Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM Wednesday, January 26, 2005: Anyone
can become a reporter for a financial publication. And often anyone does. Carol
Loomis is anyone. She works at Fortune Magazine. She graduated from the
University of Missouri, with an undergraduate degree in journalism. And as far
as I can see, she has zero qualifications to be a financial reporter.
She is, however, one of Fortune Magazine's star reporters and thus carries
huge clout in the business community. She had a material role in promoting Carly
Fiorina's star. As you may remember, Carly is the lady who came out of Lucent
to screw up Hewlett-Packard by merging it with Compaq. As everyone knows, Carly
is not one of my favorite people. The only thing she has ever delivered for HP
shareholders is trouble and strife. The merger with Compaq was and is an unmitigated
failure for poor, suffering HP stockholders. And fortunately, I've kept my readers
out of HP's horrible stock with constant warnings.
Carly Fiorina joined HP in July, 1999
Ms. Loomis does a total hatchet job on Carly in this week's issue of Fortune.
What's amazing to me is that nowhere in the entire article does Ms. Loomis apologize
for the heavy part she played in destroying one of America's finest companies
If there is a moral here, it is the obvious one: Be very wary of what you read
in the press. Know that reporters have axes to grind, missions to push and
companies to hype. Ms. Loomis was obviously smitten by Carly and motivated by
strongly promoting women executives -- whom she identified with (if only vicariously).
Now she seems to have a personal mission to save her own credibility, by, amongst
others things, calling Fiorina a liar.
As a member of the press, my personal motivation is twofold. First, warn investors
(like me) off obvious disasters. The game in investing today is capital preservation.
Cash (even in a mattress) has been a better deal than HP stock under Carly Fiorina.
Second, find decent investments -- a task that is far more difficult than warning
I recommend you
read Ms. Loomis' story on HP's Carly Fiorina in Fortune -- not because
it's a decent piece of financial journalism. It's not. It's vacuous. It's weak
on research. It reads as though Ms. Loomis is trying to compensate for her previous
hyping by dumping on Fiorina and killing the poor company. Excepts:
"Why Carly's Big Bet Is Failing. Buying Compaq hasn't paid off for Hewlett-Packard's
investors. Not by a long shot. Now, nearly three years after the merger, there
is still no easy solution to HP's problems. ...
So it is right
to ask whether this whirlwind (of Carly's fame) has succeeded. And inevitably
that question must be answered in two parts. First, under the only lens that
matters, did the famed merger that Fiorina engineered between HP and Compaq
produce value for HP's shareholders? Second, with that merger nearly three years
past, is HP in shape to thrive in its brutally competitive world?
are no and doubtful....
and overpowering problem here is that HP's shareholders paid $24 billion in
stock to buy Compaq and in exchange got relatively little value. In fact, so
little value was secured that accounting rules could force HP to write off a
chunk of the $14.5 billion in goodwill assets it set up on its books after the
In the way that mergers workand this is the true, if seldom recognized,
crime of the dealHP's issuance of roughly 1.1 billion shares to Compaq's
shareholders, to be added to HP's existing 1.9 billion, means that HP sold
about 37% of its assets to the Compaq crowd. Among those assets is that
gem of a printer business, whose 40% market share (according to IDC) makes it
one of the great franchises in the world. To sum up the damaging mathematics:
In the beginning, the old HP shareholders owned 100% of the printer business.
After the merger, they owned only 63%. ...
September 2001, when the Compaq deal was announced, HP shares have been a dead-in-the-water
asset. Recently, at about $20 per share, HP was 13% below its price just
before the merger news hit the market. That doesn't compare well with anybody
that counts, not even archrival IBM, down 6% for the same period. On the flip
side, HP's chief competitor in printers, Lexmark, rose by an impressive 60%;
and HP's nemesis, Dell, absolutely thrived, leaping almost 90%. The Lexmark
record is especially telling given that it hints at how well HP's printer business
might have done had it been spun off into a stand-alone company. ...
