HP misled investors, shareholder alleges in lawsuit

Proposed class-action suit claims company hid poor performance, plans for major shift in strategy

Was Hewlett-Packard being intentionally deceptive or responsibly discreet?

That's essentially the question to be considered in a U.S. District Court where a proposed class-action lawsuit was filed this week by a disgruntled shareholder of Hewlett-Packard.

The shareholder, Richard Gammel, alleges in the lawsuit that CEO Leo Apotheker and other HP executives for the better part of the past year purposely misled investors about the company's performance and future plans.

The world's largest computer manufacturer announced on Aug. 18 that it would cease producing devices powered by the webOS mobile operating system, such as its recently launched and aggressively hyped TouchPad tablet, and, even more amazingly, may spin off its low-margin PC business, which generates nearly 30% of HP's revenues.

HP also said it was buying Autonomy, a British database-search software company, for $10.3 billion, a price many analysts and shareholders considered to be excessive.

The moves were being made, HP said, so the company could pursue a cloud-based software and services strategy that executives promised would deliver higher margins and create greater value for shareholders.

Wall Street's initial reaction was, you might say, a tad skeptical. HP shares plummeted 25% over a two-day period.

The crux of Gammel's suit, filed in a California federal court, is that HP knew its current business model was not working but misled investors with happy talk, all while planning drastic changes that led to last month's huge drop in the company's value.

That HP's announcement regarding intentions to spin off its PC business was out of left field can't be disputed. And while its decision to kill off webOS after paying Palm $1.2 billion for the mobile operating system in April 2010 was surprising, the fact that the TouchPad was a major flop out of the gate was hardly a secret.

Nor was it a secret that HP's most recent quarterly results were disappointing.

Maybe I'm way off on this, but companies can't telegraph major strategy changes (including acquisitions and sell-offs) just so shareholders won't feel deceived. Indeed, one of the reasons HP is being criticized is that by announcing its intentions to find a buyer for its PC business, it's hurting its bargaining leverage.

If this case hinges on proving deception, it's strikes me as a hard one to win. Incompetence, though, may be a different matter altogether. But that's not what this lawsuit is arguing.

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