The HP Way, and How It Completely Screwed HP

These days Hewlett Packard can't do anything right. But, in particular, it really can't do software. One year after paying $11 billion for Big Data search outfit Autonomy, HP is taking a $8.8 billion write off on the deal, saying that Autonomy cooked its books prior to the acquisition.
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Autonomy founder Mike Lynch at HP's Global Partner Conference in February 2012.Photo: HP

These days Hewlett Packard can't do anything right. But, in particular, it really can't do software.

One year after paying $11 billion for Big Data search outfit Autonomy, HP is taking a $8.8 billion write off on the deal, saying that Autonomy cooked its books prior to the acquisition.

"HP now believes that Autonomy was substantially overvalued at the time of its acquisition due to the misstatement of Autonomy’s financial performance, including its revenue, core growth rate and gross margins, and the misrepresentation of its business mix," HP said Tuesday in a press release.

In short, HP finally agrees with what pundits have been saying for more than a year. The Autonomy deal was a stinker. HP couldn't get anyone on the phone to talk about software strategy on Tuesday. The company said it wanted to focus on its earnings.

It's the latest in a string of failed high-profile acquisitions by a mismanaged company, but it's more than that. Autonomy was also supposed to be HP's big shot at moving into the high-margin software business that's kept its two biggest competitors -- IBM and Oracle -- chugging along. But it shouldn't be a big surprise that the acquisition has proved to be a colossal failure. If HP has proved anything over the past decade, it's that it doesn't do software, at least not the sort of enterprise software that big companies pay lots of money for so they can manage their data and corporate assets.

In the corporate world, the HP Way has been to sell the servers and professional services that companies need, and then to partner with big software companies like Oracle and SAP for the applications.

This has left HP holding the bag with low-margin businesses, while its competitors can roll everything into a one-stop-shop type of product that's much more profitable. "When you talk to CIOs they tend to look for an integrated set of solutions," says M.R. Rangaswami, a San Francisco-based investor in enterprise software startups. "IBM has a great story -- all the way from hardware to the software and services. Oracle has a very similar story as well, where they can take you from hardware to applications and services."

"When you look at HP, they're missing the key ingredient, which is that software stack," Rangaswami adds. "They don't have the database products. They don’t have applications."

The problem is that HP has long been a company where hardware is king. Bob Bickel learned about this back in 2001 when HP acquired the software company he worked for, Bluestone Software.

Bluestone sold the kind of software developers were using to build web-based applications for the corporate world, but it competed with an HP partner, a company called BEA Systems. BEA was the market-leader at the time. And so, Bickel says, HP had a choice: to push its own product on HP's servers, or to keep on selling BEA's software.

For HP, where hardware was king, the answer was a no-brainer. "The hardware guys just cared about selling servers, and they knew they didn't sell as many servers selling Bluestone."

So the $470 million Bluestone acquisition failed, but HP's hardware group kept on moving product. It fostered a culture where the best people focused on expanding mature product lines rather than taking chances on something new and innovative, Bickel says.

"I think they did have a hardware DNA, and it drove a lot of their decision-making," says Jason Pressman, a managing director with Shasta Ventures, a venture capital firm that invests in business software startups.

But lately, under pressure from low-cost Asian competitors, the server business is becoming a low-margin game. And that puts HP in a tough spot.

To top it off, HP has missed the boat on the major trends that are rocking the corporate IT -- cheap, easy-to-use cloud computing services such as Amazon Web Services, Salesforce.com, and Workday; and the quick uptick in business use of consumer devices like mobile phones and tablets.

So at the very time when it should be investing in cloud computing software or tablets for the enterprise, HP finds itself with its back against the wall, cash-strapped and less able than ever to make another Autonomy-sized acquisition. Its market cap -- which dropped more than 10 percent on Tuesday -- is down to $23 billion, and it has just over $11 billion in the bank.

And after years without a hit product, the company's reputation may be irrevocably tarnished.

"Bright technology people don’t want to go there," says Bickel. "If you're coming out of college and you're a really bright kid, why would you want to go there?"

Pressman isn't quite so harsh, but he agrees that it's still not clear what HP is going to do to attempt to correct its course. "It really feels that they're strategically adrift and they're not really committed to any one sector," he says.