The Scary Story For Hewlett Packard Shareholders In One Chart

Tyler Durden's picture

Earlier today Hewlett Packard stunned investors by announcing that its had effectively bungled a massive acquisition, that of Autonomy plc, despite extensive prior warnings about the accounting practices of the UK firm (for which it appears Deloitte will now have to take the blame), by paying over $10 billion for a transaction that is now clear will provide zero income statement benefit. The one problem, however, is that HP incurred a massive debt load to fund EBITDA and Cash Flow which will never materialize. The result: a capital structure that is now appropriate of a B1/B+ rated company, i.e., one whose debt needs would be serviced by a firm like Jefcadia, and therefore whose time to default in years can be counted on the fingers of one hand. The chart below explains it all: why shareholders should just get out while they can, and also explains why despite, or rather due to, endless central bank mingling, cash flows still, oddly enough, matter. Oh, and those hoping the HPQ dividend continues uninterrupted in perpetuity, hope again.

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buzzsaw99's picture

Get Moody's on the horn. They can fix this in like fifteen minutes.

yogibear's picture

Moodys can take a C rating and turn it to a Aaa with the right subscription pledge.

Fitch also puts on blinders too when they inspect a high paying customer.

A monkey throwing darts at a bond rating board might be better at rating. 

JPM Hater001's picture

Have them bring the lipstick.

The Wizard of Oz's picture

Who makes a CDS ETF that I can buy for this. GONNA BE RICH BITCHEZ@!

SoundMoney45's picture

This is a board level problem at HP, NOT a management problem.  Ray Lane should resign.

Here is a link to the current board members:

insanelysane's picture

Are there any honest business practices in the UK?  Apparently they couldn't send all of the citizens to Australia.

NoDebt's picture

That's what I was thinking.  The Brits kick our ass in fraud-per-capita, apparently.  Though we still hold the lead in total fraud, obviously.

Carl Spackler's picture

Per capita is relevant. 

Compare an apple to an apple, not an apple tree to an apple.

Zaydac's picture

At my level (SME) here in the UK most people are still honest, or at least the ones I deal with are. Big companies? Not so sure. City of London? No chance. It's probably no different here than in USA. BTW you lot brought down Ferranti, one of our biggest and best defence companies, with a similar transaction. So really it's pots and kettles, isn't it?

Midas's picture

I don't think any american on this board is going to claim we don't have big-ass-communist-18-wheeler sized fraud in this country.  Except MillionDollarBonus, but he is doing a comedy bit.

Galactic Superwave's picture

If you happen to notice how many people on the board worked previously for private equity or venture capital companies (answer=5), then it isn't surprising that HP has spent the last 10-15 years focusing on growing through acquisition instead of through fundamental organic innovation.

The old adage applies here: if you are a carpenter with only a hammer, then everything looks like a nail.

It's amazing how otherwise supposedly smart people can delude themselves by surrounding theirselves with too many like minded people. This same principle works in politics also.

blunderdog's picture

A VC's goal is to shift risk onto the shareholders.  It's really hard to imagine how they can BECOME shareholders and still do decent work.

bondman1's picture

What a high powered group that board is! Pat Russo took Lucent from 17 to less than one in ten years and Ken Thomson was the mastermind behind Wachovia's pruchase of Golden West Financial. That drove Wachovia stock from 60 to zero in fifteen months before Wells Fargo "white knighted" the deal from Citi @ $2. Very impreesive indeed!

slaughterer's picture

HPQ: surprised the CTRL+P joint venture with the FED is not paying off. 

nantucket's picture

now that's funny, i don't care who you are.

xXJammingXx's picture

Was Goldman advising them by any chance?

Mercury's picture

Clearly one should have paid attention to ZH's heads up last week but HPQ may still be worth a look here. ~4% div, ~7$bil free cash flow...there are worse valuations out there.

arkel's picture

It is interesting. Total Equity is also about equal to the market cap right now (this includes the write down of Autonomy),  so people are factoring in no future profits. However, the debt load is a concern, so I'm passng.

lunaticfringe's picture

Taking on tremendous debt loads is really small potatoes. It has little or no effect. You either grow your way out on hopium or lie about failing to do so. It works. Look at the U.S. goverment.

Dr. Engali's picture

I thought that corporations were just loaded with cash eager to put it to work investing in this roaring economy. Do you mean to tell me  that debt might be an issue with some of them?'s picture

HP Stock has as much chance of taking off as this guy does...


LetThemEatRand's picture

I guess CEO Whitman really earned that $16M she made last year.  She was so productive and classy.

Bay of Pigs's picture

And she is articulate and has command presence in any room.


Buckaroo Banzai's picture

The funny thing is, anybody who used eBay back when Whitman was running it knows she's a shitty executive. If Craigslist ever got its act together, it would stomp eBay into the ground.

insanelysane's picture

HP Board announces plans to corner the consumer market in Greece and Spain.

Downtoolong's picture

I would have loved to be a fly on the wall the first time Med Whitman said, Why the F%^#!k did I ever leave eBay?

