Technology

HP Rating Cut by S&P After Autonomy Acquisition Boosts Debt


(Bloomberg) — Hewlett-Packard Co. had its credit ratings cut by Standard & Poor’s Ratings Services, which cited increased debt caused by the acquisition of Autonomy Corp. and strategic shifts by the world’s largest computer maker.

S&P reduced the company’s corporate credit and senior unsecured ratings to BBB+ from A, saying “major strategic reversals,” management turnover and share buybacks may have raised its risks. S&P also lowered Hewlett-Packard’s short-term rating to A-2 from A-1. The outlook on the ratings is stable, S&P said today in a statement.

Hewlett-Packard is trying to rebound from sluggish sales and the ouster of two chief executive officers in 14 months. The $10.3 billion Autonomy acquisition, announced under ex-CEO Leo Apotheker, drew the ire of investors and contributed to his replacement by Meg Whitman in September. He also shook up the board during his tenure.

“They need to strengthen their balance sheet by generating cash and paying back their debt,” Shaw Wu, an analyst at Sterne Agee & Leach Inc. in San Francisco, said of the ratings cut. Wu has a “buy” rating on the shares.

Mylene Mangalindan, a spokeswoman for Palo Alto, California-based Hewlett-Packard, declined to comment.

Hewlett-Packard fell 14 cents to $27.81 in extended trading after S&P posted its report. The shares, down 34 percent this year, had climbed 3.9 percent to $27.95 at the close in New York.

Saving Cash

Hewlett-Packard’s first-quarter profit forecast and full- year earnings outlook both missed analysts’ estimates this month. Whitman’s plan for fixing Hewlett-Packard’s ailing businesses, such as PCs and information-technology services, includes boosting research spending and limiting the size of acquisitions.

The idea is to placate customers, conserve cash and spur homegrown innovation — something the company neglected over the past decade. Whitman also decided to keep the company’s $39.6 billion PC division after Apotheker said he was considering a spinoff. The new CEO has said she will unveil more plans in the first half of next year.

“We have concerns that HP’s inconsistent growth strategies and high levels of board of director and senior management turnover have elevated the level of operational and execution risk in the near term,” Martha Toll-Reed, an analyst at New York-based S&P, said in the report.

‘Too Harsh’

The S&P cuts may make it more expensive for Hewlett-Packard to issue short-term commercial paper and long-term bonds, said Joel Levington, managing director of corporate credit at Brookfield Investment Management Inc. in New York. The reduction may be excessive given Hewlett-Packard’s cash flow and debt in relation to earnings before interest, taxes, depreciation and amortization, or EBITDA, he said.

“I don’t think an action was unwarranted — I think the degree of action was way too harsh,” Levington said. “To take a two-notch downgrade and remove them from the ‘A’ category is incredibly pessimistic.”

Moody’s Investors Service’s said on Oct. 28 that it placed the computer maker’s credit ratings on review for possible downgrade.

On Nov. 17, Hewlett-Packard appointed activist shareholder Ralph Whitworth to its board. Whitworth, whose investment firm oversees $6.5 billion, told management his appointment would burnish credibility and that he’d press for share buybacks, higher dividends or more investment in research, a person with knowledge of the situation said.

Hewlett-Packard also lost its title as the world’s biggest maker of server computers to International Business Machines Corp. in the third quarter, Gartner Inc. said this week.

Aaron_ricadela_75x75
Ricadela is a reporter for Bloomberg News and Bloomberg Businessweek in San Francisco.
Turner is a reporter for Bloomberg News in San Francisco.

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