Microsoft & IBM: Potential Suitors for HP

asiablues's picture

By Dian L. Chu, Economic Forecasts & Opinions

The longer HP languishes at the $41 a share level, the more likely the company will become a takeover target. Well, the fact that HP currently doesn`t have a CEO, and the fact that they are dirt cheap with regards to stock price to book value makes them vulnerable.

After all, when HP is trading at $55 a share, and any takeover requires a hefty premium of at least 20% to actually get a non-hostile bid to be accepted by the board and shareholders, this becomes a huge roadblock to a M&A deal being completed successfully.

But if a firm`s stock has fallen like HP`s because of a non-material event to the business like the firing of a CEO, this creates a once in a lifetime buying opportunity that might only have a short window before Wall Street investors wake up and realize that HP is too cheap relative to the company`s underlying business fundamentals, and current financial performance. But if HP is trading at $41 a share, and MSFT or IBM pays a 20% premium over this price, this is doable.

Are there synergies that could be captured in a Microsoft and HP or IBM and HP merger? Actually there are. Let`s take Microsoft first.

Microsoft & HP

MSFT wants to get into both the tablet and smart phone markets which HP is already setting up the groundwork with their 2011 launch of the HP slate and their recent acquisition of PALM. Microsoft desperately needs to branch out and get into the business services arena which HP already has a foothold in, similar to IBM. Otherwise, Microsoft risk other firms entrenching on their territory of office suite products through the backdoor of cloud computing, and other business services offerings.

Would there be a cultural clash between the two? Maybe 20 years ago, but odd as it seems, HP would actually add some much needed youthful element and growth zing to Microsoft`s staid ways. Microsoft needs an infusion; they have been stuck in the same place for basically the last decade. They need to either get off the pot and start paying a 5% dividend with all that cash they have been sitting on, or go out there and grow the top line through meaningful large scale acquisitions that really make a splash.

Next let`s look at a IBM and HP merger.

IBM & HP 

The synergies between IBM and HP are quite striking in the business services arena, and actually could help augment each company`s particular strengths in this area to attain more business by offering a more complete A-Z business solution in this high margin area. IBM could actually diversify its revenue stream by getting back into the consumer PC and hardware business, as IBM`s latest quarter suggests they may have specialized themselves into too fine a corner with their current business model approach.
 
Although IBM's current business model has high margins, it is very cyclical in nature, and almost exclusively reliant on the large corporate client, with little exposure that a large consumer base that HP offers. Acquiring HP would help IBM hedge and diversify its revenue stream.  It’s the same reason why the major oil companies are still holding onto their downstream (refining and marketing) assets.  The downstream operations offer more consistent earnings over a diverse set of economic conditions, and thus act as a revenue hedge for the more volatile upstream (E&P) operations.  The same benefit could be attained by IBM through diversifying their revenue stream from the current overly specialized model.

Like Microsoft, IBM is sitting on a pile of cash, and even though they have changed their business model over the last five years dramatically, the stock price is the same place it was 10 years ago. So IBM is facing the same challenge of organic growth just like Microsoft.  It will also either need to pony up and offer a 5% dividend, or start growing the top line through some bold moves such as an HP acquisition that would really invigorate Big Old Blue.

Takeout Put at $40

I think there is a natural put on the HP stock at the $40 a share level as the world was falling apart last week, and it held that level under some pretty serious selling pressure. This is the takeout put price. Will a deal likely happen similar to the BHP-Potash big time merger? We will see but one thing is for sure, whether we are talking about Exxon buying out XTO Energy or another merger in some other sector, we will experience major consolidations in all sectors including the Technology sector in the near future.

Corporations are sitting on too much cash and fortune 500 companies’ stock prices are too cheap given their financial performance in a tough economic environment. It is always easier and more cost efficient to grow through acquisition as opposed to an organic growth strategy in most cases. In the current challenging economic environment and a low cost of capital for major corporations, acquisitions make for the most efficient use of capital allocation.

Dian L. Chu, Aug. 17, 2010

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Bigger Dickus's picture

ASIABLUES, you are more of a moron than Johnny Bravo

Yesterday you spouted that bullshit about stocks being a great buy right now and today you bring us this crap. What is next?

Go home to your mother, Asia.