After the 100th time, it just gets old.


j0nx's picture

Oh I'm sure the execs in this deal on all sides got PAID handsomely. Just like with Hostess. The entire executive branch at the corporate and political levels consists of nothing but gypsy style hucksters whose only goal is to loot the host at the expense of the rest of us. Keep blaming your boogiemen of unions and whatever else though.

ITrustMyGut's picture

well said man! exactly.. beck-ster boy, limpdick, etc.. its all labor's fault.. carefully ignoring pure and absolute GRAFT by management for DECADES!

Buckaroo Banzai's picture

Bullshit. 99% of companies are well-run by competent management teams, otherwise they wouldn't be in business. It's the giant multinational corporations where the management teams are overrun by self-serving sociopaths. Incompetent sociopaths can only survive inside a bureaucracy large enough to blur accountability and foster enough politics to allow these types to do what they do best.

In fact, the big multinational corps twist the laws in their favor and make it even MORE difficult for small companies to survive, much less thrive-- raising the bar even higher. The margin for error that management has at small- and medium-size companies is tiny thanks to the uneven playing field that the big politically-connected corps create.

The flip side of this is that 100% of labor unions destroy economic value-- BY DEFINITION. You can make a moral and ethical case pro or con for unions, but it is absolutely an iron law of free market economics that they destroy economic value.

lunaticfringe's picture

Bullshit. Socio pathic oligarchies and crony capitalists have done far more to strip economic value by socializing losses and privatizing profits. Buying politicians and sympathetic judges. Surely you don't need examples.

Blaming easily disposable workers is ridiculously simplistic and inaccurate. It is a target rich environment.

Buckaroo Banzai's picture

Read for comprehension. Where did I blame workers? Labor adds value and gets compensated. Labor UNIONS, on the other hand, destroy economic value.

Stick with me here. A union represents a local monopoly of a resource. What do monopolies do? DESTROY VALUE.

Not really complicated. You might want to flush out your headgear.

Zaydac's picture

He wasn't blaming the workers. he was blaming the Unions. Different concept entirely.

Edit: original poster got ahead of me!

Totally agree with the follow-up post.

blunderdog's picture

    The flip side of this is that 100% of labor unions destroy economic value-- BY DEFINITION.

Aha!  A real insight into your madness.

Here we see that "economic value" in your mind really is defined by how effectively private ownership can exploit resources, rather than any kind of mutually-beneficial arrangement between parties.

Buckaroo Banzai's picture

Not hard to understand. Put down the bong, and try to follow along.

Labor adds value, and gets compensated. Unions create a local monopoly of a labor resource, and destroy value.

Get it?

I am also available to help you add 1 and 1 and get 2, if you need me.

blunderdog's picture

     Unions create a local monopoly of a labor resource, and destroy value.

That's false--unions can't "monopolize" labor.  They're just the businesses on the other side of the labor MARKET.

It's a *market* see--just like with capital, there have to be at least two sides.

The role of the union is to provide coherent representation of the interests of the workers, just as the role of the corporation is to provide management of the use of capital by the shareholders.

Bazza McKenzie's picture

The very essence of unions is extortion, the use of force to extract more from an employer than otherwise they would pay.  This is not a side effect or an occasional aberration.  It is the sole reason unions exist.

Like all gangs of extortionists, most benefits go to the bosses and there is zero morality in their behavior.

blunderdog's picture

It's not extortion--it's called PRICE DISCOVERY.

Just as the seller can't unilaterally set the price of his commodity in a free market, the business can't unilaterally set the price of labor.

You guys don't really understand that whole "market" concept, do ya?

nantucket's picture

exactly, they are probably paid on volume,,...transactions baby! 

how about a 5-10 year clawback period where bonuses are escrowed and paid out after that time, or the bonuses can legally be clawed back if is turns out there was blatant fraud.  who am I kidding, it'll never happen.

slaughterer's picture

CEO Whitman: taking lessons from the Ken Lewis school of management.  

catacl1sm's picture

Gov't is corrupt. Corporations are corrupt. Burn them both down.

Nothing To See Here's picture

The government corrupts corporations. Burn the government, cure the corporations.

j0nx's picture

More like the revolving door for people from corporations/banks to government is the problem. But then you can blame the people for continually voting for these sociopaths. You get what you vote for in the end(literally in the end). This is all assuming that you believe that those voting machines aren't hacked 6 ways to Sunday (I don't).

Buckaroo Banzai's picture

Any large bureaucracies-- whether it is government or corporate-- become corrupt, because they become havens for sociopaths. Saying that fixing government will fix corporations demonstrates a fundamental misunderstanding of both human nature, and organizational dynamics.

Human organizations have to be kept small. There really isn't any way around that.

ariele25's picture

does anybody knows who was financing the autonomy deal?

SmoothCoolSmoke's picture

Half the Dow red and HP down 12%....but the Dow is only down 12?  WTF?

ebworthen's picture

And they are wasting a whole lot of money running that damn obnoxious commercial/jingle on CNBC non-stop.

Dan Conway's picture

And all of those political hacks think private equity deals are highly leveraged!  HP is just another silicon valley pig with lipstick loaded up with debt.