Bill Ackman was on Bloomberg Television and explained why he hates HPQ. Large shareholders of Hewlett Packard were literally begging Bill Ackman to take an activist stake and whip the company into shape Fortunately Bill Ackman noticed that he would suffer a significant amount of brain damage if he invested in HPQ. Here is what Bill Ackman said:
"We have gotten over the last several months probably at least five or six calls from the largest shareholders of Hewlett-Packard begging us to take a stake in the company and be a proactive shareholder. I think that what we focus on is that we try to find a business that we can predict what it's going to look like over a very long period of time. I have the fairly quaint notion that the value of anything is the present value of the cash you can take out of the business over its life."
"The problem is that HP is in a number of businesses where I think it's very difficult to predict what the business is going to look like five years from now, let alone over the many, many years of a discounted cash flow calculation you need to figure out what the business is worth. The problem you've had is that it looks cheap, but the future of the PC industry is a very difficult business to handicap. It's incredibly competitive. I think the announcement of their intention to spin part of the business off perhaps has damaged the brand and it is a big, complicated mess. One of the things I learned a lot earlier in my career is to do a calculation which I call return on invested brain damage, which is before I make an investment which requires brain damage, or a lot of work and energy, I figure out how much money I can make. The higher the brain damage, the higher the profit has to be to justify it."
"I was actually at HP yesterday for a meeting unrelated to their core business and it was just depressing walking around. The morale of the employees going from an outstanding company to one where they don't understand the direction of the business."
Do we agree with Bill Ackman? Not completely because HPQ is still a $50 billion company and it may be too big for Ackman to take an activist stake. However we agree with him about the risks in investing in HPQ. We don't feel comfortable investing in HPQ because there wasn't a single insider purchase since the stock went down to low 20s. One HPQ insider exercised his options at $24.61. If the stock was ridiculously cheap, he wouldn't have done this.