October 28, 2010 / 10:38 PM / 9 years ago

Analysis: Apotheker's job: restore stability, credibility

SAN FRANCISCO (Reuters) - Leo Apotheker takes over at Hewlett-Packard Co (HPQ.N) as the ghost of Mark Hurd haunts the halls, Oracle’s Larry Ellison fires potshots from across Silicon Valley and Senate candidate Carly Fiorina is an ever present reminder of an inglorious chapter in company history.

His job: return the former Silicon Valley icon to stability.

Just getting familiar with HP, the world’s largest technology company by revenue, will be a daunting task when the former chief executive of German software company SAP AG (SAPG.DE) starts his new job on Monday.

Apotheker’s chief priority will be keeping key senior executives in the fold and executing, analysts say. At the same time, he must win over skeptical investors, address concerns about innovation, and combat newly aggressive rivals.

“Right now, he needs to get back investor credibility,” said Wedbush Securities analyst Kaushik Roy.

“He has never run a hardware company, so he needs time to understand the business,” Roy said. “And he’s going to make some strategic changes, and decide what direction he and (new chairman) Ray Lane are going to take the company.”

There will be no honeymoon period. Apotheker will immediately be faced with critical decisions over which acquisition targets to pursue, and how to tackle emerging threats from Oracle Corp ORCL.O, Apple Inc (AAPL.O) and Cisco Systems Inc (CSCO.O).

Stability would be a welcome change for a company that has not seen much of it recently.

Over the past decade, HP has grappled with a messy takeover of Compaq; the controversial tenure of Fiorina, which ended messily after she clashed with the board; a board spying scandal; and the tabloid-tinged ouster of Hurd involving expense reports and a female contractor.

Apotheker himself is no stranger to controversy. He spent seven months as SAP’s sole CEO before leaving amid a barrage of investor and customer complaints.

Now, Apotheker’s initial weeks may be packed with more drama. Oracle, HP’s newest antagonist, has publicly attacked Apotheker, prodding him to testify in a high-profile intellectual property trial between Oracle and SAP that starts next week.

HP would not say whether Apotheker would indeed testify.

WISE CHOICE?

The selection of Apotheker was not well-received by HP investors, who are not familiar with him.

HP shares remain down roughly 8 percent since HP ousted Hurd from the CEO post on August 6. During that time, the Standard & Poor’s 500 climbed more than 5 percent.

By some measures, HP shares are undervalued. According to an analysis by Thomson Reuters StarMine using a quantitative model, HP shares have an intrinsic value of $74.91 — well above their current price a bit above $42.

In choosing an outsider, HP passed over highly regarded PC division chief Todd Bradley, enterprise head Ann Livermore, and Dave Donatelli, an up-and-coming executive who runs HP’s servers, storage and networking business.

Keeping key executives from leaving should be one of Apotheker’s chief priorities, said Stifel Nicolaus analyst Aaron Rakers. “Obviously, what people want to see is that you’ve got stability amongst the ranks. That’s one of the key concerns out there,” he said.

HP is a leading vendor in most of the major technology markets, including PCs, servers, information technology services and printers. Its commodity hardware products make HP a higher-sales but lower-margin player when compared with chief rival International Business Machines Corp (IBM.N), which derives of major chunk of its profits from software.

HP faces stiff challenges from newcomers Oracle and Cisco in servers, and red-hot Apple in PCs. At the same time, HP is moving into a networking space dominated by Cisco.

Software is a relatively tiny business at HP, making up less than 3 percent of revenue, but that could change given Apotheker’s background. He has called software the “glue” for HP’s businesses.

“People are focusing on whether software acquisitions are the next move for HP,” Rakers said.

IT services and printing provide nearly half of HP’s revenue, and two-thirds of its operating profit. PCs, servers and storage provide less than 30 percent of its profit.

“This guy has to develop an operating model that sets HP apart in some manner,” said Joel Achramowicz, an analyst with investment bank Blaylock Robert Van, who praised HP’s execution but said the company is too reliant on printing and needs to take more risks.

“They really need a strategy that pulls in more software, and gives them more control of the network,” he said.

HP’s innovation machine has been the subject of much criticism since Hurd’s departure, and Apotheker will help determine how HP develops new technology. It spent plenty acquiring new assets, but cut back spending on research and development under Hurd.

It has said it plans to grow R&D faster than revenue in fiscal 2011. HP has spent $31 billion on acquisitions since 2006, making such high-profile purchases as smartphone maker Palm and networking company 3Com.

HP, which became known for its cost-cutting under Hurd, has lately made an effort to stress its investments, such as adding several thousand employees to its sales corps.

Editing by Edwin Chan, Gary Hill

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