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As HP swims upstream, investors bet it gets washed away

Hewlett-Packard's $8.8-billion (U.S.) Autonomy trouble was sown by the company's long history of dysfunction. HP blames accounting improprieties at the U.K. software company it bought for $11.7-billion last year for the majority of the writedown it was forced to take in its earnings report on Tuesday. But HP, facing declining businesses and boardroom disarray, was too eager to do a deal. Chief executive officer Meg Whitman may be wondering what else can go wrong.

A recent history of mismanagement is a big part of the problem. HP underinvested in research and development over the past decade, spending only half as much as IBM as a proportion of sales. In place of innovation, HP bought other companies. It made over $60-billion of deals in the past 10 years, including the huge Autonomy purchase at a 64-per-cent premium to its market price. But after Tuesday's decline of more than 10 per cent in its shares, HP's market capitalization is only $23-billion. And partly thanks to paying cash for Autonomy, its once pristine balance sheet is weighed down with a whopping $17-billion of net debt.

M&A isn't easy to get right. But HP's balkanized board didn't help. Inexplicably, some of the feuding directors didn't meet former CEO Leo Apotheker before hiring him. That can only have increased the chance of a huge mistake like Mr. Apotheker's deal for Autonomy, which looked overpriced even based on what HP now says were inflated numbers. Worsening business performance surely increased the desire for a big deal. But Mr. Apotheker lasted less than a year, and Ms. Whitman's status as the sixth actual or acting CEO in eight years testifies to the absence of strategic direction.

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Unfortunately, HP's earnings for its last fiscal quarter suggest its problems are only intensifying. Revenue in its PC division fell at a 14-per-cent annual clip. Sales from the supposedly steady operations – IT services and printing – also shrank.

HP's founders created the archetype of two engineers in a garage building the product of the future. The company is the granddaddy of Silicon Valley, and most people there are rooting for its survival. But rival executives are skeptical of a turnaround, and the market isn't betting on it: HP's stock is trading near 15-year lows. The company's debt hangover is a concern. And the now inevitable finger-pointing over Autonomy will make Ms. Whitman's already tough job still harder to pull off.

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