In interviews for our book, Billion-Dollar Lessons, Paul Carroll and I talked to a number of CEOs about the kinds of things that can distort clear thinking. High on their list were quarterly conference calls.
While CEOs would prefer to deliberate carefully behind closed doors, they have to deal with a cacophony of questions every quarter from young MBA know-it-alls. If earnings, forecasts or other news are anything less than great, there will be a bunch of squawking (and downgrades) unless senior management can promise a strategy that will soon make things hum.
You’d be amazed how many acquisitions or cost-cutting moves are rushed to conclusion in the days or hours leading up to one of these conference calls. Or maybe you wouldn’t.
Imagine the thinking that went on in the executive suite at HP in the run up to last week’s conference call. Revenue and earnings were up in HP’s fiscal third quarter but missed the Street’s consensus, and executives knew they were going to have to lower guidance for the next quarter. Revenue for the PC business, a source of constant complaints by analysts, was down 3 percent year-over-year. Consumer sales were down a horrendous 17 percent. Adding to the gloom was the news that HP’s TouchPad was a dud, with a sell-through rate of less than 10 percent. The TouchPad, while an insignificant part of the HP business, was generally considered a barometer of the company’s innovation prospects.
You can picture the teams of executives holed up in conference rooms at HP headquarters in Palo Alto, CA, just down the street from the iconic garage where Bill Hewlett and Dave Packard launched the company more than 70 years ago and planted the seed that became Silicon Valley. Everyone is desperately searching for a story about a path to a brighter future.
What they came up with was really nothing more than the sketch of a strategy, but that was the best they could do under the time pressure.
The core of the story was the $11.7 billion purchase of Autonomy Corp, the British software company. Whatever you think of that acquisition, it is expensive. As one analyst noted on the conference call, “[Autonomy] is less than one percent of HP's revenues yet cost 15 percent of its market cap.”
To emphasize how Autonomy would transform HP into a software giant focused on high-profit business customers, and, perhaps, to forestall some nagging questions about PCs and the tablet failure, HP also announced that it was exploring the sale or spinoff of the PC business and that it was closing the WebOS device business.
Knitted together, HP’s press release trumpeted:
HP is taking bold, transformative steps to position the company as a leader in the evolving information economy. Today’s announced plan will allow HP to drive creation of long-term shareholder value through a focus on fewer fronts, thereby improving its ability to execute, invest in innovation and drive a higher-margin business mix.
But exactly what was HP going to do with that PC business, the one that represents almost a third of its revenues? As reported at AllThingsD:
CEO Léo Apotheker said on the conference call, all options are on the table, including a spinoff, sale to another company, sale to private equity, or even no transaction at all.
Apotheker also said that it would take 12 to 18 months to complete the process, whatever it turns out to be (if anything at all).
With that kind of specificity, why bother making the announcement at all? Also from AllThings D:
The reason for making today’s “strategic options” announcement is that it frees up management and the board of directors to take a deep dive and look at what’s best.
You couldn’t take some time "to look at what’s best" before scaring away customers and driving down the potential value of the PC assets? Or spell out how the lost of the PC business would affect HP’s relationships with the very corporate customers that you now want to rely on solely? Or address how your very profitable printer business will survive the lost of its biggest customer? Or make the case for how your struggling, legacy EDS assets can compete head-to-head with IBM? And so on...
Well, they needed a good story and thought this one might work. It didn’t.
Analysts and investors gave the story a collective thumbs down. There were numerous downgrades, and HP lost 20% of its market value, or more than $12 billion, the day after the call. That’s an expensive conference call.
Could such high-stake deliberations really be driven by the need to tell a good story at a quarterly conference call? Isn't that getting things backwards? Please share your comments below.
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