MISSION INTANGIBLE

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MISSION:INTANGIBLE, the blog of the Intangible Asset Finance Society, offers critical comments on intangible asset, corporate reputation, and finance; supplemented by quantitative reputation metrics. Intangible assets include business processes, patents, trademarks; reputations for ethics and integrity; quality, safety, sustainability, security, and resilience; and comprise 70% of the average company's value. MISSION:INTANGIBLE is a registered trademark of the Intangible Asset Finance Society.

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Hewlett-Packard: Come again?

C. HUYGENS - Monday, November 26, 2012
As you recall, HP announced last Tuesday losses tied to alleged fraud at Autonomy. Huygens opined that Steel City Re’s Reputational Value Metrics prior to Hewlett-Packard’s announcement of the $8.8 billion charge indicated that stakeholders were immune to further surprise. That interpretation was good, but not good enough.

Last week, HPQ’s reputational ranking was at the 33rd percentile and its forecast stability was the highest among 22 peers. That's a poor showing for what was once the icon of Silicon Valley, but its been a bad year. After all, in addition to the boardroom personnel shenanigans, H-P this past August took an $8 billion writedown on the 2008 EDS acquisition representing more than half the $14 billion purchase price. Likewise, H-P is believed to have written down most if not all of the value of its 2010 acquisition of Palm for $1.2 billion.

Back in September, the Motley Fool explained why HP’s reputation—based on expectations of innovation--was on a downward spiral.

-Lack of invention/innovation: Well we can say that HP has not lived up to its tag line-invent. HPQ has filed 1 patent a week on an average last year as compared to 44 filed by International Business Machines (NYSE: IBM) and 88 filed by Samsung…(I)f patent filing is taken as a sign of innovation power for the company, then HPQ has miles to travel before it is in par with its competitors.
-Lack of competing factor: The last CEO of the company Leo Apotheker made an announcement in the public which led to a huge negative impact on its business.… In such a situation instead of taking a hasty decision of separating the PC business from its umbrella brand, HPQ should have worked more on how to improve its operating margin and bring down its overhead costs in this segment.
-Technological Pace: HPQ - the pioneer of the mobile device, is … unable to keep up the momentum in the mobility space. HPQ launched its Touchpad in July 2011 – a ray of hope. But as a shock to many, they removed the Touchpad within 45 days itself - reflecting non competence in this arena.
-Over reliance on webOS: WebOS lacked that appeal to the consumer sector…and which caused the failure of its Touchpad.


And then there were the governance matters:

-Fragile / Inconsistent top management: One of the signs that the company is going down the drain is when we see that the top management is fragile or changing regularly. This is quite visible in HPQ where the CEOs have changed many a times with the likes of Carly Fiorina, Mark Hurd, Leo Apotheker and now Meg Whitman.
-Maligning its own reputation: HPQ is quite famous in the imaging and printing group – one of its major sources of earnings. HPQ was busted a few months back for putting less and less ink into its Printer cartridges. … In their attempt to earn pennies they lost the trust factor of many of their precious loyal customers.


With the latest metrics now available, Huygens interpretation of last week's numbers was only partly right. The vital signs (top right graph, below) show rock-bottom historical volatility of RV, a non-financial measure of reputational value, meaning, as The Fool explained, every stakeholder had good reasons to not expect much from HP. Current volatility, however, has jumped from the 10th percentile to the 52nd percentile, meaning, HPQ is now "average" among firms in this highly risky technology sector. It could have been a greater shock, but, as the metric show, it simply wasn't. The RVM volatility time series, (top left graph, below), shows last week's spike raising current volatility to a level only slightly above the median for the whole sector. HPQ's CRR, a measure of relative reputational ranking, dropped over the week from the 33rd percentile to the 10th percentile. ROE remained at bottom, and the forecast stability dropped from 1.0--the most stable--to the the 29th percentile and clearly not the worst in this sector. Forward looking measures, (right column, bottom two rows) are signalling further reputational value deterioration. (For a deeper understanding of the metrics, read: Reputation Stock Price and You: Why the market rewards some companies and punishes others).

Yes, when everyone expects you to fall, it's hard to elicit any startle responses. It is even harder to surprise anyone with a fall when you are already on the floor. And yet, mathematicians have long suggested that there must be some practical application for imaginary numbers. Now, Pippin?

