HP says: It’s the economy, stupid…
Hewlett-Packard (HPQ) filed its 10-K late yesterday and there were so many interesting details in the 182-page filing that it’s hard to know where to begin. But the thing that really seemed to resonate throughout was growing concerns about the economy and what impact that was likely to have on HP. The K comes on the heels of the analyst’s meeting last week where HP predicted its estimates would meet, rather than outperform analysts expectations. (Of course, footnoted regulars know that the whole analyst prediction thing remains a giant game, but that doesn’t seem to stop these sorts of events from happening).
While HP didn’t mention the sub-prime crisis by name, it did note that it could experience weakness, particularly in its consumer and financial services businesses due to “conditions in the residential real estate and mortgage markets, access to credit and other macroeconomic factors affecting spending behavior”. It also noted in the filing that the “inability of suppliers to borrow funds in the credit markets” could also have a negative impact on the company. Both are new disclosures and while it’s true that companies tend to put anything (and everything) into their risk factors, it’s usually because some attorney is making that call.
Deeper into the filing, the company noted that its investment in other stocks had shrunk to $9 million at the end of the fiscal year from $36 million at the end of 2006, though the company didn’t provide many details, other than to note it had recorded a $28 million impairment. Stocks weren’t the only loss: the company also didn’t do all that well employing various hedging strategies: it lost $64 million on cash-flow hedges and another $109 million on net investment hedges, compared with $46 million and $36 million respectively in 2006. The filing also noted that bad debt expenses were increasing, especially in the company’s Financial Services unit, which saw growth of 11% in fiscal 2007.
One final interesting detail: the amount of money going toward goodwill on some of HP’s smaller acquisitions — most of which are not named directly in the filing or whose purchase prices are disclosed — increased sharply last year: from 40% in 2006 to a whopping 70% in 2007. Yet, the company says it plans to continue its buying spree and has already announced four new deals since the end of October.
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Posted in Tags: 10Ks, M&A, risks |
 5 Comments » |
December 19th, 2007 at 4:48 pm
Could someone elaborate on the “Goodwill” portion of the HP filing? Why does an increase in the value of Goodwill affect the number of acquisitions? Is HP basically saying that its Goodwill has increased substantially over the past despite the current distress it’s experiencing financially?
December 19th, 2007 at 6:40 pm
We read so many headlines about subprime and its (pro-cyclical) economic impacts, but it is interesting to see it playing out, in color, all the way over in trenches of tech.
Also, the goodwill metric is interesting: % of purchase that is goodwill. Interesting way to analyze goodwill…
(though cash-flow hedges. I would argue a big company should always be hedging something, and on average, a hedger should be losing money on those hedges. Ergo, I’d argue, a big company on average should be losing a bit of money on its hedges…)
December 20th, 2007 at 11:33 am
Ever since the Time Warner/AOL fiasco where something like $100 billion was accounted for as goodwill (and later charged off), I’ve paid attention to what % of the deal is accounted for as goodwill. Even with new rules, goodwill is one of those things that is open to interpretation, so I think it makes sense to pay attention when it starts to increase. Not a huge red flag, but certainly worth paying attention to.
December 21st, 2007 at 2:22 pm
“Goodwill” loosely translates into the portion of the purchase price of an acquisition that is over and above the target’s “fair market value”. So by extension if a surprisingly large portion of the purchase price is allocated to goodwill, it suggests that the acquiror has past too much for the target.
December 21st, 2007 at 8:05 pm
Agreed amj, but emphasis on ‘loosely translates’ because it’s the excess not over fair value but over all the assets (tangible and intangible) that can be “identified.”
So, the existence of goodwill by itself does not automatically signify overpayment against fair value – rather, goodwill is the “plug variable” (by definition, residual and therefore impossible to measure directly). Problem is, many of the next era companies ought to have lots of goodwill (i.e, less capital intensive).
But i like Michelle’s “look” at this metric for sure, especially % goodwill (of purchase) versus history. On the theory that the company is mostly buying in the same space.