HP shake-up leaves shareholders rattled

It's hard to imagine Hewlett-Packard shareholders could suffer more under new management than they did during the 5-1/2 years of Carly Fiorina's reign at Silicon Valley's largest company.

But it's not impossible.

Stock-picking professionals were all over the map Wednesday in assessing where investors should head now that Fiorina has been forced out as HP's chairwoman and chief executive officer.

Bloomberg Financial tallied nine updates from technology stock analysts: Two raised their estimates for HP stock, two lowered their estimates, and five said they were sticking with their current rating.

HP shareholders, in other words, may feel bewildered in deciding whether this is a time to buy, sell or stand still.

What is clear, given the wisdom of hindsight, is the magnitude of Fiorina's failure to perform for investors.

Let's say you bought $10,000 in HP shares July 16, 1999, the last trading day before the announcement of Fiorina's appointment to the top job at Palo Alto, Calif.-based HP. At the close of trading Tuesday, the last day of the Fiorina era, your investment was worth $4,500. That includes shares in Agilent Technologies, spun off from HP in 1999.

You'd be much better off — although hardly delighted — if you'd invested that $10,000 on the same date in Dell or IBM, HP's two most direct competitors. The Dell stock Tuesday would be worth $9,500, and the IBM stock $6,900.

Fiorina's single biggest decision at HP — acquiring Compaq Computer in summer 2001 — also fizzled for shareholders on both sides. The merged company Tuesday was worth $5 billion less than the separate total market values of HP and Compaq immediately before the deal was announced.

Such a sorry track record makes it easy to understand the market's reaction Wednesday to Fiorina's sacking: HP jumped $1.39 a share, or 7 percent, to close at $21.53, its biggest one-day gain in four years.

So where does HP stock go from here?

There are three possible scenarios, two of them likely to be positive.

Scenario one: More of the same, only better. HP's newly empowered board of directors emphasized Wednesday its commitment to the road map laid out by Fiorina.

Patricia Dunn, the board's new chairwoman, talked about "accelerating execution of the company's strategy" in a conference call with stock analysts. Temporary CEO Robert Wayman added, "We continue to believe that we have the right ingredients for success in our marketplace."

These statements could, of course, be nothing more than a smoke screen to prevent customer panic during a time of turmoil.

There is reason to believe, however, that HP could flourish under new leadership. Fiorina had a reputation for delivering vision and charisma, while remaining aloof from HP's day-to-day operations. A new CEO with an old-fashioned, taking-care-of-business approach could gradually lift HP stock out of the cellar.

Scenario two: More of the same, only not better. Pessimists will argue that HP is trying to do too much in too many businesses in the midst of faster-moving competitors.

While HP is expected to report solid results next Wednesday for its fiscal first quarter, some analysts are expecting disappointments in the second and third quarters. If that's true, HP stock will slide.

Scenario three: The big breakup. Most of HP's black ink comes, literally, from the black ink of its thriving printer business. In the 2004 fiscal year ended Oct. 31, the printer group accounted for 73 percent of operating profit on just 30 percent of sales.

Some investors have long argued that HP should sell or spin off its non-printing businesses, in the same way the company spun off its semiconductor and instrument business into Agilent.

The remaining printing business alone would be worth about HP's current stock price, say breakup boosters, and shareholders would get cash or additional stock from the sale or spin-off. Such a move would almost certainly deliver a short-term jolt to HP shares, although it's possible the separated halves wouldn't ultimately thrive on their own.

Which scenario will prove true? No one knows. I can only say for sure HP won't be a safe widows-and-orphans stock anytime soon.

Mike Langberg is a columnist at the San Jose Mercury News.