 
 

Hewlett-Packard: Manifest destiny.

C. HUYGENS - Wednesday, November 21, 2012
It's hard to believe that more than a year has passed since Huygens last visited HPQ and opined that, based on the metrics, the board appeared dysfunctional. Yet in under thirteen months, HPQ has fulfilled expectations of underperformance and driven a once-fabulous company to the lowest rankings among 22 peers in the computer hardware processing sector. Tim Travis, writing for Seeking Alpha, put it this way:

The noise in the quarter was the result of a non-cash charge for the impairment of goodwill and intangible assets primarily relating from the Autonomy acquisition, which in my estimation can be firmly placed in the Mount Rushmore of disastrous acquisitions. The write down was no surprise to us as the day it was announced we were in disbelief that a CEO and Board of Directors could be so naïve about destroying shareholder value.

As to the metrics, the RVM measure of Steel City Re's reputational value metrics showed a consistently low level of volatility for the entire past year -- in English, all stakeholders were in agreement that the reputation was appropriately slowly drifting downward (just as Travis said). The metrics were scraping rock bottom. RVM vol was as low as they go among peers; current RVM vol was at the 10th percentile foretelling increasing uncertainty. CRR rank at the 33rd percentile (and sinking), ROE at rock bottom among peers, and forecast stability at the highest levels (it is hard to fall when you are near the bottom.) Collectively, all of these suggest that for the past year, all stakeholders have been anticipating the additional bad news finally announced end-of-day Monday 19 Nov.

Hewlett Packard: WTF?

C. HUYGENS - Friday, September 30, 2011
In the race for distinction by dysfunction, scoring an own-goal is helpful. But from time to time, it does not hurt to have an assist. We're referring, of course, to the lack of love between Oracle and Hewlett Packard. Here's the latest installment, a press release from Oracle 28 September, reproduced without edits or comments.

"After HP agreed to acquire Autonomy for over $11.7 billion dollars, Oracle commented that Autonomy had been ‘shopped’ to Oracle as well, but Oracle wasn’t interested because the price was way too high. Mike Lynch, Autonomy CEO, then publically denied that his company had been shopped to Oracle. Specifically, Mr. Lynch said, “If some bank happened to come with us on a list, that is nothing to do with us.” Mr. Lynch then accused of Oracle of being ‘inaccurate’. Either Mr. Lynch has a very poor memory or he’s lying. ‘Some bank’ did not just happen to come to Oracle with Autonomy ‘on a list.’ The truth is that Mr. Lynch came to Oracle, along with his investment banker, Frank Quattrone, and met with Oracle’s head of M&A, Douglas Kehring and Oracle President Mark Hurd at 11 am on April 1, 2011. After listening to Mr. Lynch’s PowerPoint slide sales pitch to sell Autonomy to Oracle, Mr. Kehring and Mr. Hurd told Mr. Lynch that with a current market value of $6 billion, Autonomy was already extremely over-priced. The Lynch shopping visit to Oracle is easy to verify. We still have his PowerPoint slides.”

The latest reputation numbers from Steel City Re show no material change from last week, if you consider another 4% relative under performance immaterial. The alleged overpayment by HP for Autonomy by nearly $6B is impressing no one that hasn't already formed an opinion on Hewlett Packard's (NYSE:HPQ) reputation. At the close of trading 29 September, HP was ranked in the 47th percentile relative to the 17 companies in the Computer Processing Hardware sector. This is up a notch from the 41st percentile last week. Its exponentially weighted reputational ranking volatility is up from last week's 460% to 512%, while both the reputational vector and velocity are negative at 19.6% and 41% respectively compared to -15% and -46% last week, respectively.


 Economically, the performance is poor with a trailing twelve month return on equity that is under performing the median of the peer group by 33.05% down approximately 4% from last week's 29.28% under performance leading us to affirm that the expectations set by a board -- its reputation -- are material.

Hewlett Packard: Odd competition

C. HUYGENS - Friday, September 23, 2011
Leo Apothekar is out and Meg Whitman is in as Yahoo! and HP continue their odd competition for the most interesting performance by a governing board this past decade. Here's a quick recap of HP's ongoing  saga, courtesy of The Economist (22 Sep): "Whatever happens, the saga is another blow for a company that has lurched from one boardroom crisis to another. Mr Apotheker took the wheel at HP in November 2010 following the departure of Mark Hurd, who left abruptly amid stories of sexual indiscretions and problematic expense-reporting. Mr Hurd had taken over from Carly Fiorina, who was binned in 2005 after the firm’s profits plunged. A year later Patricia Dunn, HP’s then chairman, also departed after a scandal involving an investigation into suspected press leaks from HP directors."

