BBG Video: Should Hewlett-Packard Even Be in the PC Business?

My chat with @nicolelapin last night on @BloombergWest re $HPQ:

Sphere: Related Content

The HP Board Hires Trusty Bankers to Protect It From Fiendish Imaginary Activist Investors

The HP Empire is under grave threat from peasant shareholders who actually want its stock price to increase. The board must not allow it.

Read the full post in Forbes

Sphere: Related Content

Ray Lane Must Go at HP

How can you be the Chairman of HP after the last 11 months and give yourself a promotion? Ray Lane must go now.

Read the full post in Forbes

Sphere: Related Content

HP Directors Lack Skin in Game

By Eric Jackson, Senior Contributor09/29/10 - 05:59 AM EDT

Stock quotes in this article:HPQ, ORCL

By the time this article appears, we will likely know the next CEO of Hewlett-Packard(HPQ_). [Actually, we didn't find out yesterday.]

And leading the committee who selected the new CEO is Silicon Valley wunderkind Marc Andreessen. Andreessen was the public face of HP when it ousted former CEO Mark Hurd in August (after granting Hurd an estimated $35 million severance package to get him through in between jobs).

When HP and Oracle(ORCL_) crossed legal swords after Hurd became Oracle's next co-president 30 days after leaving HP, it was apparently Andreessen who called Larry Ellison to smooth things over.

HP shareholders might be surprised to learn, however, that Marc Andreessen owns exactly zero shares in HP. As an HP shareholder, I'm very disappointed that Andreessen and most of his colleagues on the HP board haven't dug into their own (deep) pockets to buy some HP stock.

I'd prefer feeling that my representatives on the board feel the same pain that I do when the stock tanks. For this reason, I've recently filed a shareholder resolution with HP to adopt high stock ownership requirements for all directors. I hope that HP will allow its shareholders to vote on this matter at the spring annual meeting.

Long-term shareholders have been disappointed in HP's stock returns relative to the S&P 500 index return over the last decade. As of Sept. 22, 2010, HP's 10-year stock return was 25.14% vs. -22.64% for the S&P 500.

Over that time period, HP's board has been criticized for lax governance practices, including (1) the recent decision to oust Mark Hurd for questionable behavior, while still paying him a rich severance package, (2) the decision to use "pretexting" to gather information on a Wall Street Journal reporter and some of HP's own directors in 2006, and (3) the decision to pay Hurd $98 million in total compensation (before severance) for the three years prior his departure even though HP's stock return for the three years prior to Aug. 6, 2010, was -2.33%.

The Corporate Library, a corporate governance ratings firm, has consistently rated HP's board as "high risk" for its inability to manage incentive compensation. Nell Minow, co-founder and executive editor of The Corporate Library, has called HP's board "a serial corporate governance offender."

I believe that HP's outside directors would be more vigilant and effective monitors of management, as well as better judges of effective compensation packages (including executive perks such as personal use of corporate aircraft, personal travel and meals expenses, and gross-ups at the expense of shareholders for these executive taxable benefits), if all of them owned a significant equity stake in HP which they had to dig into their own pockets to buy, rather than being granted stock or stock options.

........

[** This post is an excerpt of the full article, which is available on TheStreet.com by clicking here. Free Site.**]

Sphere: Related Content

Microsoft R&D Hasn't Delivered

06/10/09 - 02:01 AM EDT

MSFT , AAPL , ORCL , IBM , GOOG , HPQ , PFE

Eric Jackson

A couple of weeks ago at the D7 Conference in Carlsbad, Calif., Microsoft(MSFT Quote) CEO Steve Ballmer boasted the software company could create a lot of new things by spending $9.5 billion annually on research and development expenses. That's right, Microsoft spends almost $10 billion each year on R&D. That's more than any other company in the world, by a long shot.

R&D spending at many tech, pharmaceutical or biotech companies is treated as motherhood and apple pie. R&D is never a bad thing -- it's only good. More is always better. When you invest in research, you are investing in hope and possibilities. No matter how much you have lost in past projects that never panned out, every new dollar invested in a R&D project holds the possibility that it will deliver a large multiple of that dollar in future earnings before interest, taxes, depreciation and amortization.

