HP Tumbles as Strategic Shift Leads to ‘Lost Confidence’

Hewlett-Packard Co. (HPQ) fell the most in more than 23 years after issuing forecasts that missed analysts’ estimates and unveiling a set of strategic shifts that undermined confidence in the company’s management.

Hewlett-Packard, based in Palo Alto, California, dropped $5.91, or 20 percent, to $23.60 at 4 p.m. on the New York Stock Exchange. The decline was the largest since October 19, 1987, the market crash known as Black Monday. The drop erased $16.2 billion from Hewlett-Packard’s market value since Aug. 17, the day before the company’s plans were made public.

Leo Apotheker cut sales forecasts for the third time since becoming CEO in November, citing tepid demand. He’s spinning off the personal computer unit, dropping a five-month-old plan to put the WebOS mobile software on devices and purchasing Autonomy Corp. for $10.3 billion. While aimed at helping adding higher- margin products, the shifts are costly and may be time consuming, said Brian Marshall, an analyst at Gleacher & Co.

“People just lost confidence in the company,” said Marshall, who is based in San Francisco and has a “buy” rating on the stock. “People are realizing the financial model is in greater disarray than they previously thought.”

Standard & Poor’s and Moody’s Investors Service said they may cut their credit ratings on Hewlett-Packard’s debt. S&P gives the company its A rating and Moody’s ranks it A2, both the sixth level of investment grade.

Investors may be concerned by the amount of time it will take to execute the changes, Marshall said. Evaluation of strategic options for the PC unit may take 12 to 18 months to complete, the company said.

‘Stretched Thin’

Hewlett-Packard yesterday also issued sales and profit forecasts for the current quarter that missed analysts’ estimates. It will have to execute the strategic changes as it competes against rivals such as International Business Machines Corp. (IBM), Oracle Corp. (ORCL) and Dell Inc. (DELL)

At least six analysts slashed their ratings for the stock. Deutsche Bank AG’s Christopher Whitmore lowered his rating to “sell” from “hold” and said the stock is worth $20. Needham & Co.’s Richard Kugele cut it to “underperform” from “buy.”

“We are worried that HPQ may be stretched thin trying to do too many things at the same time,” said Shaw Wu, an analyst at Sterne, Agee & Leach Inc., in a research note today. Wu, based in San Francisco, downgraded the shares to “neutral.”

Apotheker is pushing a sweeping overhaul of the company that hearkens back to his two-decade career at SAP AG. (SAP) With the plans announced yesterday, Apotheker, 57, aims to make good on pledges to expand in cloud computing and challenge Oracle and IBM in more profitable products aimed at corporations. Business software delivered a 19 percent operating margin last quarter, more than triple the amount for the PC unit to be jettisoned.

‘Repeatable Revenue’

The Autonomy purchase is Hewlett-Packard’s largest since the $13.2 billion acquisition of Electronic Data Systems Corp. in 2008 and Apotheker’s biggest deal since becoming CEO. In February, he orchestrated the purchase of data-analysis company Vertica for an undisclosed price.

Hewlett-Packard also said it’s discontinuing products that run WebOS software, which it acquired last year in the $1.2 billion purchase of Palm Inc. The operating system, which powers smartphones and tablet computers, fell short of “internal milestones and financial targets,” Hewlett-Packard said yesterday.

With the shift, Hewlett-Packard “separates out a lower- return business from a higher-return business, and you’ll end up with one that is a better business long-term,” said Don Yacktman, founder of Yacktman Asset Management Co. in Austin, Texas, which oversees $11 billion and holds Hewlett-Packard shares. “Software is a more repeatable revenue stream.”

Apotheker’s Record

Apotheker, who hails from Germany and speaks five languages, rose through SAP’s sales and marketing operations, becoming sole CEO in 2009. He was ousted from Walldorf, Germany- based SAP, the top maker of business-management software, in February 2010.

His tenure as CEO was blemished by an attempted price increase during the recession that rankled consumers and by a clash with German unions on plans to cut jobs. He resigned after presiding over the company’s first revenue decline since 2003 as customers delayed software purchases.

He joined Hewlett-Packard after Mark Hurd departed as CEO amid a scandal over a personal relationship with a company contractor. Hurd now is a co-president at Oracle.

As he assumed control of Hewlett-Packard, the company faced slowing revenue growth and increasing competition in cloud computing, the delivery of software and storage over the Internet.

Software Expansion

Apotheker vowed to buy more companies with software expertise, improve product quality and boost spending on research and development.

While Apotheker is following up on his software pledge, he’s backtracking on efforts to make the WebOS operating system a viable competitor to Apple Inc. (AAPL) and Google Inc. (GOOG)

WebOS has been suffering, Hewlett-Packard said yesterday. The business had an operating loss of $332 million in the fiscal third quarter on sales of $266 million, chief financial officer Cathie Lesjak said on a conference call. Losses would have widened if the business continued, she said.

“We have better ways to use that capital,” than trying to revive WebOS, Apotheker said in an interview yesterday. “Sales of HP TouchPads were not meeting my expectations.”

In the PC business, competitors’ tablets have cut into sales and consumers are changing how they compute, Apotheker added. “We want to sharpen the focus of HP.”

Unwinnable War

Apotheker is exiting WebOS products just a month after the company named Palm’s former CEO Jon Rubinstein to head of product development and innovation for the personal systems group, which includes PCs, tablets and smartphones.

Apotheker said in March that all of the company’s PCs will feature WebOS, a shift away from machines that only run Microsoft Corp. (MSFT)’s Windows operating system.

“He’s decided he just can’t win that war,” said Maribel Lopez, founder of Lopez Research in San Francisco. “If he’s not going to be in devices on the PC side, it makes no sense to be in devices on the phone side.”

To contact the reporters on this story: Zachary Tracer in New York at ztracer1@bloomberg.net; Aaron Ricadela in San Francisco at aricadela@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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