This Board-level soap opera has left its mark.This week, HP ranked in the 41st percentile among the 17 companies comprising the Computer Processing Hardware sector. This ranking represents a 35 percentile drop from a ranking of 76 twelve months ago. Its exponentially weighted reputational ranking volatility is hovering around 460% while both the reputational vector and velocity are negative at 15% and 46% respectively.

Over the past few weeks, the median reputational metric of the Computer Processing Hardware sector has been stable at a relative ranking of 40%.  Meanwhile, the intangible asset fraction of the company continues to climb to more than 110% suggesting either major book asset write downs or additional leverage. The median for the sector is around 80%.

Economically, the performance is poor with a trailing twelve month return on equity that is underperforming the median of the peer group by 29.28% leading us to conclude that the expectations set by a board -- its reputation -- are material.

HP: Ethics takes a holiday?

C. HUYGENS - Thursday, January 27, 2011
There's never a dull moment in the HP (NYSE:HPQ) boardroom. At the firm that just released its last CEO for ethical issues, the National Association of Corporate Directors newsletter this morning cites a story from the Denver Business Journal raising concerns about the close business ties between the ostensibly independent directors and the new CEO.

The Journal (Jan. 26, Schubarth) cites the concerns of several corporate governance experts that Hewlett-Packard Co. recently recruited executives to its board of directors who all have business ties to CEO Leo Apotheker. Consequently, they will need to prove they can act independently.

Dominique Senequier, for instance, manages an investment buyout arm of French insurer AXA SA, where Apotheker is on an advisory board. Three other new directors -- former General Electric Co. Chief Information Officer Gary Reiner, former Alcatel-Lucent CEO Patricia Russo, and ex-eBay Inc. CEO Meg Whitman -- all did business with SAP AG while Apotheker was on staff.

Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware, comments, "If directors have significant relationships with the CEO or other directors of a company on whose board they sit, it's harder for them to be objective. Directors are supposed to be representing shareholders, not the CEO or one another, and that's why companies typically try to recruit directors who are independent of one another and management."

It  is an interesting problem, and one that will confront any CEO who's business (or prior business) has a large global footprint. After all, it could be argued that anyone coming from a firm that did not work with, or use, SAP products is coming from a business still operating in the dark ages. And that appears to be the reaction of the majority of stakeholders, as reflected in the Steel City Re Corporate Reputation Index metrics. In a word, no impact. No change in the relative ranking among 18 peers in the Computer Processing Hardware sector, no change in reputation volatility, and no change in reputation vector or velocity.


Yet given the governance challenges HP has faced over the past few years, the concerns in this instance merit deeper consideration.

Hewlett-Packard: Silicon Valley smackdown

C. HUYGENS - Friday, October 08, 2010
The most recent “gotcha last, no tagbacks” comes from the Hewlett-Packard (NYSE:HPQ) team who named former SAP boss Leo Apotheker as its new chief executive 30 Sep.

Team HPQ sued its rival, team Oracle (NASDAQ:ORCL) recently when the latter hired briefly-disgraced HPQ CEO Mark Hurd. The grounds: misappropriation of trade secrets. ORCL is now enraged. This is why. Not only did HPQ just name Ray Lane, former Oracle president and COO, as nonexecutive chairman of HP's board, it turns out that Mr. Apotheker had been in charge of SAP (NYSE:SAP) at a time when it was stealing Oracle’s software. The case of ORCL v SAP is scheduled for trial soon.

On the basis of reputation and financial metrics, Oracle is winning this spat. A side by side comparison of metrics from the Steel City Re Corporate Reputation Index, with a customized peer group comprising relevant hardware and software companies totalling 132 in all, shows that HPQ’s reputation ranking (on the left) has slid over the trailing twelve months 27 points from the 97th percentile to the 70th percentile, while ORCL’s (on the right) has slid only 18 points from the 84th to the 66th.