Spending a lot on R&D would be a good thing for Microsoft if it was generating a large return from that investment. But that's not the case and it hasn't been the case for a long time.
Ballmer's comments show that Microsoft's senior leadership is proud of its continued investment in R&D and sees it as a source of competitive advantage for the company. On an absolute dollar comparison basis, Microsoft is making a much bigger bet than most in this area.

Microsoft spent 46% more than the $6.5 billion IBM(IBM Quote) invested in R&D last year, 252% more than Oracle(ORCL Quote) ($2.7 billion), 763% more than Apple(AAPL Quote) ($1.1 billion), and 390% more than Google(GOOG Quote) ($2.8 billion). Yet, most would conclude that Microsoft isn't 9 times as innovative as Apple, despite the discrepancy in how much money it is pouring into its research activities. Beyond its Office, Client, and Server core franchises, it's difficult to name innovations associated with Microsoft.

What is also remarkable about Microsoft's spending on R&D is the cumulative total racked up over the years. In the last 10 years, Microsoft has invested $62 billion in the R&D area. Microsoft could have bought back nearly 40% of its stock with that amount; it could have beefed up its dividend; it could have made a string of acquisitions which presumably would have continued to grow its top and bottom lines more than what it has achieved organically.

It's hard to know exactly what Microsoft has delivered for its R&D investment; it doesn't break out the numbers according to its five business segments. However, the two smallest business segments -- Entertainment & Devices, which includes the Xbox, Zune, and Windows Mobile software groups, and Online Services, which includes Search, and the Microsoft MSN, Hotmail, and Messenger properties - likely have taken the lion's share of the investment. Combined, these two divisions have delivered $71 billion in revenue for Microsoft over those 10 years and $15 billion in losses.

So, what Microsoft's $62 billion R&D investment has led to a $15 billion loss for at least those two businesses in 10 years.

Ballmer has argued that Wall Street investors are too focused on the short-term. One large Microsoft investor told me recently that Ballmer had complained loudly to him about the short-sightedness of investors who called on the company four years ago to do a large stock buyback and pay out a dividend with the excess cash on Microsoft's pristine Microsoft balance sheet.

Ballmer apparently said to this large investor: "We did everything they asked for. We did a huge buyback. We did the biggest one-time dividend ever. And what good did it do us?"

Ballmer's right. Total shareholder returns, or TSR, for Microsoft since it initiated its stock buyback and dividend program are down 25%. For the last 10 years, TSRs fell 47% (as of early April). This includes returns from dividend payments (including the big, one-time dividend of $3 a share), as well as stock appreciation, over that time.

Is 10 years a sufficient amount of time for a shareholder to wait to judge a company's management team for how it has performed? Those TSR numbers are clearly unacceptable and likely reflect poor investment decisions and loss of confidence by shareholders in the future prospects for the company.

Over that same 10-year time period (again, as of early April), Apple's total shareholder returns have been 826%, Nintendo's have been 243%, Oracle's have been 166%, IBM's have been 3%, and Nasdaq's returns have fallen 37% -- all substantially higher than Microsoft's TSRs.

If the predominant Microsoft strategy of investing more in internal R&D, steering away from acquisitions, and keeping tight control of the five business segments has led to these results in the last 10 years, should shareholders expect that the same approach will lead to different results in the next 10 years? Are we being "short-termists" or "flippers" of the stock by pointing out these results and suggesting they should have been much better?

R&D spending can lead to blockbuster returns. And Microsoft has a big advantage relative to its competitors in that it can invest enormous sums for future product development. But Microsoft, in being proud of the fact that it can spend almost $10 billion a year on R&D, is like a driller of oil and gas being proud of the fact that it can drill thousands of dry holes. It doesn't matter what you spend on R&D; it only matters what return you make from that investment for your investors. So far, Microsoft hasn't delivered on its promises.

A private-equity investor friend of mine once told me that he only liked investing in companies who practiced "small 'r' and large 'D' R&D" - meaning he wanted to see fewer ivory tower white coats and more of an emphasis on taking cutting-edge ideas and technologies out of the lab and building a real product and revenue stream around it. That process requires discipline, but it can be managed.