Rogerwilco's picture

Synergies? How about simple survival?

HP+Dell, a marriage of two lost corporate souls.

HellP?

wesa's picture

A large cash position does not necessarily mean a company's stock price will go up.  There are plenty of examples of nice looking cash-rich companies whose stock prices haven't sizzled for a long time.  HP has a lot of good attributes but Hurd slashed R&D to the bone and this is going to hurt HP going forward.  Looking at cash is a poor reason for a small investor to buy.  On the ther hand, a large cash hoard could be redeployed by an aggressive buyout player and turned into something worthwhile if buyer and buyee were a good fit.

A Texas oilman is reputed to have opined that money is a lot like horse manure.  If you let it pile up it starts to smell.  For it to do any good you have to spread it around.  He was talking about philanthropy, but the same idea applies to corporate governance.

 

CPL's picture

The fact the SLA's they offer are written in pencil is the first reason.  Second is the fact, yes, they have no R&D, or support, or anything different from the market at large.

 

To be blunt, they are a fossil then just don't understand they are hip deep in the tar pit already.  Dell sells servers at 1/2 the price with the same level of service (crappy support, poor delivery).  Acer, as crummy as the name is, is actually making good laptops now versus 10 years ago.  HP on the other hand has beaten that crummy cumdumpster of a PC the pavillion into the ground.  Ubuntu doesn't even look twice at support for the newer models because of the poor design, sloppy parts and the draconian support policies HP loves placing on their over priced gear.

 

Sad to sad Sony and Apple make slightly better (and again saddly cheaper) equipment on the desktop end of thing that are more expandable than a toaster.

ZackAttack's picture

Just, nonsense. Anyone would be out of their mind to spend $100b on this sack of shit.

bugs_'s picture

IBM sold its thinkpad division - why buy back HP's?

MSFT probably doesn't want to get into the hardware business.

I also have a gut feeling that the disclosures at HP are NOT finished.

Perhaps a foreign buyer might be interested in HP and its market share, but my advice is to wait until after the election between carly and boxer.

 

Bankster T Cubed's picture

sounds absurd, so in this time period it just might happen

One ponzi scheme behemoth mating with another, forming an even too-much-bigger-to-fail crock of shit accounting megalith

Jesse Liversore's picture

This is a turd. HP is a good company I guess- but I cant see any board selling because they have had a vacant CEO spot for a week.  The financials don't warrant a takeover.  Its market cap is trading slightly below the Enterprise value but hardy a bargain when you consider that 33BB of the assets on the balance sheet are goodwill.  17BB in debt is a hurdle to any company but IBM and MSFT I'll give her that but with commercial paper markets shaky at best I cant see them giving up the kind of cash it would take to get this deal done .  Very few takeovers outperform the cost of capital and with a ROA of 6% and ROE of 20% this one would be doomed.  You are also forgetting you don't have the same antitrust attitudes you had during the Bush years.  40 may be a solid floor but did you ever think about the fact that Mr.  Hurd may have been pushed out because things have started to turn south. 

 

I found her other post on the Dow 30 pretty mindless.  You could have at least shot for the low 5 or top 10  (see O'Higgins "Beating the Dow").  To say that the Dow companies as a category are experiencing any top line growth is pure garbage.  If we had top line growth they would actually be hiring people and treasury rates and the Dow would likely be meaningfully higher.  

Akrunner907's picture

HP and IBM would be possible, but HP's market cap of $95 billion would be tough to swallow for IBM.  I don't think that HP ever realized the efficiency they planned when the aquired Compaq. 

Hammer's picture

Unlikely as well.  No way on anti-trust.

dlmaniac's picture

Unlikely. HP does not generate enough profit to justify its fat size for anyone to take it over.

Hephasteus's picture

Ya but they have pricing power on ink. Or they would if their printers would work long enough to sell any.

CPL's picture

I would have to agree, that and it's in a space saturated with hardware vendors and their after product support sucks a donkey cock.  Since when does next day service 24/7 mean 7 business days later for a fucking tape drive and some Costa Rican that can barely understand where the on switch is on a computer.

 

The company should have been dead about two years after dot.bomb.

 

What's mark up now on hardware anyways.  2-5% now.  It's digustingly low.