Tech's cataclysmic week
Moves by Google and HP underscore changing technology landscape
The world's largest computer maker is giving up on PCs. The world's largest search engine plans to sell smartphones.
The news this week regarding Hewlett-Packard and Google was big. HP is killing off WebOS and wants to sell its PC unit, thus betting its future on cloud-based enterprise software and services.
Google, meanwhile, bought troubled Android-maker Motorola Mobility at a 60% premium, fueling speculation that the motive behind the pricey $12.5 billion purchase (by far Google's largest acquisition) was expensive patent protection. Motorola Mobility owns more than 17,000 wireless patents, while Google's Android OS has been the target of intellectual property litigation. Should the deal be approved by regulators, much of Google's patent pain will be eased.
Each company acted in response to market conditions in their respective sectors. However, they were primarily defensive moves, and actions taken defensively almost always carry some downside or risk because they're not made in optimal conditions.
For example, in acquiring Motorola Mobility and its war chest of wireless patents, Google also has signed on to running a low-margin business (selling mobile devices). Wall Street is used to -- and historically has rewarded -- Google for producing high margins from its online advertising juggernaut. If the acquisition goes through, Google's operating margins will be diluted.
In addition, Google would be taking over a company with a smartphone market share of only 10%. A company whose employee headcount (19,000) would increase Google's managed workforce by 60%, and a company that would be competing against other Android makers such as Samsung and HTC.
These obvious complications and potential problems are apparent to Wall Street. Shares of Google (NASDAQ: GOOG) are down about 10% since the Motorola Mobility announcement, and the stock has received a sharp downgrade by Standard & Poor's.
Meanwhile, shares of HP (NYSE: HPQ) were down 20% early Friday afternoon, less than a day after HP released dismal third-quarter earnings and again revised downward its full-year revenue outlook.
The earnings announcement came hours after HP confirmed rumors that it was going to kill off WebOS, attempt to spin off its Personal Systems Group, and buy U.K.-based cloud software and services provider Autonomy for $10.3 billion.
If HP had been counting on its dramatic strategic shift to cushion its stock price from its bad quarter and worse outlook, it was in for a disappointment. Friday's price of 22.75 was the stock's lowest in more than six years.
Chief executive Leo Apotheker is under tremendous pressure to kickstart HP's sagging share price, so Wall Street's immediate and sharply negative reaction makes it imperative that the new strategy bear immediate positive results.
It's hard to see how that's going to happen, since HP will be losing about 30% of its revenue when it dumps the PC group, which rang up $9.6 billion in third-quarter sales. Granted, the group's margins are low and sales are declining, but HP is a long way off from replacing that revenue with software sales, even counting Autonomy's $256 million revenue in the second quarter.
However the HP and Google moves play out, they certainly made this anything but a slow news week in tech.