Tuesday, August 11, 2015

HP & Carly

Carly Fiorina had a good debate. She's getting big kudos and accolades for her performance. Good for her. But I would remind, in some respects this sort of post-debate underdog glow is somewhat bittersweet as it often comes with the presumed expectation that the candidate was going to fare much worse and instead pleasantly surprised. Similar to when we applaud a racehorse that went off at 50-1 odds and came in third. Bravo, stellar effort, but in actuality the horse is likely still not very good.

Also, don't forget that Romney beat Obama in debate #1. Nuf said. Debate performances can be extremely temporal.

It's of course not lost on Carly that she's going to need an incisive answer to the inevitable question, "Why did you get fired from Hewlett Packard?" Her chosen defense from a recent interview:

Look, I led Hewlett Packard through a very tough time - the dot-com bust, post-9/11, the worst technology recession in 25 years.  And tough times, unfortunately, requires, sometimes, tough decisions. 
Two things to keep in mind when she tries to get away with this spin:

1) When it comes to stock price performance, there's absolute and relative. Absolute stock price performance measures simply what the stock price did over a period of time. Relative stock price performance compares the stock price versus a relevant index or benchmark.

2) Stocks tend to discount the future by about 6-9 months. In other words, if a stock plunges -20% today, it's doing so as a reflection of expectations for the company over the next 6-9 months.

That said let's take a look at the absolute and relative performance of HP's stock during the time Carly was CEO.

July 1999 - February 2005

Hewlett Packard stock: -54%
S&P 500: -15%
NASDAQ Composite: -27%

During Carly's reign, HP's stock declined by 54%, pretty awful. However, she has attempted to explain this dreadful performance away by reminding us that it was "a very tough time" with "the dot-com bust, post-9/11" (Really? She uses 9/11 as an excuse for her dismissal? Please.) and of course an economic recession. 

In this regard, the relative stock price performance is much more revealing. How did HP's stock price do compared to the S&P 500 and the technology-heavy NASDAQ Composite? Answer: not well. HP's stock underperformed the S&P 500 by a whopping 39% during this time and trailed the NASDAQ Composite by 27%. 

The moral: despite the dot-com bust, a recession and 9/11, the S&P 500 headed south by "just" -15% compared to HP's horrific -54% decline, and the arguably more appropriate NASDAQ Composite dropped by -27%, or just half of HP's percentage loss. Yes, the times then were dismal, but HP's stock still dramatically underperformed relevant benchmarks -- likely a very integral reason for Carly's forced departure.

According to HP's stock price performance, Carly did an exceptionally poor job at running the company. But what did HP's stock price suggest about the company's prospects once Carly exited the scene? I already mentioned that stock prices are discounting mechanisms with today's current stock price typically reflecting investor expectations for the next 6-9 months (approximation). My research shows that Carly left HP on February 8, 2005.

Six months after February 8, 2005        One year after February 8, 2005

Hewlett Packard: +21%                         Hewlett Packard: +59%
S&P 500: +2%                                       S&P 500: +5%
NASDAQ: +4%                                      NASDAQ: +9%

Interesting. After Carly's dismissal, HP's stock was a stellar performer, beating the S&P 500 by 19% and the NASDAQ by 17% in six months. A year later, HP's stock surpassed the S&P 500 by 54% and the NASDAQ by 50% -- wow! It's safe to conclude that investors believed Carly was a significant impediment to HP and the company had a much brighter future with her gone.

Please remember these figures the next time you hear Carly trying to spin her past into a success story. Did she get rich? Oh certainly, to make her go away, HP paid Carly an exit package of somewhere in the neighborhood of $20-$40 million, depending on which news story you want to believe. But was she a successful CEO? That's quite a different question and one that is much more relevant to her campaign narrative.


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