Microsoft isn't the first large company to face this challenge of effectively managing its R&D process. Hewlett-Packard (HPQ Quote) lost its way a few years ago. Pfizer(PFE Quote) and other "big pharma" companies are facing similar questions around their R&D activities.

Instead of patting Microsoft on the back for its continued spending on R&D, investors and the press should be asking, "Where's the beef?" The onus should be on the company's management to articulate why its status quo approach for running this function will lead to different results in the next 10 years. Otherwise, I can think of several better ways to spend the next $62 billion of cash flow.

At the time of publication, Jackson's fund held a long position in Microsoft.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

Sphere: Related Content

Hey Microsoft, Use Debt Sale for M&A

05/11/09 - 12:25 PM EDT

MSFT , CSCO , IBM , ORCL , SHLD , YHOO , GOOG

Eric Jackson

This morning brought news that Microsoft(MSFT Quote) will be selling five, 10-, and 30-year debt as soon as perhaps later today. This makes a lot of sense. Microsoft has been overly conservative in how it's managed its business since its founding, due to the personal biases of Bill Gates.

Investors couldn't complain in the early days, but the last 10 years have been grim from a shareholder-return perspective. Even when you count the dividends you've received as a shareholder Redmond initiated that program in the early part of this decade, you still have seen total shareholder returns of almost -50% from holding Microsoft for 10 years -- far below the Nasdaq and Microsoft's chief competitors like IBM (IBM Quote), Oracle (ORCL Quote) and faster-growing Apple (AAPL Quote) and Google (GOOG Quote). That's depressing for Microsoft investors and employees alike.

From a capital structure perspective, Microsoft's antipathy toward debt has always puzzled investors. Here is a dominant franchise, with perhaps the most pristine balance sheet in the world and a remarkable cash-generating ability, and yet it still keeps an enormous amount of cash on its balance sheet and refuses to use debt.

There are two open questions regards this debt issuance announcement: (1) How much debt will they issue? and (2) How will they use it?

If Microsoft's history holds, the amount of debt issued through this will be modest. They've indicated that the offering will be "benchmark" size, which indicates at least $500 million. If you compare the debt-to-cash ratios of larger peers Oracle and IBM, Microsoft should be looking to issue much more than that. Oracle has an equal amount of cash and debt, implying that Microsoft should look at taking their debt load to $24 billion. IBM uses debt even more aggressively. IBM's debt-to-cash ratio implies that Microsoft could take on $60 billion in debt easily.

If Microsoft does announce that it will raise a lot of debt, that news alone will likely send its shares lower. The market might figure it plans another high-ball offer for Yahoo! (YHOO Quote) or to take over Facebook at the $16 billion valuation Microsoft agreed to at their last round. How the market interprets the amount of debt Microsoft raises very much depends on how they will spend it.

Microsoft has begun buying back stock in the last five years and currently has an open plan to buy back an additional $40 billion in stock between now and 2013. For years, several Microsoft investors have called on the company to buy back stock as a way of reducing the amount of cash inefficiently sitting on its books to its investors.

Microsoft has obliged over the last five years, using about $100 billion in capital to pay shareholders dividends or buy back stock. Yet that strategy has led to total shareholder returns over that period of about -25%. To be fair to Microsoft, the simple strategy of dividending out cash to shareholders and buying back stock hasn't worked out for many companies over the last two years, as companies like Microsoft and Sears Holdings (SHLD Quote) have watched billions of dollars of their capital used to buy back stock at now-inflated prices.

Continuing to just buy back more stock is not the answer for Microsoft's low stock price. The company needs to give its investors a strategy for how it is going to grow. Investors are currently pricing in the likelihood that Microsoft will essentially run itself like a utility for the next 20 years -- as well as spend money in areas like search or the Zune, which will never return the capital spent. They believe Microsoft's top line will stay flat.

Microsoft management has given investors no reason to believe otherwise. We've heard little to excite us about the future growth of this company, more about its obsession with getting a deal done with Yahoo! and catching Google. That's not a corporate strategy.

