Why H-P Buyback Is Bad News For The Economy

Wall street Journal : the company said it will spend $10 billion buying its shares, which are languishing near the 52-week low. The timing defies the tendency of U.S. corporations to buy their own stock during the high points of the market and avoid buy backs during the troughs.


The latest buyback also is clearly a nod to investors who have endured months of turmoil, from CEO Mark Hurd’s surprise resignation to a bidding war for 3PAR, a relatively obscure network storage company. Concerns about a leadership void and concerns about overpaying for 3PAR have driven H-P shares down to yearly lows.

It is important to put the latest authorization into perspective. The $10 billion comes on top of $8 billion in buybacks authorized in November 2009. The total far exceeds the amount of money that the company has spent each year on M&A for the past nine years, excluding 2008, when the H-P spent $13 billion on Electronic Data Systems, according to data provider Dealogic. Also consider that the buybacks total 17% of H-P’s market capitalization. Investors, of course, love the buybacks. H-P shares are up 1.75%, while the broader market is down by nearly that amount.

But looking beyond the corporate parameters of H-P, the buyback arguably sends a dispiriting message about the state of technology industry and the overall economy. Consider that the buybacks come as H-P is spending increasingly less on Research and Development. In 2009, the company’s R&D budget was $2.8 billion, not much more than the the $2.3 billion it spent in 1998. As a percentage of revenue, the drop in R&D has been dramatic. R&D was 2.5% of revenue last year, compared with 6% of revenue in 1998.

To be sure, H-P’s revenues have expanded greatly over the past decade since it acquired Compaq and Electronic Data Services. Nonetheless, the fact that its R&D has not kept pace perhaps signals that a company, once known for its innovating prowess, is taking the easier route in keeping its shareholders happy.
As the recent bidding war for 3PAR illustrates, it is easier (and logical) to spend billions buying technology that others have created than spending that money on R&D that may or may not produce a viable product.
But that is not ideal for the broader economy, which benefits from the creation of new products to help it grow and create jobs.

Amid great economic uncertainty, H-P likely figures it can get more bang for its buck by focusing on the financial engineering of share buybacks than on the engineering of new technologies that made the company famous.

Never Discount the Grumbling Workers

(Article : TheStreet.com. Image : http://fuckyoumarkhurd.com/)

Setting aside these more salacious details, I thought the most interesting new information came from Joe Nocera of The New York Times Friday. In his column, Nocera suggests the real reason Hurd was shunted aside was that he'd lost the trust and respect of the HP employees, and that charges of sexual harassment and inflated expenses merely masked that fact. Nocera illustrates this with some damning faint praise for Hurd from analysts and HP employees, both former and current:
"He was a cost-cutter who indulged himself."
"Mr. Hurd cares about one thing, how much money is in it for him. As an HP employee I see it every day. We don't have the tools to do our job, but he isn't doing without anything and doesn't care."
"He didn't have the support of his people. . . . he seemed to be the only one benefiting from HP's success"
"I was delighted to see Hurd go."
" . . . he lacks the moral character to be CEO."

I believe these latest revelations show board did lose trust in Hurd, thus providing reason to suggest he move on. However, I also believe Nocera has put his finger on a critical point: namely, the depth of HP employees' resentment toward Hurd for well over a year. About a year ago, for instance, I wrote about my belief that Hurd was not such a great CEO as what was portrayed by Wall Street analysts and investors -- and I remember being very surprised at the immediate and strong reaction I got from then-current HP employees. They were all united in their antipathy for Hurd.

They complained about how he'd cut the business to the bone but didn't have any ability to grow the company's revenues. They talked about his hypocrisy in forcing 5% across-the-board paycuts while doubling, tripling, or quadrupling senior executives' total compensation in the same year. Most of all, they complained of Hurd's total inability to connect with HP employees and a disregard for the vaunted "HP Way" of the past.

The comments and emails went on and on. Many pleaded with me not to share them publicly for fear of losing their jobs. Some of the comments I received for my most recent HP article, which published last Wednesday following Hurd's departure, further highlight the employees' sentiment:
"As a long-time HP employee, I have seen this incredible greed by our executives for some time while the employees have suffered income loss: loss of benefits and, more importantly, loss of jobs. There is no remnant of Bill and Dave's company left."
"Hurd did the same thing to HP that he did to NCR, a tech firm Hurd headed prior to his term at HP. He squeezes out profits in the short term at the expense of the long-term viability of the company. HP's IT information technology has been gutted, there is little to no growth in existing businesses, morale is terrible, teamwork is dead thanks to forced rankings, there is no innovation, and pretty much everything is outsourced.
"I agree there is nothing left of Bill and Dave's company. Working for them was such an inspiration. They were the epitome of humility and conservative frugality. They treated us so well and we were frugal too to repay them. Our management-development department worked hard to capture their style in our programs, to teach managers the "HP Way.'"

