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HP throws M&A wrench in turnaround gears

Hewlett-Packard has thrown an M&A wrench in its turnaround gears. Chief Executive Meg Whitman helped the troubled tech firm regain investor trust by patching the hole left in its balance sheet by her predecessors' deal-making. Now she reckons a return to M&A could help stem HP's declining revenue. No wonder shareholders had, by midday on Thursday, vaporized $6 billion of the stock's value.

The company's awful quarterly results highlight the continuing meltdown in HP's markets. Revenue shrank eight per cent compared to the same period last year as every division except its small software unit suffered from declining sales. The growth of mobile devices and online software services means there's no reason to think HP's bread and butter businesses - PC, printing and consulting - will reverse this trend anytime soon.

Yet, HP's stock has been on a rocket ride this year. As of yesterday's market close, shareholders enjoyed a 70 per cent return on their investment. The reason was simple - HP had finally stopped digging a hole for itself.

The company's past attempts to revitalise itself with acquisitions had been a disaster. In 2011, it confessed that most of the $1.2 billion it spent on Palm was wasted. Last summer it wrote down $8 billion in connection with its 2008 purchase of the EDS consulting business. A few months after that, it acknowledged it had wasted nearly $9 billion buying Autonomy. These deals also left HP heavily in debt.

Last year, HP finally admitted it had a problem with capital allocation. Its promise to focus on dividends, buybacks and debt repayment quickly paid off. Net debt has fallen more than $1 billion in each of the past six quarters. And, boardroom discussion about dismantling the firm added to the stock's upward momentum, as the company had been trading far below the sum of its parts, according to a Breakingviews analysis.

Now, Whitman says acquisitions will be part of the company's turnaround. True, the amounts are limited - up to $1.5 billion - and the boss promises to be careful. But with HP's businesses struggling, talk of more M&A rather than selling units has frightened investors. Promising to consider hawking sub-par performers would be the best way to calm them.