November 10, 2011--Hewlett & Packard
While still in their early 20s, after graduating from Stanford, Bill Hewlett and Dave Packard established an electronics company in Packard's garage with an initial capital investment of $538. They tossed a coin to decide whether it would be called Hewlett-Packard or Packard-Hewlett. Packard won but named their enterprise the Hewlett-Packard Company.
Of the many projects they worked on, their first financially successful product was an audio oscillator, which is essential to radio, TV, and other forms of wireless transmission. Their innovation was the use of a small incandescent light bulb (known as a "pilot light") as a temperature dependent resistor in a critical portion of the circuit, the negative feedback loop, which stabilized the amplitude of the waveform output. This "simple" solution allowed them to sell their version for $54.40 when competitors were selling less stable oscillators for over $200.
One of the company's earliest customers was Walt Disney Productions, which bought eight of their oscillators (at $71.50 each) for use in the Fantasound surround sound systems installed in theaters for the movie Fantasia.
The rest of the story is well known--before long they moved out of Packard's garage, got into the PC business, then printers, and so on. In spite of their recent much-publicized troubles, HP today employs about 325,000 and is the world's largest manufacturer of PCs.
That was then but this is now.
After decades of innovation and sharp business practice, HP more recently has attempted to grow by acquiring the work and achievements of others. For example, they merged with Compaq in order to enter the computer laptop market but quickly found that they couldn't make it work and lost billions in the process. CEO Carly Fiorina, who clumsily led that takeover effort was unceremoniously fired.
Even more recently HP moved into the software business and away from its dependence on things such as printers and hyper-expensive ink. For example, under the failed leadership of Léo Apotheker, they acquired Autonomy, a business software company based in England. They paid a king's ransom for Autonomy--$11.7 billion which represented an astonishing 80 percent premium for its stock. For the uninitiated, this means HP paid 80 percent more than the value of the stock at the time of purchase. Normally, a 50 percent premium is considered to be more than sufficient.
How then did this turn out for the parent company? Not so good. Within 24 hours of the deal being consummated, HP's market value plummeted by as much as $12 billion. (See linked New York Times story.)
You might wonder where the idea came from to go after Autonomy in the first place and why HP paid so much to take it over?
Hewlett-Packard did so on the advice of others. And for that advice they also paid royally. At least $30 million. And as is customary in such acquisitions, they also agreed to pay Autonomy's advisers to the tune of at least another $38 million. That's $68 million for basically worthless advice. In fact, less than worthless advice.
Who cashed in in the advice-giving business? A familiar cast of characters--Goldman Sachs, UBS, Bank of America, Merrill Lynch, and JPMorgan Chase.
And then there was HP's $2.35 billion acquisition of 3Par, an on-line maker of storage systems. If an 80 percent premium sounds excessive, how does a 242 percent premium? The highest ever in corporate history. For the advice HP sought for this embarrassing and costly deal, HP paid JPMorgan a mere $13 million. As these things go, chump change.
What happened to CEO Apotheker who initiated these financial fiascoes? He followed Carly Fiorina out the door. But after just 11 months on the job he received a pre-hiring, non-performance-based agreed-upon "termination" payout of $23 million. Ms. Fiornia, if you are curious, after six years leading the company walked away with $20 million.
Dave Packard's garage is now a national historic monument. All future HP CEOs should be required to spend a week working in it as part of their corporate orientation.
Of the many projects they worked on, their first financially successful product was an audio oscillator, which is essential to radio, TV, and other forms of wireless transmission. Their innovation was the use of a small incandescent light bulb (known as a "pilot light") as a temperature dependent resistor in a critical portion of the circuit, the negative feedback loop, which stabilized the amplitude of the waveform output. This "simple" solution allowed them to sell their version for $54.40 when competitors were selling less stable oscillators for over $200.
One of the company's earliest customers was Walt Disney Productions, which bought eight of their oscillators (at $71.50 each) for use in the Fantasound surround sound systems installed in theaters for the movie Fantasia.
The rest of the story is well known--before long they moved out of Packard's garage, got into the PC business, then printers, and so on. In spite of their recent much-publicized troubles, HP today employs about 325,000 and is the world's largest manufacturer of PCs.
That was then but this is now.
After decades of innovation and sharp business practice, HP more recently has attempted to grow by acquiring the work and achievements of others. For example, they merged with Compaq in order to enter the computer laptop market but quickly found that they couldn't make it work and lost billions in the process. CEO Carly Fiorina, who clumsily led that takeover effort was unceremoniously fired.
Even more recently HP moved into the software business and away from its dependence on things such as printers and hyper-expensive ink. For example, under the failed leadership of Léo Apotheker, they acquired Autonomy, a business software company based in England. They paid a king's ransom for Autonomy--$11.7 billion which represented an astonishing 80 percent premium for its stock. For the uninitiated, this means HP paid 80 percent more than the value of the stock at the time of purchase. Normally, a 50 percent premium is considered to be more than sufficient.
How then did this turn out for the parent company? Not so good. Within 24 hours of the deal being consummated, HP's market value plummeted by as much as $12 billion. (See linked New York Times story.)
You might wonder where the idea came from to go after Autonomy in the first place and why HP paid so much to take it over?
Hewlett-Packard did so on the advice of others. And for that advice they also paid royally. At least $30 million. And as is customary in such acquisitions, they also agreed to pay Autonomy's advisers to the tune of at least another $38 million. That's $68 million for basically worthless advice. In fact, less than worthless advice.
Who cashed in in the advice-giving business? A familiar cast of characters--Goldman Sachs, UBS, Bank of America, Merrill Lynch, and JPMorgan Chase.
And then there was HP's $2.35 billion acquisition of 3Par, an on-line maker of storage systems. If an 80 percent premium sounds excessive, how does a 242 percent premium? The highest ever in corporate history. For the advice HP sought for this embarrassing and costly deal, HP paid JPMorgan a mere $13 million. As these things go, chump change.
What happened to CEO Apotheker who initiated these financial fiascoes? He followed Carly Fiorina out the door. But after just 11 months on the job he received a pre-hiring, non-performance-based agreed-upon "termination" payout of $23 million. Ms. Fiornia, if you are curious, after six years leading the company walked away with $20 million.
Dave Packard's garage is now a national historic monument. All future HP CEOs should be required to spend a week working in it as part of their corporate orientation.
posted by Steven Zwerling at
5:20 AM
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