Hewlett-Packard’s Pipe Dream

Hewlett-Packard’s (NYSE: HPQ) new CEO Léo Apotheker laid out a relatively simple formula for the expansion and improved profitability of the large technology firm that completely ignores the work of his successful predecessor Mark Hurd.  According to Apotheker,  the company can grow through the creation of new cloud computing applications. The new chief executive acted as if those clients would never do business with HP’s competition. The market had a positive reaction to his strategic vision. It should not have.

Apotheker believes that he can elbow aside companies which have already gone where HP will go. These include IBM (NYSE: IBM), his former employer SAP (NYSE: SAP), Oracle (NASDAQ: ORCL), Salseforce.com (NYSE CRM), and legions of smaller companies which decided two or three years ago that applications that run in the cloud appeal to corporate customers. Cloud products are accessible at multiple locations, and they save supposedly money on hardware.

Apotheker is also in a race with Microsoft. (NASDAQ: MSFT) Ballmer & company have come to the cloud business late, but the CEO of the world’s largest software company can afford to push billions of R&D and marketing dollars behind his effort. Microsoft understands that PC operating systems that reside on computers and servers have become less and less useful to its customers. The future of the world’s largest software company is based on Ballmer’s rush to embrace the cloud system.

Hurd decided that the fastest way to improve HP’s earnings was to aggressively cut costs. But, he was not blind to the need to diversify into software and services. He spent nearly $14 billion to buy IT consulting firm EDS three years ago. HP also bought ArcSight and several other companies that allowed HP to move in the general direction that Apotheker wants to push the company.

HP is trapped near the bottom of the tech food chain along with Dell (NASDAQ: DELL). Hurd did a reasonable amount to move the company into the industry’s hierarchy. Apotheker wants investors, employees, and customers to think he can. He is up against a wall of competition so there is a real chance he is wrong.

Douglas A. McIntyre