I remember chatting with some investors last year about these kinds of emails and comments. They immediately discounted them and defended Hurd. They said things such as:
"What do you expect from a bunch of workers? These are the whiners that Hurd probably already cut out of the business."
"Employees always complain. What matters is that Hurd's making the numbers. He delivers what he says he will."
"'The HP Way" -- who cares? That's not how business is run today. Fiorina should have whipped this company into shape, and Hurd finally went in there and did it."

I believe there's some truth both in the side of the employees and that of the analysts. But what's striking to me is just how easy it was -- before Hurd was forced out -- for outsiders to belittle the importance of employee satisfaction. Obviously people who comment on a story or email an author to complain are going to be the ones most upset about Hurd, and maybe there was a silent majority who thought he was doing just fine. For me, however, the quantity of strongly upset employees last year was a clear warning sign of trouble ahead for the company and for Hurd. You can't just stuff those kinds of feelings down for long without some problems cropping up down the road.

It's also interesting to reflect on the investors' comments now and see how quick they were to attribute HP's success to Hurd alone, and to discount the crucial nature of culture and of workers' feelings. I'm not saying all investors and analysts need to start holding hands and singing "Kumbaya" when they look at their price-to-earnings ratios. If nothing else, though, the HP affair shows that -- in this age multiple rounds of layoffs and real economic hardship that affects millions of workers -- investors need to examine the happiness of the remaining workers with the CEOs and senior executives who are leading them.

http://finance.yahoo.com/news/Never-Discount-the-Grumbling-tsmp-982139253.html?x=0&.v=1&.pf=family-home&mod=pf-family-home

HP Shouldn't Pay for Hurd's Mistakes

" NEW YORK (TheStreet) --HP's ousted and disgraced Chairman and CEO Mark Hurd screwed up and investors have to pay for it. I don't get it.

Despite concluding that Hurd's conduct "displayed a profound lack of judgment", HP gave him a big-money sendoff to the tune of $12.2 million in severance payments, an extension of the deadline to cash in options on 775,000 HP shares, pro-rata vesting and settlement of 330,177 performance-based restricted stock units, settlement on December 11, 2010 of 15,853 time-based restricted stock and eligibility for continued group medical and dental coverage for up to 18 months., according to an SEC filing retrieved through EdgarOnline.

Why should a single dime come out of the bottom line? Why should a single share be awarded to someone who, in his own words, "did not live up to the standards and principles of trust, respect and integrity" that he demanded of others at HP?
Make no mistake, Hurd wasn't hurting for the money. As Eric Jackson pointed out in his recent column titled Mark Hurd's Excesses Were in Plain Sight, Hurd's total compensation for 2008 was $43 million, making him the fourth-highest-paid CEO that year.
HP's board may think it is fair to reward Hurd for the work he did to set the company back on the road to success -- and there are few who don't acknowledge that the company improved under his leadership -- but what about the damage to HP's reputation that Hurd also inflicted in the end?

The performance of a leader must be measured -- and rewarded -- based on more than the numbers. Integrity matters. Trust matters. We're talking about "violations of HP's Standards of Business Conduct" by the man who held ultimate responsibility for corporate conduct.
Hurd should have been fired, but the board on which he had served as chairman didn't have the stomach for it.
It may appear that the board took the high road by pushing Hurd out, but the severance agreement shows that old-school, nepotistic boardroom behavior is alive and well in America.
The message to investors is clear: The instinct among board members to look out for their own is stronger than their sense of duty to shareholders "

Jodie [Fisher] Will Likely Get 300,000 Thank You Notes’

By Michael Corkery, Wall Street Journal

If ever there was a case of schadenfreude, it is on display by the employees, past and present, of Hewlett-Packard.
As one of worker put it, “we had an office party this Monday at HP HQ,’’ to celebrate the resignation of CEO Mark Hurd amid an expense account scandal. In short, dozens of readers identifying themselves as H-P employees or ex-employees have left comments on Deal Journal cheering Hurd’s resignation.