The status quo isn't working at Microsoft. There needs to be a plan for growth at Microsoft, and it needs to involve acquisitions. The business press is littered with articles about how IBM, Oracle, and Cisco(CSCO Quote) will be using their strong balance sheets to pick off once-in-a-generation priced acquisitions in the next year -- yet Microsoft's name is never mentioned as another suitor. With its cash-generating ability and more capital from a debt offering, it should be in the mix.

To be successful in the long run, Microsoft needs people to green-light the best acquisitions and teams of people with the right skill sets to integrate them. Frankly, Microsoft hasn't shown it has either of those abilities. Microsoft investors don't need another expensive aQuantive deal or Facebook investment that smacks of desperation and has questionable long-term value for the company's shareholders. It needs to take a page out of IBM's and Oracle's playbook, though, and start doing deals to grow its top and bottom lines.

A big debt issuance, with a skilled acquisition team, and evidence of some exciting growth-related deals could suddenly show the market that this elephant can dance again.

TheStreet.com

At the time of publication, Jackson was long Microsoft.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

Sphere: Related Content

Betting on M&A Skills

We constantly hear about tech companies' strong balance sheets. While some, like Apple (AAPL) and Microsoft (MSFT), seem intent on building the largest pile of cash possible, others will no doubt use their cash to begin making acquisitions in the next year.

One lens to apply to your stock selection then should be judging a company's M&A purchase and integration skills. Some companies -- like Yahoo (YHOO) and EBAY -- have a track record of making lots of unrelated acquisitions at inflated prices (today we read about YHOO shutting down its 1999 GeoCities group because it's not competitive). EBAY is now in the process of unwinding itself from that failed approach and it's likely that things will change in this regard under Carol Bartz at YHOO.

When MSFT has made acquisitions (like aQuantive or its investment in Facebook), it's over-paid, giving the sense it's more desperate than thoughtful. Fears about its lack of M&A integration skills among its management team helped push investors to urge Ballmer to drop the YHOO bid last year.

The three tech companies who have proven themselves adept at making strategic deals at fair prices and then quickly integrating them into the fold are Oracle (ORCL), IBM, and Cisco (CSCO). There are more deals ahead for the sector and these companies have an edge for their shareholders in seeking out the best of what's for sale.

Position: Long MSFT.

Originally published in RealMoney.com on 4/24/2009 9:43 AM EDT

Sphere: Related Content

Oracle Wants Sun's Installed Base

It's fitting that IBM (IBM) and Oracle (ORCL) have been the ones fighting over Sun Micro (JAVA). Both have taken an aggressive approach to growing their top and bottom lines -- compared to, say, Microsoft (MSFT). The markets have rewarded growth over increased EPS as a result of retiring shares alone.

Sun Micro is a shell of its former self 10 years ago. It is simply being put to rest through this deal. For years now, it has struggled selling its older expensive OS (SPARC Solaris) in the face of Linux. Java has been popular but hasn't replaced that declining Solaris revenues.

Left alone, Sun would have continued to shrink. Why do ORCL and IBM want to buy them? Installed base. Both want those relationships which Sun has had for years so they can upsell new ORCL and IBM gear.

Sun's shareholders will ensure the deal gets done this time.

Originally published in RealMoney.com on 4/20/2009 7:56 AM EDT

Sphere: Related Content

All Public Company CEOs Should be Required to Attend Quarterly Earnings Calls

This morning, Vikram Pandit decided not to attend Citi's (C) earnings' call. To me, this is an affront to any C shareholder. Even in the best of times, a public company CEO should see it as a job requirement to be on these 4x a year calls. After taking billions from taxpayers, I'm amazed that Pandit couldn't fit this in his schedule and left CFO Ned Kelly to soldier on without him. Whatever conflict Pandit had, he should have rearranged it. The optics are terrible and optics matter these days.

Next week, Microsoft (MSFT) will report. Until the last earnings' call in January, Steve Ballmer had routinely skipped these opportunities to communicate with his shareholders -- leaving his CFO, Chris Liddell, to fend for himself. I simply can't understand such reasoning. Do you think Larry Ellison skips out on these kinds of calls? Never.

We shouldn't need Mary Schapiro at the SEC to have to mandate this: public company CEOs need to simply start seeing these calls as obligations -- not distractions.

Originally published in RealMoney.com on 4/17/2009 3:39 PM EDT

Sphere: Related Content