Stay with us
as we de-layer just how much HP makes. Bottom line, according to Generally Accepted
Accounting Principles (GAAP), 2004 profits were $3.5 billion. That's a dull
4.4% of $80 billion in revenues. Nor does it stack up well against assets of
$76 billion (the ratio is 4.6%) or stockholders' equity of $37.6 billion (9.3%).
When the next FORTUNE 500 comes out with its performance rankings for such key
measures as return on equity (in which the 500 median is likely to run about
14%), this huge company will place way down the list.
HP's 2004 profit
figure, however, was reduced by certain charges (including restructuring items
related to the merger) that the company prefers not to think of as operating
expenses. So in reporting to Wall Street, HP adds back these charges and arrives
at a non-GAAP profit figure of $4.1 billion, which is roughly equivalent to
operating earnings after taxes. The pretax operating earnings are $5.3 billion.
And of thatget ready for a heavyweight and a lightweight in the ringthe
printer operation accounts for more than $3.8 billion, while the rest of the
company tags along with about $1.5 billion.
some outsiders hypothesize that HP is internally allocating every cost it possibly
can to printers so that it can keep profits down to a level that will not suck
new competitors into the business. ...
In any case,
it is the non-GAAP profits that Wall Street analysts run with, dwelling almost
always on the twists and turns of today. ...
But no one
spends much time remembering that even HP's best quarters in computers are
so far away from what the company forecast in its merger proxy (and in marketing
"road shows" as well) that it is embarrassing. This proxy was
sent out by management and the board in February 2002 (a point at which no one
could claim ignorance of 9/11's effects). The document ... said that integrating
the two companies' operations and facilities would rationalize the product line,
produce billions in savings, and create computer businesses with respectable
the integration part of this plot worked fine: Products were successfully meshed,
and billions in costs were cut. ... When the integration was artfully completed,
the hardware parts of the computer operationsthe source of nearly $40
billion in revenues last yearstood there naked, barely making profits.
And the $13.8 billion computer services business, though certainly a far better
earner than hardware, not only didn't make its 2003 goal but backslid in 2004.
Here is what
the proxy statement forecast for operating profit margins in 2003 and how far
away from these targets HP was even in 2004:
In dollar terms,
of course, these percentage shortfalls translate into missed billions. Had HP
made the margins on its computer businesses in 2004 that were forecast for 2003
in the proxy, and had all other things been equal, pretax operating earnings
last year would have been almost $2.4 billion higher than they were.
That would have increased the pot from $5.3 billion to about $7.7
When you have flubbed a forecast so completely, you may also have blanked out
memories of the deed. Fiorina herself needed to be reminded where these forecasts
that FORTUNE was questioning her executives about had come from. ...
All this leaves
open the possibility that the forecasts were just so much proxy-fight froth,
never meant to be believed. ...
In this exercise of very large judgment calls, some Wall Street analysts have
an implicit opinion: They argue today that there is no value in the price of
HP's stock for computers. That is, they think the stock would be selling where
it is were HP simply a printer company. ...
So the CEO's
job at HP is exceptionally difficult, perhaps beyond the ability of anyone to
handle well. Still, the latest proxy available, for 2003, shows that Fiorina
was paid around $7 million in cash and options. It's therefore fair to
hold her to a high standard. ...
the merger proxy, Fiorina has not served herself by habitually engaging in financial
forecasts that meet analysts' misbegotten calls for "guidance." As
a new CEO she got caught flat-footed twice with her forecasts when the bursting
of the tech bubble destroyed earnings. Much more recently, in December 2003,
she told analysts that HP thought it could increase earnings per share by more
than 20% annually. That is an extravagant ambition for any giant company (see
"The 15% Delusion"), let alone one trucking along in a tech industry
often described as "maturing."
The folly of
big promises became terribly apparent last summer (just a short time after Fiorina
gave a totally upbeat speech at Allen & Co.'s big Sun Valley conference).
