$23B of Silicon Valley Cash Heading East…

August 19, 2011

So we now have a pair of $10B plus technology acquisitions this week after an upside Cisco number last week.  Is it 1999? Not so much, especially after today’s action.  And with apologies to the Purple One if anything it’s better, in 99 no one would dream of using cash with so much inflated currency to toss around.    On the face of it, it would be hard to imagine a more resounding vote of confidence in the future of technology and the economy than 23 billion simoleans spread across two conference tables in Mountain View and Palo Alto, on their way to Chicago and London, respectively.  If only it were that straightforward.  And to boot they were both guided to be accretive, though HPs guidance seems like a bit more of a stretch,   As we have discussed, GOOG is actually paying much much less for what they are after than the headline number, though they have been mistakenly accused by many of acting in the same fashion as HP; namely panic.  GOOG at least had enough confidence in what they  were doing to put the big ugly number in the first paragraph.


The fact that HP included the share price to be paid for Autonomy (UK) to the second decimal point ($42.11) in its earnings release but didn’t bother to note in its release that it’s a $10B deal really says all that need be said about HP.  It’s a net $9.5B deal for a $1B revenue company that’s growing 10% though with exceedingly high margins.  Nice to see that the Board shake up didn’t change HPs tendency to dramatically overpay (how is 3Par doing anyway?) , and incredibly ironic that these two deals are likely to be mentioned in the same breath with regard to their profligacy.  Outside of providing the one and only positive valuation comp for CRM (though that’s only on an EV/Sales basis at 10x vs 7x, HP paid a paltry 35x EPS vs 100X at CRM, one wonders how long investors will pay an additional 50 points for the word “cloud” in this market), who proved once again after the close that no matter how large the top line gets they are incapable of making more than 30 non GAAP cents in any given quarter, it’s hard to see what this deal accomplishes given the size of the rest of HP.   My math says the deal adds $0.15 in  EPS to HP’s annualized $4.85 run rate at the cost of most of its $13B cash balance.  That might be accretive after a year given low debt costs and zero cash yields, though let’s remember GOOG paid a net $9B for $12B in modestly profitable growing revenue and still has $30B of cash on the balance sheet.


The final point of intersection of these two deals was the announcement of plans to shutter HPs smartphone and tablet operations and try to monetize the Palm WebOS operating system they are built on. This should provide a golden opportunity for those who see disaffected Android OEMs rushing to alternatives to be proven right.  Thus I will be willing to entertain wagers that we will not see HTC,  Samsung or LG looking to buy WebOS.  Further, unless this decision was taken yesterday and it may well have been, one might assume some of these discussions may have already happened.  It seems clear that there may not be more sufficient room in developer land for more than three major mobile OS’s (somewhat generously including Win7 as major at this point, and whatever RIMM is doing makes four) thus my wager is that WebOS ends up next to MySpace.


As for the PSG potential spin and any notion of value at HP, I have had yet another experience this evening to dissuade me of that notion.  Which is to say, it’s typically more productive to search for value in companies that make products that actually work.   A surprisingly fair amount of my initial short inclination, along with the company’s previous acquisition track record (3Par, 3Com, Palm)  was driven by the sublimely terrible HP lap top that, after cascading keyboard, battery and hard disk malfunctions over the last year was finally put to rest last week in favor of the delightful Lenovo on which I currently tap.  Unfortunately also on the Lenovo is HP printer installation software for the device that my son received for free (still not a great deal) with his recent MacBook purchase (I am the sole Windows user in the house).  It’s still running, despite the removal of the disk an hour ago after heaven and earth was moved to make it function with Snow Leopard 10.6.  Add the multi function paperweight in the triple nickel downtown and that makes a trifecta.  Admittedly not scientific, but 100% failure has to be meaningful on some level.   Dell continues to look like a much better place for those seeking value in hardware.  With a $25B debt load and now $3B in cash HP is a few bad breaks or a deep recession away from existential problems post the Autonomy deal, though again still trades at a 100% plus EV/Sales premium to long suffering ALU.