Back in the 2008 financial Crises, GM was finally brought to its knees and had to face a radical makeover. They asked for a bailout from the government that allowed the unions to swap out lower compensation for equity, something no union would do unless the alternative was to shutter the doors. The bondholders and the shareholders got a major hair cut in the process. For the management, what they wanted in return for running the company was the flexibility and cost structure to allow them to focus the future of the company in two areas: trucks and the fast growing China market. Meg Whitman has to come up with a strategy that get’s HP out of commodity box that is being slammed on many sides (i.e. Oracle, IBM and Apple). One proposal would be for her to return HP to its roots by buying AMD and going vertical in the PC and Server space to a degree that can be unmatched by Dell, IBM or Oracle.
As I blogged a few months ago, HP’s unraveling began in the summer of 1994 when they decided that they no longer wanted to develop PA-RISC server processors and instead signed on with Intel to have them develop Itanium. HP quickly set out to acquire all available minicomputer architectures (Convex Computer, Tandem and DEC VAX and Alpha) under its umbrella to spread Itanium’s architecture into a market share leadership position. Itanium was late and the issue of porting software to the new architecture was a greater challenge than first imagined. As a result HP did not overcome IBM or Sun’s lead in the high-end server and workstation business. IBM continues to profit and Oracle’s acquisition of Sun SPARC allows it to execute on a very profitable razor/razor blade business model with some legacy customers. Meanwhile HP continues to lose share and revenue.
Listening to AMD’s recent earnings conference call I was struck by how well they were doing in the emerging markets and the fact that they are increasing revenue along with Intel and nVidia in 2011. Clearly the emerging market is growing much faster than Gartner or IDC or the Wall St. analysts can get their hands around. All this is happening even with the economic slow down in Europe, which still represents about 20-25% of the world economy. AMD said in the conference call that they believe that they have 28% of the $200-$600 retail market which is 45% of the total retail market. All the growth was in notebooks. They are executing on a <$30 CPU plan at 45% Gross Margins that Intel does not have the capacity or desire to play in.
What we are witnessing is a massive shift in notebook price points (meaning 14” and 15” LCDs) into what was a 10” LCD based netbook space just 12-24 months ago. The crunch down in notebook prices and not Apple’s iPAD is the reason netbooks are dead. The driving factor is lower cost LCD panels, nearly FREE $ DRAM and x86 CPUs that sell down to $20. I assume that in some of the emerging markets where notebooks approach $200, the O/S is Linux or a boot copy of Windows.
Back to HP and the reasons for an acquisition of AMD. Some months ago, I made another prediction that AMD would get bought when its stock price dropped below $5. I speculated nVidia as the likely suitor. nVidia, though has done much better than expected the past year focused on >$700 notebooks which is above AMD’s $200-$600 focus. In addition, nVidia is very focused on the ARM based Tegra. AMD today is under $6 and valued at less than $3.7B. They did drop below $4.5 in September. But either way, well within the range that HP could pull off rather easily, especially given their almost unlimited ability to raise debt.
As HP looks around them, they see that all of their chief competitors with the exception of Dell have an internal processor group (i.e. IBM, Apple, Oracle) that can customize the processors for the target market. With an AMD acquisition, they can leverage themselves into the emerging markets at the expense of Lenovo, ASUS, Acer and Dell who would have to rely on more expensive Intel processors. HP could finally move their market share from around 20% today to a range of say 40-50%, where they would have the world’s lowest cost supply and operations infrastructure.
Secondly, an AMD acquisition paired with a partnership with Calxeda, could allow HP to offer a broader data center product line. Calxeda is the Austin startup focused on low power, ARM based server processors. With Intel raising prices on Xeon and reaping 80%+ gross margins, it now becomes a major focus for Google, Amazon and data centers to figure out how to shift work loads off of x86 to other lower cost architectures like ARM. This is no different than IBM helping Fortune 500 companies move their workloads over to their PowerPC based mainframes and servers.
Without a processor group, HP will continue to be commoditized in both the PC and the server markets by lower cost China based competitors and by IBM and Oracle. For the small price to pay for AMD and investing in Calxeda, HP can go to a broad set of customers and offer a better value proposition than any of its competitors with complete server and networking solutions that they designed. HP then, would be back in the business of Inventing.
Next Generation of Systems Design at Siemens