Acquisitions Require Special Skill – One Competitor to Snake-Bitten HP Has the Knack
International Business Machines (IBM) is the company Hewlett Packard (HPQ) secretly wants to be, one where high-margin service and software businesses support huge but slow-growing (at best) hardware divisions. But IBM got to its generally successful mix of products by tapping into a talent HP is clearly lacking: the ability to acquire and integrate other companies.
HP, as we all know now, is taking an $8.8 billion write-off largely attributed to last year’s acquisition of software company Automony. The reasons behind that loss are rather titillating, but they aren’t as pertinent to HP investors as the familiarity of the failure. The Autonomy write-down came just a few months after HP wrote down another $8 billion related to the $13.25 billion acquisition of Electronic Data Systms in 2008; and that followed a $3.3 billion write-down in August 2011 for costs related to getting out of certain (webOS) devices. The last one included closing down a big chunk of Palm, a smartphone maker HP paid $1.2 billion to acquire barely a year earlier.
If IBM recorded major acquisition-related write-downs in the past five years, please remind us. IBM has done some 50 or more acquisitions in that time, with many of them in software, so there are plenty to peruse. Mainly, IBM in recent years has been known for using acquisitions in products such as cloud computing, analytics and consulting services to spark growth and improve profitability in a huge, mature company.
IBM says acquisitions will continue to be key to its growth strategy at least through 2015. Its ability to pay reasonable prices and then smoothly integrate such targets – and usually, meet and beat performance forecasts while doing so -- starkly contrasts with HP’s much criticized experience of outbidding rivals and paying high, ultimately ridiculous, premiums. Sure, HP has had some successes with acquisitions. But the mistakes were so huge that they wiped out any of those benefits.
For investors, the glitch in buying into IBM now lies in share price valuations that have shot up as other big tech companies struggled. The shares trade at a PE ratio of about 14 and more than twice sales, just as it reported a worrisome drop in sales of big-ticket items, like mainframe computers, and some slowing of software sales. That share price drop in October followed a third quarter earnings report that missed revenue projections but hit profit targets. About a third of analysts tracking IBM recommend its shares now, while most of the rest rate them as hold. Warren Buffett’s Berkshire Hathaway (BRK.B) added significantly to its IBM stake last quarter. Sam Peters’ Legg Mason (LM) Value Trust sold out.
For IBM to have such trouble even while enjoying a relatively solid track record on acquisitions doesn’t bode well for investor in HP. About 70% of HP’s revenues come from slow-selling hardware products like PCs. To get the share price out of the gutter, HP investors will eventually want HP to buy companies that sell much hotter products. But who at HP has the talent to do this properly?
HP’s former CEOs have made for easy targets for the acquisition mistakes of late, and mostly for good reason. But let’s remember that they didn’t act alone.
Dee Gill is a contributing editor at YCharts, which includes the just-released YCharts Pro Platinum for professional investors.