Early on Aug. 12, Fiorina shocked analystssome of whom had been dragged
from their West Coast beds by 4 a.m. phone callsby announcing that earnings
per share for the July quarter just ended would be nearly 23% below the figure
analysts were expecting. ... "
do I think this funny, crazy, ironic, etc.? Today's
Wall Street Journal writes: "The French government has just finished
helping Walt Disney Co. bail out Euro Disney SCA, the operator of two Disney
theme parks outside Paris. A state-owned bank is contributing around $500
million in investments and loan concessions to save Euro Disney from bankruptcy.
This comes after 17 years during which French leaders have spent hundreds of
millions of dollars and countless hours to ensure that the land of Monet could
keep Mickey Mouse. Still saddled with debt, Euro Disney is gambling that expensive
new attractions and an improved tourism climate will deliver a turnaround.
In an interview last fall as the rescue negotiations hung
in the balance, French Prime Minister Jean-Pierre Raffarin vowed not to let
Euro Disney go bankrupt. "We are grateful to the American people and have
lots of respect for their culture," said Mr. Raffarin."
unemployment rate is 10%, about twice the U.S.'s. Disney accounts for 43,000
and according to the Journal, ranks as the biggest employment site in the Paris
region, attracting over 12 million visitors a year, more than the Louvre Museum
and the Eiffel Tower combined. In October President Jacques Chirac, during a
trip to Vietnam, called the spread of American culture an "ecological disaster."
France subsidizes its film industry to counter the influence of Hollywood, imposes
quotas on non-French movies and songs on the airwaves, and officially discourages
the use of English words such as "e-mail."
on the Nigerian scam front: Today I received this email from my new
Nigerian friend. I suspect he's annoyed I haven't sent him the $500 he wants
to "normalize" my bank account. Once he gets the $500, he will send
me the $25,000 in funds that are mine to claim in his Nigerian bank. Here is
his email. Below is my favorite picture of a flying pig.
ATTN: HARRY NEWTON,
THIS IS TO CONFRIM
FROM YOU WHAT EXACTLY IS YOUR PLAN TOWARDS YOUR FUND.
DID YOU STILL WANT TO CLAIM THIS FUNDS OR NOT? WHY DONT YOU DO WHAT I ASK YOU
TO DO SINCE LAST WEEK?
LET ME KNOW WHAT THE PROBLEM IS?
ENG. BEN GIWA.
It's time to pay your taxes.
Father O'Malley answers the phone.
"Hello, is this Father O'Malley?"
"This is the IRS. Can you help us?"
"Do you know a Ted Houlihan?"
"Is he a member of your congregation?"
"Did he donate $10,000 to your church?"
"No, but he will".
bar room joke:
As the woman finishes her drink, the woman to her right says, "I
would like to buy you a drink, too."
The old woman says, "Thank you. Bartender, I want a Scotch with two drops
"Coming up," says the bartender.
As she finishes that drink, the man to her left says, "I would like to
buy you one, too."
The old woman says, "Thank you. Bartender,
I want another Scotch with two drops of water."
"Coming! right up," the bartender says.
As he gives her the drink, he says, "Ma'am, I'm dying of curiosity. Why
the Scotch with only two drops of water?"
The old woman replies, "Sonny, when you're my age, you've learned how to
hold your liquor. Holding your water is a whole other issue."
This column is about my personal search for the perfect investment. I don't
give investment advice. For that you have to be registered with regulatory authorities,
which I am not. I am a reporter and an investor. I make my daily column -- Monday
through Friday -- freely available for three reasons: Writing is good for sorting
things out in my brain. Second, the column is research for a book I'm writing
called "In Search of the Perfect Investment." Third, I encourage
my readers to send me their ideas, concerns and experiences. That way we can
all learn together. My email address is .
You can't click on my email address. You have to re-type it . This protects
me from software scanning the Internet for email addresses to spam. I have no
role in choosing the Google ads. Thus I cannot endorse any, though some look
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will help pay Claire's law school tuition. Read more about Google AdSense,
here and here.