Could this Dow component be a takeover candidate?It's a crazy notion that now seems like a remote possibility. Investors should not focus on the company's battered shares and relatively strong trailing sales, cash flow and profits as a catalyst for M&A that would lift shares though. Instead, they need to watch for signs that new CEO Meg Whitman is going to steer HP toward a business model that will be competitive in Silicon Valley in the long-term. Much ink has been spilled about the deal making at HP over the last two years. Two CEOs ago, the company looked like one of tech's serial post-crisis acquirers, buying 3Com, Palm, Arcsight and winning out against Dell in a heated battle for 3PAR. In August 2011, then-CEO Leo Apotheker made a giant wave when he announced the acquisition of British software giant Autonomy for $10.3 billion and planned a spin of the company's world-leading personal computer business. Whitman quashed the PC spin-off plans shortly after Apotheker's firing, and she is now focusing on leveraging Autonomy and identifying a durable strategy to combat falling PC profit margins amid the competitive threat posed by the mobile smartphone and tablet world. HP won't be doing much M&A anytime soon, Whitman has said, and if asked, she'd likely say they aren't looking at a sale either. Nevertheless, at a $50 billion market cap, which fell as low as $35 billion in 2011, speculation of potential buying interest from Oracle made it to the pages of the New York Post back in August 2011, especially as the company was toying with the PC business spin-off. It even gave fodder for analysts to speculate on a deal that once would have seemed unthinkable but there hasn't been much noise since then. Maybe one day a deal will emerge. In the meantime, HP is facing a year of intense investor scrutiny and a high bar for execution. Will the company be able to successfully open source its WebOS mobile operating system to keep pace with competitors like Apple? Will it revisit its options for the PC business if consumers increasingly look at mobile devices as a substitute for computers? Meanwhile, HP needs to watch for a feisty Dell that is picking up share in some of its businesses. For both companies, a big potential stabilization to their PC businesses may finally arrive with Microsoft's coming launch of Windows 8. In a March note, Bloomberg Industries makes the point that strong iPad 3 and android based-tablet sales in 2012 may challenge the late-year acceptance of Windows 8. The new iPad is set to launch on March 7 to much hype and interest, making fall 2012 a distant thought for device shoppers. Until then M&A speculation should not drive investors thoughts on HP. Rather, it's wiser to stay focused on whether the company can start consistently meeting earnings benchmarks and stabilize profit margins. HP's revenue and profit are expected to fall to $122 billion and $6.7 billion respectively in 2012, according to consensus analyst estimates polled by Bloomberg, who give the company a $31.61 price target. The stock opened Monday below $25 a share, down over 40% in the past year, with its forward price-to-earnings multiple pushed down to a measly 5.7X. -- Written by Antoine Gara in New York
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