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The true state of a "Union" and The HP Debacle ( 0) Printer friendly page Print This
By Michael C Feltham FCEA, ACPA, FSPA
Axis of Logic
Friday, Mar 4, 2005

It is sometimes surreal, how a number of disparate events trigger a thought process, which, in itself, has been fomenting in one's sub-conscious mind.

At last, that maven of M & A, Ms Carly Firiona has received her brown envelope. What took so long?

Now, this writer must confess, that Drs Hewlett and Packard have long been heroes: heroes of invention and probably, the true founders of Silicon Valley. Perhaps it is worth recalling how they started.

As star research doctoral graduates of Stanford, they wanted to develop a valve audio oscillator circuit, which would enjoy a number of unique applications. However, like most young would-be entrepreneurs they lacked capital. Thanks to Dean Berman of Stanford, they borrowed a few hundred dollars. Probably the first venture capital deal, as we now know it.

Their audio oscillator neatly dovetailed with the ambitions of a young film animator called Disney and was quickly utilised to make some of the first sound movies. Such is how dynasties are commenced.

Both Dave and Bill, as the liked to be known, rarely if ever wore ties: they operated the first Open Door, management policy and created a corporate culture - which they called "Doing things the HP way" - which is still case study material for today's managers. HP's staff were always considered a primary and valuable asset: and treated, accordingly.

Setting yet another trend, in later life, Dave and Bill were almost embarrassed at their financial success and having ensured that they had provided, comfortably for their kids and grand kids, gave their stock to the Hewlett Packard Foundation.

Now, as with most large organisations, once the original founders retire, there is invariably a succession problem. HP was no different. Lacking strong and motivating leadership, the company struggled with direction: fortunately, thanks to the cash cow of the printing division, which HP still dominate, globally, the business continued.

Enter the Wicked Witch of the West. Now, prior to acceding to the HP CEO role, Ms Fiorina was a Sales Exec with Lucent Technologies: yet another fallen star in the tech firmament.

This was obviously a lady with a mission: to make herself wealthy and to create hubris. The normal "Strategies" came into play. Sell-off various divisions, despite their huge success and global presence. Next, do a major Merger or Acquisition.

Now, in business, you have two potential avenues for growth: the most effective, in terms of corporate longevity is organic: build upon what you have. The second, far preferred by modern short-termist corporate rapists, is M & A.

Most rational people would realise that merging a successful company with a failing company can be a problem: it's OK, if the weaker company benefits from a stronger capital base, superior management and access to more powerful channels to market.

Who, however, in the wildest dreams would consider merging one deeply troubled company with another deeply flawed business? Ms Fiorina, that's who!

Compaq Computer, after years of struggling in the PC wilderness, decided to acquire DEC (Digital Equipment Corp): now DEC, themselves, were a problem. Their earlier expertise and success had been founded on Mini-Computers, when these were a viable option against the might of Big Blue's mainframes. But, as always, the world moves on. Downsizing, was already a massive reality. The evolution of the PC and the ability to network ever more powerful processors, created a revolution in corporate data processing. The DEC acquisition therefore made little sense. Compaq had been a true innovator: they had developed a new data bus, which rapidly became adopted by all IBM PC clones: they also developed the 386 series of PCs. Thereafter, however, they languished in the light of past success and seemed content to rest on their corporate laurels.

To Carly, though, Compaq seemed to offer a magic solution to HPs problems: market size. By ignoring the huge success of Dell and Dell's unbeatable direct sale business model, HP were already hobbling their own sales potential.

Now, in analysis, it seems obvious that if you merge one huge problem with yet another huge problem what you finish up with is an even bigger problem!

Of course, as Carly has departed with a huge cheque in the region of $21 million - for failing: why oh why can't we all be treated like this? We'd all fail each and every day! - the analysts and the corporate vultures are already gathering at the scent of blood.

