underpromising and overdelivering. Quarterly beating of estimates has become the norm for H-P. However, a big red flag for investors popped up last week in the company's most recent proxy filing with the SEC.

As discovered by Michelle Leder of Footnoted.org, on page 47 of the proxy filing, in addition to his $23.3 million in total compensation last year, Hurd received "an other gross-up" of $79,814, which "represents amounts reimbursed to the NEOs for taxes on meals associated with business travel undertaken by the NEOs in connection with events to which family members were invited."

Based on disclosures elsewhere in the proxy, Leder estimated the "gross-up" meant Hurd and his family ate over $243,000 worth of food last year on shareholders' dime. I don't know how that is possible for a family to do, even assuming they dine at the finest restaurants in the land.

After this news bounced around several media outlets last week, H-P issued a statement to Silicon Alley Insider:

The tax gross-up figures contained in H-P's 2009 proxy were miscalculated. The correct "other gross-up" figure for Mark Hurd was $4,117 (not $79,814), which is in-line with last year's figures. Notwithstanding this, some media outlets inaccurately extrapolated the supposed tax rate, resulting in vastly inflated and inaccurate figures for Mark's meals. While this is not a material disclosure, we wanted to set the record straight.

If Hurd and his family really charged over $200,000 in meals last year to H-P's shareholders, it is a major heads-up, especially in the wake of Merrill Lynch CEO John Thain's $1.2 million personal office renovation. In a TheStreet.com opinion column last week, I wrote there were few warning signs of selfish spending prior to Thain's ultimately rejected request for a $30 million to $40 million bonus for 2008, followed by his rushing up Merrill Lynch's year-end bonuses to December and only decreasing them by 6% from the previous year.

In the case of Hurd -- if the original proxy is correct -- this is a warning that he thinks it's OK to charge a few personal things here and there to H-P shareholders. After all, hasn't he increased the shares by 80%, far outpacing his peers, since he took over as CEO? As we learned at Enron, Tyco (TEL - commentary - Cramer's Take), WorldCom and Adelphia , it's that type of thinking that causes corporate leaders to ultimately take one step too far and dramatically cripple or kill the company.

But what if the H-P PR people are right and erroneously inflated the number 19 times in the SEC filing? It's hard to believe the accountants would make such a mistake, but if they did, as in the case of Broadridge, it makes you wonder what other reports to the SEC might have been wrong. It wouldn't give me any more confidence as a shareholder, than if Hurd's family had taken advantage of shareholders.

It reminds me of the terrible blunder made in the counting of Yahoo! (YHOO - commentary - Cramer's Take) shareholder votes at last August's annual meeting. Initially, tabulation company Broadridge Financial Solutions (BR - commentary - Cramer's Take) reported that Yahoo!'s directors had received much higher levels of shareholder support than in 2007. Reporters painted the entire annual meeting as a ho-hum affair, suggesting that reports of shareholder discontent prior to the meeting were overstated.

A few days later, Gordon Crawford of Capital Research Global Investors, one of Yahoo!'s largest and most influential shareholders, challenged the veracity of the reported numbers. It turned out that Broadridge had forgotten to add 200,000 shares for some directors and 100,000 for others. When the company corrected this error, several Yahoo! directors had much higher "against" votes than originally reported (40% versus 20% in the case of Chairman Roy Bostock).

You wonder what would have happened had Crawford not kicked up a fuss? Probably nothing, which makes you wonder how often this happens.

In addition, no revised filing has been sent to the SEC. Just a simple "Whoops -- we messed up" apology is all H-P had to issue for this story to go away.

Will the new SEC headed by Mary Schapiro not give out penalties for mistakes in filings? Surely the public deserves to know that the public company financials on the SEC's EDGAR website are accurate. And why did it take a blogger to uncover all of this? Where were the research analysts working to uncover what was really going on for the benefit of investors?

Whether H-P has a problem doing its numbers or with food expense budgeting, shareholders have seen a bright red flag. At the same time, H-P is trying to digest a slower and less profitable company in EDS, purchased for $14 billion in early 2008. In the next quarter or two, it wouldn't be surprising to get a warning from H-P about cost overruns or expected synergistic revenues that have not materialized.

There will likely be pain in 2009 for H-P shareholders. It would be wise to stay clear until the company shows it has its arms around the new acquisition and is treating its shareholders fairly.

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