HP CEO Hunt for Growth Seen Weighing on Bonds After Rally

Hewlett-Packard Co. Chief Executive Officer Meg Whitman, who rewarded stock and bond investors in 2013, may soon be pressured to make acquisitions that favor shareholders over those owning her company’s debt.

Whitman, who took the helm in September 2011, spent last year repaying creditors -- cutting debt by about 40 percent -- to repair a balance sheet damaged by disastrous acquisitions while also eliminating jobs to boost profitability. The shares almost doubled and bonds outperformed those of technology peers.

Having improved Hewlett-Packard’s finances, Whitman is looking to expand, a process that will once again require dealmaking as the company plays catch-up in mobile and cloud computing. While stockholders often see growth as a cause for increasing their bets, bondholders tend to seek stability and financial health with limited risks.

“You want them to be successful and grow, but you don’t ever want them to jeopardize their balance sheet,” said Daniel Morgan, an Atlanta-based money manager at Synovus Financial Management Services, which owns Hewlett-Packard stock and bonds. “Acquisitions, at least recently, have been horrible.”

In each of Whitman’s first two years, sales declined at the Palo Alto, California-based company, a trend that analysts project will continue in 2014, according to data compiled by Bloomberg. The 75-year-old company has failed to win business in new markets to compensate for a slump in personal computing and a shift to cloud-based servers, away from big expensive boxes.

2013 Rally

Still, the shares surged 96 percent in 2013, more than triple the advance in the Standard & Poor’s 500 Index, as Whitman cleaned up some of the mess she inherited and promised to return more cash to investors. Prior to last year’s rally, the stock had plunged for three straight years, losing 72 percent of its value over that stretch.

The price of Hewlett-Packard bonds gained an average 2.3 percent last year, the best performance among the more than $100 billion of U.S. investment-grade debt linked to peers from Cisco Systems Inc. to International Business Machines Corp. and tracked by Bloomberg. That compares with an average 5 percent drop in 2013 for debentures issued by technology companies.

Whitman, 57, has already proven she can bring down the company’s debt load. When she took control, Hewlett-Packard had more than $22 billion in net debt, a number that was more than halved to $10.4 billion by the end of 2013.

Excluding its financing unit, the company now has a $1.7 billion surplus, compared with debt of $12.5 billion of debt when Whitman arrived, the CEO said this month.

Eliminating Jobs

Whitman, who spent 10 years as CEO of EBay Inc., has also cut costs at Hewlett-Packard, reducing headcount by 9.2 percent to 317,500 and bringing operating expenses down 3.6 percent. The CEO put a plan in place in 2012 to eliminate 29,000 jobs through fiscal 2014 to save as much as $3.5 billion a year.

The company has improved its cash flow by speeding up how quickly it gets paid by customers, holding less inventory and reducing the number of models of laptops, printers and servers it sells to focus on higher-margin offerings.

Whitman has thus far dealt with the most pressing problems, though she hasn’t addressed the company’s need to bolster sales, said Bill Kreher, an analyst at Edward Jones & Co. in St. Louis.

“They have a real problem with legacy businesses winding down over the next several years,” said Kreher, who has a hold rating on the stock. “If you’re talking about transitioning to software and the cloud, that gets back to the need for acquisitions.”

Smaller Deals

The company is considering deals for small and medium-sized businesses because the markets where it operates are changing rapidly, Whitman told analysts on a Feb. 20 conference call.

“We may need acquisitions in security, big data, mobility and cloud,” she said. “We will be very judicious.”

While purchases may be necessary to lure technology investors looking for growth, buying companies has not been a strength of Hewlett-Packard’s over the past half decade.

The $11.1 billion acquisition of Autonomy Corp. in 2011, orchestrated by former CEO Leo Apotheker, led to an $8.8 billion writedown a year later and a shareholder lawsuit. In 2010, the company spent a combined $3.3 billion on Palm Inc. and 3Par Inc., increasing debt without producing results.

Whitman is doing more to lure investors looking for dividend yield than those seeking another stock rally. She said in October that growth should match gains in U.S. gross domestic product over the long term. The company said half of the $6.5 billion it will generate in free cash flow this year will be paid to shareholders in the form of stock buybacks and dividends, a pledge Whitman repeated yesterday at the annual shareholders’ meeting.

Higher Yields

Kate Holderness, a spokeswoman for Hewlett-Packard, didn’t make executives available for interviews.

Even yield-seeking investors have more attractive options. Apple Inc., Intel Corp. and Cisco all have higher dividend yields than Hewlett-Packard’s 1.8 percent. Of the nine biggest dividend-paying U.S. technology companies, only Oracle Corp. and EMC Corp. have lower returns. Both spent more on buybacks last year than Hewlett-Packard paid in dividends and repurchases combined.

Hewlett-Packard today boosted its regular quarterly dividend by 10.2 percent to 16 cents a share. The increase will be effective around May, the company said in a statement.

With Hewlett-Packard’s business challenges, there’s no guarantee that the company will be able to keep generating money as fast as its peers, which have higher operating margins.

Happy Bondholders

“Having cash on the books doesn’t mean it’s always going to be there,” said Matthew Duch, a fund manager at Bethesda, Maryland-based Calvert Investments Inc., which owns short duration Hewlett-Packard bonds. “That cash can erode quickly.”

Bond investors happy with the status quo are urging Whitman to avoid any pricey deals that could threaten the repairs she’s made to the balance sheet.

Hewlett-Packard, reeling from the Autonomy disaster, has stayed away from acquisitions for more than two years. Instead, the company has been divesting parts of underperforming businesses, including the sale earlier this year of Palm patents to Qualcomm.

“From a bondholder perspective, things can go on for a long time the way they are,” said Dave Novosel, an analyst at Gimme Credit LLC in Chicago who has a buy rating on the bonds.

For stock investors, technology is viewed as a growth market. Hewlett-Packard has to prove it still belongs in that category at a time when companies like Apple and Google Inc. are redefining computing.

“There’s still a lot of work to be done,” said Peter Karazeris, an analyst at Minneapolis-based Thrivent Financial for Lutherans, which manages $90.4 billion and has a small equity stake in Hewlett-Packard. “You can’t shrink your way to success.”

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