ebook essays pieces of the puzzle
Thursday, September 29th, 2011
ready or not

The long-running corporate soap opera that is Hewlett-Packard got even more interesting with the appointment of Meg Whitman as CEO.  Immediately, commentators started to say that she’s “never run something this big.”  Her fame, of course, came as the head of EBAY.

Here are a couple of ways to look at that statement.  In terms of market capitalization, the top panel shows that there was a period during Whitman’s reign where EBAY was worth more than HPQ, but it didn’t last long.  Interestingly, with EBAY showing some improvements of late and HPQ continuing to disappoint, the market values have been converging again.

The middle chart looks at annual net income, just looking at the business, not the interpretations of investors.  Other than a period when HPQ had losses, it’s been no contest.  (And sales?  HPQ’s are currently about twelve times larger than EBAY’s.)

A little arithmetic will show you that HPQ has an extraordinarily low P/E on trailing earnings now, so the bar is not high at all for Whitman.  No matter what she actually does, should the market improve in the next couple of years, she’ll be looking at another big payday by being in the right place at the right time (given the ridiculous structure of CEO compensation packages, which should not reward market movement but do).  As the bottom panel shows, a ramp in EBAY stock from 2001 to 2004 made Whitman very rich, but if you take out the first few months after the IPO, the stock was basically a market performer during her tenure.

I’m not one to begrudge compensation that is deserved, so I think she should get some combat pay for dealing with the dysfunctional board, of which she’s a member.   Regarding that board, I’m surprised it got aced out in the race to have Chelsea Clinton sitting around the table with them.  I think it would have been a good fit.  (Chart:  Bloomberg terminal.)

broken charts

A defining aspect of an investment manager’s style is what happens in response to broken charts.  It provides a “tell” that you won’t see in other circumstances.