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posted: 4/13/2013 7:31 AM

HP CEO seeks turnaround with super server

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By Bloomberg News

SAN FRANCISCO -- After a board shake-up that investors said was overdue, Hewlett-Packard's Chief Executive Officer Meg Whitman is seeking to use a new line of servers to jump- start a multiyear turnaround of a company that has become a symbol of corporate mismanagement.

Chairman Ray Lane is stepping down while two other directors are resigning, Hewlett-Packard said last week. That's giving the 74-year-old computer maker a chance to rebound from a three-year stretch of falling sales, strategy shifts and management turmoil. Director Ralph Whitworth of Relational Investors will be interim chairman while directors seek someone with the "time, energy and ability" to lead the board and keep revival efforts on track, the company said.

Part of the campaign is Moonshot, a powerful, energy- sipping computer released Monday that's designed to win a place in the data centers powering the world's largest websites. On the heels of the second board revamp since early 2011, Whitman needs a hit product to convince investors that Hewlett-Packard can deliver high-margin technology to make up for a weakening printer business and diminishing demand for personal computers.

"They're in yesterday's technologies," Lawrence Haverty, a portfolio manager at Rye, New York-based Gamco Investors Inc., said in an interview on Bloomberg Television's "Surveillance." "It's a very, very hard hand for them to be dealt."

Hewlett-Packard's shares fell 1.5 percent to $21.97 on April 5, leaving them up 54 percent this year, compared with an 8.9 percent gain for the Standard & Poor's 500 index.

Investors showed dismay with past Hewlett-Packard moves, including the acquisition of U.K. software maker Autonomy Corp., by re-electing Lane and directors G. Kennedy Thompson and John Hammergren by slim majorities in March.

"Further evolution" of the board is coming, Whitworth, whose hedge fund owns about $800 million in Hewlett-Packard share, wrote in an April 4 blog posting. He said he supports Whitman and her staff's efforts to revive the company.

The board is intent on "moving beyond the challenges of the past few years so we can focus solely on supporting the HP team as Meg leads us through this herculean turnaround," wrote Whitworth, who joined the board in 2011 after accumulating a stake and making the case to management that he would bring focus and credibility to the board.

Hewlett-Packard is betting that Moonshot will appeal to the biggest social-media, cloud-computing and e-commerce sites, which are equipping data centers with millions of servers. These customers in turn are seeking to meet demand from users flooding the Internet with updates, photos and videos.

The $51.3 billion global market for servers, where Hewlett-Packard is second to IBM in revenue, is undergoing a seismic change. Customers such as Facebook and Google are opting to assemble systems tailored for their needs or source custom designs from low-cost suppliers instead of buying high-end machines from brand-name vendors.

Whitman, who introduced Moonshot during a webcast this week, has cast the product as proof that Hewlett-Packard is still capable of turning out relevant technology.

"This could truly be a revolution," she told shareholders at the company's annual meeting March 20. "This is not evolutionary innovation, this is disruptive innovation."

The stakes are high for Whitman, who became CEO in September 2011, succeeding Leo Apotheker, who was ousted after 11 months at the helm.

For much of the first year of her tenure, Hewlett-Packard's shares slumped as the company suffered from dwindling PC demand and the new CEO -- the fourth in three years -- came to terms with the enormousness of the challenge she faced. She outlined her turnaround plan in October and warned that growth wouldn't resume until 2014.

Hewlett-Packard kept falling through most of the following month, reaching a trough the day that the company said it would take an $8.8 billion write-down on Autonomy, which it accused of fraudulent bookkeeping.

Shares have rebounded 88 percent since then, compared with a 12 percent advance for the S&P 500. As a result, Hewlett- Packard's discount to the index on a forward price-to-earnings basis has narrowed to 58 percent from a low of 74 percent, just after the Autonomy write-down.

The company forecast fiscal second-quarter profit in February that topped analysts' estimates amid cost cutting and rebounding demand for enterprise services.

That's also a reflection of projections that have been pared back amid Whitman's dour warnings about the need for patience.

Dating from the 1930s, Hewlett-Packard created or popularized categories including handheld calculators, inkjet printers and corporate Unix servers. Underinvestment in new products and exposure to a personal-computer business eroded by the shift to smartphones and tablets, along with management upheaval dating back to Carly Fiorina, let Apple take the lead in the mobile arena while IBM raced ahead in enterprise computing.

Aside from its efforts in servers, the company is also introducing software and tablets for businesses. It seeks to revive printer sales with a new product that delivers laser printer speed and quality using cheaper liquid ink technology. Also in the lineup are servers that combine computing, storage and networking.

"HP's trying to do the right things," said Brent Bracelin, an analyst at Pacific Crest Securities in Portland, Ore. He has a sector perform rating on the shares. "Under the hood, there's still innovation happening at HP."

The challenge for Whitman is ensuring that it happens at a fast enough clip. The company is the biggest maker of personal computers and desktop and office printers, categories that are in decline. An attempt to build a franchise in smartphones and tablets with the 2010 acquisition of Palm foundered.

Hewlett-Packard's server revenue fell 7.5 percent to $14.1 billion last year, according to market researcher IDC. Earnings before taxes in the company's enterprise group -- which includes servers, storage and networking gear -- fell 18 percent to $1.08 billion in the quarter that ended in January.

Whitman has said she has no plans to break up the company.

At a late February Morgan Stanley conference, she said Hewlett-Packard would consider divesting "small businesses" or technology projects such as the Halo videoconferencing product that it sold to Polycom in 2011.

"But nothing at the level of our core operating divisions," she said, referring to the big units she aims to keep.

Still, the company said in a late December regulatory filing that it would consider disposing of businesses that don't meet its goals. Late last year analysts at UBS AG were projecting that Hewlett-Packard could boost its stock by separating into companies focused on consumers and businesses.

Talk of a breakup has died down in light of the stock-price run-up, as investors give Whitman a chance to prove that products such as Moonshot can keep the rally alive.

"The company is on a great track," Jeffrey Sonnenfeld, a management professor at Yale University in New Haven, Conn. "Meg has a very good plan."

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