Friday, August 19, 2011

Why I don't understand the stock market, part 51 and falling

Public companies are financially, legally, and morally mandated to make money for their stockholders. (OK, some people might say "immorally," but I'm an heir to the Protestant tradition.)

Public companies are also required to disclose certain material facts.

One leading public company, Hewlett-Packard, recently disclosed such a material fact during my two-day vacation:

HP today announced that its board of directors has authorized the evaluation of strategic alternatives for its Personal Systems Group (PSG), including the exploration of the separation of its PC business into a separate company through a spin-off or other transaction.

PSG has a proud history of innovation and technological leadership as well as a strong operating track record and industry-leading profitability. PSG is the leading manufacturer of personal computers in the world and had annual revenues of approximately $41 billion in fiscal year 2010. PSG enjoys leading global market positions in consumer and commercial PCs.

HP is implementing a plan to fundamentally transform the company. An important component of the plan is focusing its investments, resources and management attention to drive higher value solutions to enterprise, small and midsize business and public sector customers. HP believes that the exploration of alternatives for PSG will help the company accomplish its strategic goals and pursue profitable growth and enhanced shareholder value. A post-transaction HP would continue to help its customers manage the information explosion and address their most critical needs through a portfolio that spans printing, software, services, servers, storage and networking.

Or, to put it briefly, HP wants higher margins, and jettisoning the consumer hardware group helps it achieve higher margins.

Later in the release, the following statement appears:

HP management, together with its financial and legal advisers, will explore strategic alternatives, including the exploration of the separation of its PC business into a separate company through a spin-off or other transaction that would likely be tax free to U.S. shareholders. HP expects that the process could be completed within approximately 12-18 months.

This isn't surprising. How many years elapsed between the time that Motorola announced its "strategic alternatives" and the time that Google purchased Motorola Mobility?

So upon this news, how did the market react?

Hewlett-Packard (HPQ) shares plummeted more than 20% Friday to $23.54 after the tech company and Dow component announced a complete corporate restructuring late Thursday. HP said it plans to spin off its computer business, which it acquired after a $25 billion merger with Compaq.

The odd part about this is that presumably if HP had announced that it was RETAINED its low-revenue consumer PC business, the stock would NOT have dropped significantly.

Granted that the drop isn't entirely due to the spinoff announcement - HP missed revenue targets, and it spent $11 billion buying a software company - but I fail to see the logic here.

Did the market expect that HP would announce that it's spinning off the personal computing business, and that it had already lined up Lenovo or whoever as a buyer? No, in that case HP would have been sued by people claiming that HP should have waited 12-18 months to find a better offer.

The lunacy continues...

P.S. Oddly enough, while HP is shifting from hardware to software, Steven Hodson reports that Microsoft may be moving in the other direction.
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