Hurd may have been beloved by Wall Street (H-P’s stock tumbled 8% on Monday, but rose more than fourfold during his five-year tenure at the H-P helm) but he wasn’t loved by everybody inside the technology giant where he had implemented draconian cost cuts, including laying off thousands of people.
“Many HP employees were dancing in the hallways today, the witch is dead. Morale was at an all-time low at lunch last Friday,’’ wrote one employee. “Jodie will likely get about 300,000 thank you notes.”
While expressing delight in his resignation, many objected to the “golden parachute” that will cushion the fall from grace. Hurd, who ranks among the top paid CEO’s in the nation, will walk away with about $28 million in severance and stock options.“If any employee was found fiddling with their expenses they would be marched out of the building and tossed into the street. No compensation. Why then should Hurd get any compensation?” asked one Deal Journal commenter.
There were some who called out Hurd’s apparent hypocrisy: A CEO who was ruthless in his efforts to cut expenses was accused of falsifying his own expense reports.
A reader identifying himself as Joe the engineer from HP wrote: Hurd’s employees left in droves (including me). The rest would have left when the economy got better… those that he didn’t fire, anyway. I love watching all this happen to him, couldn’t have happened to a better guy. Thanks Mark for making me take all that ethics training - looks like YOU were the one who needed it.
Judging from the comments, much of the animosity appeared to come from EDS, the software company that H-P acquired in 2008.
An ex-EDS employee writes: “God he deserved it. The way we (EDS ) employees were treated after the merger, was just terrible. HP made their numbers basically through the EDS division and we got rewarded with a 20% pay cut. Mark also took a pay cut on his base salary - note base salary not on his bonuses! I am glad that he will be using his bonus money to pay his lawyers.”
Of course, it is unclear whether such comments are a representative sampling of the H-P morale or the venting of a few disgruntled workers. But it is clear that Hurd didn’t inspire much love from some corners of the company.

H.P. Ousts Chief for Hiding Payments to "Friend"

Yes !!!

"conflict of interest, failed to maintain accurate expense reports, and misused company assets".

"The woman’s lawyer contacted the company in late June, charging sexual harassment. While the directors were investigating that charge, they found inaccurate expense reports that covered payments made to the woman. The directors said, however, that the sexual harassment charge was unsubstantiated.

The board charged that Mr. Hurd, 53, failed to disclose his use of company funds. It urged Mr. Hurd to resign, but he balked and offered to compensate the company for the disputed funds, said to range from $1,000 to $20,000, according to a person close to Mr. Hurd who was briefed on the situation but was not authorized to speak publicly.
The board, however, insisted. “This was a necessary decision,” said Marc L. Andreessen, a venture capitalist and a director.
...
Mr. Holston also said Mr. Hurd used inaccurate expense reports to conceal the relationship with the woman. Mr. Hurd, who is married, has denied having a sexual relationship with the woman, according to the person briefed on the situation. Mr. Hurd declined comment.
Gloria Allred, the celebrity lawyer who has agreed to represent the woman, said, “We want to make clear that there was no affair and no intimate sexual relationship between our client and Mr. Hurd.” She declined to make the woman available for an interview or to identify her.
The company’s stock plummeted almost 10 percent on Friday on the news of Mr. Hurd, known for his straight-talking, analytical approach to business. Mr. Hurd rewired H.P. through layoffs, acquisitions and relentless cost-cutting measures.

The woman worked for H.P. between the fall of 2007 and the fall of 2009, having been hired by the office of the chief executive, the company said. Sources close to the company and familiar with the situation said that over a number of months, the contractor attended events for H.P. in Asia, Europe and the United States, and often dined alone with Mr. Hurd after the events. The contractor’s fees ranged from $1,000 to $5,000 for events in the United States and up to $10,000 for overseas ventures.

Even though the same contractor was present, Mr. Hurd said that he dined alone or with a different person on his expense reports, these people said.
A person briefed on this situation said Mr. Hurd had described the situation as “surreal and bizarre.” Mr. Hurd has denied any romantic context in the relationship with the contractor and talked about the board being swayed by the potential public relations problems that would follow accusations of sexual harassment.

Mr. Hurd, who was in the midst of contract negotiations with the board, did not file his own expenses, this person said. H.P.’s board and Mr. Hurd had, over the past month, been negotiating a new contract that would have had him earning $100 million over the next three years, according to a person briefed on the meetings. "

http://www.nytimes.com/2010/08/07/business/07hewlett.html?_r=1