While the former’s slide has been chronic and steady -- the most recent six months shown in the second set of graphs -- the bulk of ORCL’s reputation change has occurred only amidst the sturm und drang of the past few weeks. Hence HPQ is underperforming this peer group by a respectable 18% (yellow line, top graph, left)while the now volatile ORCL is currently outperforming this peer group by 21% (yellow line, top graph, right).

Oracle: Larry's premonition.

Nir Kossovsky - Friday, September 10, 2010
There is little to add to the Silicon Valley soap opera that hasn’t been posted somewhere else recently. Here is a summary  of the more relevant facts relating to Oracle (NASDAQ:ORCL) and Hewlett Packard (NYSE:HPQ).

1. After a quarter century of working together closely, Oracle started competing with HP by selling computer servers with Oracle's $7.4 billion purchase of Sun Microsystems last year.

2. HP sued Hurd in a California court on Tuesday, a day after he joined Oracle. HP argues that Hurd won't be able to do his job at Oracle without spilling HP's trade secrets.

There is no shortage of colorful figures. At the top, though is Oracle CEO Larry Ellison, who recently shared his opinion of the HP board with this memorable letter sent to the New York Times 

The H-P Board just made the worst personnel decision since the idiots on the Apple board fired Steve Jobs many years ago. That decision nearly destroyed Apple and would have if Steve hadn’t come back and saved them. H-P had a long list of failed CEOs until they hired Mark who has spent the last five years doing a brilliant job reviving H-P to its former greatness. In losing Mark Hurd, the H-P board failed to act in the best interest of H-P’s employees, shareholders, customers and partners.


Mistakes are in the eye of the beholder, and in business, the overall impression is called “reputation.” We turn to the reputation metrics, courtesy of Steel City Re.

One month out from when HP dismissed Mr. Hurd, HP’s reputation metrics are sliding, and enterprise value is disappearing. After riding steadily at the 95th percentile in the Reputation Index ranking of its peer group, Computer Processing Hardware, HP is now in the 84th percentile. The exponentially weighted moving average volatility is climbing and both the trailing twelve week vector and velocity are materially negative. Not surprisingly, the company is underperforming its peers by 28%.



Oracle's reputation is not unblemished either. Rather than an uptick, Hurd’s arrival was associated with a material drop in the Reputation Index ranking and an uptick in volatility. But the equity markets appear to be tolerating the move, at least in the short term, with Oracle currently outperforming the median of its 110-member Packaged Software peer group by 2.4%. So Oracle is winning the reputation derby -- so far. But this is a soap opera, so stay tuned.

Hewlett Packard: Curse of the C-suite

Nir Kossovsky - Wednesday, August 25, 2010
It would be difficult to top the language of the Silicon Valley Mercury News. “In a stunning plot twist in the long-running Silicon Valley soap opera that is Hewlett-Packard (NYSE:HPQ), Mark Hurd resigned as CEO of the Palo Alto tech giant after an investigation into a sexual-harassment claim.” While a company "investigation determined there was no violation of HP's sexual harassment policy, the probe concluded Hurd filed false expense reports to conceal his relationship with the woman. Blame it on whatever is in the water cooler servicing the C-suite.

The Steel City Re Corporate Reputation Index indicates the event was material. To quote an HP employee website, “The performance of a leader must be measured -- and rewarded -- based on more than the numbers. Integrity matters. Trust matters. We're talking about "violations of HP's Standards of Business Conduct" by the man who held ultimate responsibility for corporate conduct.”

HP began the period with a reputation ranking in the 95th percentile and exhibited little volatility (EWMA=0.014) until the events of the recent past. At this writing, the company’s reputation index has drifted down to the 84th percentile to the benefit of both Fugitsu Ltd (OTC:FJTSY) and Lenovo Group Ltd. (OTC:LNVGY), and further distancing itself from the 22-company Computer Processing Hardware sector leader, Apple Inc. (NASDAQ:AAPL).



Economically, HP is currently underperforming the median of this sector by 27.53%, but this is largely legacy effect from having both outperformed most of the sector, and having shown material resilience over the past five years. However, the future is not promising. The sector, as a whole, is in decline with the median reputation ranking relative to the whole market drifting from the low 40th percentile to the high teens over the trailing twelve months. Thus HP’s reputation slippage at this juncture does not bode well for teh company's future economic returns.

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