The standard prescriptor is to un-bundle or break-up HP: Sell off the hugely profitable printing division etc. Nice for the investment bankers, the stock brokers and the other financial pimps: not so nice for the employees and not at all, what Dave and Bill would have wanted. Not nice, either for the US economy, or for the future of US tech. It is worth noting, by the way, that under Ms Fiorina's guiding hand, HP offshored production of PCs and laptops to Taiwan. Yet another nail in the coffin of US industrial might.

It is apposite, at this point, to quote some stats from S&P. Apparently the twenty largest M & A deals since 1995, on average under-performed the market by 13%! So, apart from the huge fees racked up by investment banks, CPAs lawyers et al, and the obscene rewards to directors, what the hell was the point?

So, all of this sorry episode set your scribe pondering: he asked himself, "What, precisely are companies for?"

Well in essence, there ought to be a symbiotic relationship between companies and the state in which they reside and operate. Yet, sadly, they don't; they have become the enemy. The enemy of the workers, their customers, the environment and the economy. These hostile raiders at the gates of sanity and society seem to totally neglect the more onerous aspects of noblesse oblige. There is nothing for nothing in this sad old world.

And now, we are faced with yet another form of corporate raider. This new breed emulates the activities of such as T Boone Pickens and Henry R Kravis of some few years ago, when Leveraged Buy-Outs were all the rage.

The new breed of raider is the Hedge Fund, awash with capital and seeking to buy quoted companies and return above average capital gains.

Short term greed versus long-term stability, seems to be their mantra. Hundreds of thousands of workers' futures are thus at risk.

Now, if a company is under-performing, then sack the Board and the executive managers and find someone who knows what they are doing!

Sadly, there exists a cosy and incestuous synergy, between equity funds managers and Boards, otherwise, these funds managers, (who, remember, are normally vicariously investing and managing your money, from your pension, life assurance, savings and investments), would have acted before.

As this article was being researched, perhaps the final pinnacle of the expression of financial insanity came to light.

Europe, which unlike the USA has signed up to the Kyoto Accord, is implementing carbon emission regulations. In future, all major carbon polluters, will be given a total annual allowance. Those who introduce effective "Scrubbers" and treatment equipment will find that they have "spare" carbon credits.

So, the latest form of financial pimping is to be trading emissions credits!

Already, in Europe, Emission Exchanges are being set-up and those involved, rubbing their greedy hands with glee, estimate that the potential size of this market by early 2006 will be $58 billion!

The corollary is simple: choice one: invest heavy capital to ensure your plant stays within its limit: choice two, ignore the environment, save the capital, buy spare credits and stiff the consumer, at the same time as increasing executive pay and stock options. Has Enron been forgotten, already?

At this moment in time, US companies are awash with nearly $1 trillion in cash.

From Businessweek's regular periodic analysis, earnings for the top 900 companies show earnings have increased by 25% in the last quarter.

What will these corporations do with the cash?

Probably, in the spirit of short-termism, raise dividends, since this pleases Wall Street, guarantees even more obscene levels of Board remuneration and ensures executive reputation. Also, of course, yet more M & A activity is on the cards, despite the reality of failure as stated above.

Yet, if this is so, how can these same corporations continue to deny workers' pay rises and worse, still avoid topping-up pension funds, which are languishing in the doldrums of under-funding?

S&P estimate a 12% increase in corporate dividends to circa $ 203 Billion in 2005.

It is time to re-think the role of the corporation in the 21st Cent.

Copyright: Axis of Logic

An abstract of this article by Columnist Michael Feltham is also published as a letter on Business Week.

Michael C Feltham FCEA, ACPA, FSPA
Shoeburyness, England

Michael C Feltham is a columnist for Axis of Logic.  See his bio and additional insights, analyses and forecasts at Feltham on the Economy.  By professional discipline, an accountant, who specialised in international finance and economic analysis in the 1970s. Until December 2001, he was an External Examiner and Moderator to Ashcroft International Business School at their Cambridge and Chelmsford faculties at MBA level. He writes widely on technical finance and economic matters. Michael is Founder and CEO of a software company and CFO of a New Media company.  You can reach Mr. Feltham at:

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