I’m fascinated by the spin placed on political campaigns -- and now divestitures, too. In USA Today this morning, HPE CEO Meg Whitman was positioning its spin-off of services to CSC, at a little over half the price of what it cost, as a merger, not a divestiture. It is a merger, just not for HP which, under Whitman, is showcasing what can happen when financial types run a company they don’t understand. Given how well this news is being spun, I’ll need to explain myself, so let’s get to that.
How to Spin a Negative into a Positive
We certainly saw the spinning of a negative into a positive in spades with former HP CEO Carly Fiorina’s presidential campaign. She positioned herself as a successful CEO, highlighting how she grew HP, which was true but through acquisition using resources that existed before her, and didn’t mention that she was fired. The massive layoffs were positioned as difficult decisions that strong managers must make rather than the direct result of her inability to grow the company organically and the merger of two very similar companies with lots of overlap.
Given that nothing is 100 percent negative or 100 percent positive, spinning is the act of calling out the positive out of proportion to create a perception that is disconnected from reality but consistent with the reality that the reader would prefer.
What’s Going on with HPE?
So what is actually going on here is that HP, now HPE, is being operated largely by financial types who have surrounded Whitman, tell her what she wants to hear, and have put the firm on a path of selling off the assets to artificially inflate stock price. I say “artificially” because the stock price isn’t tied to execution success but to the downsizing acts. You see, if you sell off parts of a company, execute stock buybacks, and inflate dividends, you can increase the perceived value of a stock, but you are reducing the firm’s ability to execute.
Basically, these practices bleed a company until it lacks the resources to invest in the future, lacks the resources to execute in the present, and lacks the resources to execute a turnaround. It is similar to watching what likely would happen if you had a doctor who was only expert at amputation. Every time you got hurt, the doctor would just cut off the offending part and, other than the trauma of the amputation, you’d seem to be better -- until you ran out of parts to cut off or until the doctor harvested a critical organ.
The CSC Deal
This CSC deal is being positioned as a creative merger. HP gets CSC and CSC pays for the privilege of being part of HP. This is like selling half your house to someone else and claiming you now got half the buyer’s assets and they paid to give them to you. No one would do that deal and that isn’t what happened here.
HP got 50 percent control of the entity, which doesn’t give it control (just a board seat), and CSC management runs the resulting entity. I expect you’ll see HPE divest itself of this position over time. If you buy something, you control it; if you don’t, that doesn’t happen, and HP won’t control CSC. So while Whitman is right that the industry is consolidating, HPE isn’t benefiting from it. In fact, an even more simple analysis is that in a consolidation, the firm grows if it is part of the wave. The new HPE is substantially smaller than the HP it came from, so this is just creative BS.
Wrapping Up: Who Went with HP Inc.?
A few years back, I highlighted the strongest executives at HP when Whitman took over. Two that stand out were Cathie Lesjak, who has been CFO through a number of HP CEOs and was credited with being against the Autonomy acquisition that turned out so badly, and Tracy Keogh, the Harvard-trained Chief Human Resources Officer who was arguably the best HR head in tech. Both of these women were known for being the best in their fields and would intimately know the inner workings of HP. When given a choice of where they were going to work, they both picked not to stay with Whitman but to go with Dion Weisler, the well-regarded ex-Lenovo executive who was running the spun-out PC and Printer business.
In the end, spin aside, HPE appears to be executing a strategy of selling off the assets or otherwise benefitting investors who have short-term interests. This isn’t just an HPE problem. Over the last decade or so, stock ownership has largely moved from individuals to hedge funds and other investors whose interests are tied to quarterly performance. This is driving decisions like this and it doesn’t bode well for many public firms, both inside and outside of the tech market. It also helps explain the growing interest is going private or staying private.
I have to give credit to HPE’s communications team for creatively positioning a divestiture as an acquisition but, in the end, I think we are seeing the result of management that doesn’t understand the industry it operates in and that is executing a strategy of divestiture with the goal of being gone when HPE becomes non-viable as a result.
Rob Enderle is President and Principal Analyst of the Enderle Group, a forward-looking emerging technology advisory firm. With over 30 years’ experience in emerging technologies, he has provided regional and global companies with guidance in how to better target customer needs; create new business opportunities; anticipate technology changes; select vendors and products; and present their products in the best possible light. Rob covers the technology industry broadly. Before founding the Enderle Group, Rob was the Senior Research Fellow for Forrester Research and the Giga Information Group, and held senior positions at IBM and ROLM. Follow Rob on Twitter @enderle, on Facebook and on Google+