Analyst: Investor 'Exasperation' With HP at High

Thursday, 15 Sep 2011 11:04 AM

 

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Analyst Toni Sacconaghi Jr. with Bernstein Research says that the "overwhelming majority" of Hewlett-Packard's large shareholders are opposed to HP's proposed acquisition of business software maker Autonomy Corp., a roughly $10 billion deal that would be one of the biggest takeovers in HP's 72-year history.

He added that, while his firm considers chances low that HP itself might be acquired, "we don't see it as completely implausible" that a company such as Oracle Corp. could buy HP, particularly given the "boldness and unpredictability" of Oracle CEO Larry Ellison.

Sacconaghi said that "investor exasperation" with HP is the high. He said his firm's conversations with investors "continue to point to near universal opposition of the Autonomy acquisition" particularly because of its high price and the fact many investors don't think Autonomy has particularly strong growth prospects.

HP's stock price has fallen by 50 percent since CEO Mark Hurd resigned under pressure in August 2010 over ethical issues. New CEO Leo Apotheker has failed to inspire investor confidence, and his decision to buy Autonomy and try to sell or spin off the PC business — which had $40.7 billion in revenue last year — have further disappointed many shareholders.

Palo Alto-based HP's market value is now $47 billion, which has led to chatter about whether the company could be acquired, and if so, by whom. Sacconaghi said in his note, which he sent Tuesday to clients, that Oracle is the only "realistic potential suitor" and that Ellison's maverick streak might compel him to one day make an offer.

Ellison's hiring of Hurd to serve as an Oracle co-president also gives Oracle an edge in running the business. But Sacconaghi wrote that the odds of such a deal are likely low, since HP is involved in lots of "transactional" deals that would water down the percentage of Oracle's overall business that comes from "recurring" revenue streams such as maintenance contracts. Recurring revenue is attractive because it's guaranteed future revenue.

But Sacconaghi added that investors' unhappiness is largely tempered by a feeling among many of them that HP's stock remains "intrinsically attractively valued." But even at the stock's depressed value, Sacconaghi said he doesn't see a short-term catalyst that would move the price higher. He reaffirmed his firm's "outperform" rating on the stock and its price target for HP shares of $37.

HP shares rose 23 cents, or 1 percent, to close at Wednesday at $22.93.

"With no near-term catalyst, HP's stock requires patience — ultimately, we believe that the company is in leadership positions across all of its businesses except services, and should be able to deliver 8 to 11 percent annual (earnings per share) growth, on 2 to 4 percent revenue growth, if managed properly," Sacconaghi wrote.

"We believe that if HP's results don't improve, the company will ultimately restructure its portfolio and/or replace its leadership, either of which would likely serve as a catalyst for the stock."

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