Wall street's disproportionate sway over the U.S. economy has caused big problems in recent years, from the subprime crisis to high-frequency-trading debacles. But here's one you may not have noticed: it's crippling innovation.
To understand how, look at the latest victim, the once mighty Hewlett-Packard. It's hard to think of a company that's been as loved and, more recently, loathed. The godfather of high-tech firms, HP was started in a garage in 1939 by two engineers and came to symbolize the Silicon Valley culture of creativity and collaboration. But that was then. For more than a decade, HP has been plagued by management flameouts, layoffs and slumping profit margins. Now the company is reeling from its Nov. 20 announcement that it is taking a massive write-down on Autonomy, a software company it paid $11 billion for in 2011. HP is erasing $8.8 billion of Autonomy's value from its books amid allegations of accounting improprieties and disclosure failures. And HP's stock chart is looking like a downward slope on one of the mountains near its headquarters.
HP's real problem--it is one that also troubles the rest of corporate America--is an addiction to buying short-term growth at the expense of long-term innovation that can produce profit and jobs. Executives are still rewarded on the basis of stock price and behave accordingly. Many have come to resemble financial institutions, running their balance sheets like portfolios to hedge short-term bets while failing to invest in their future. Over the past three decades, companies that have sacrificed long-term growth for short-term gain have included Kodak and Merck. Suffice it to say the list is long and, thanks to ever shorter investor time horizons, growing.
In the case of HP, buying Autonomy, which made search and analysis software, was supposed to boost the company's stock price by moving its focus away from computer hardware and printers, which are under increasing pressure from competitors' cheaper products. Yet integration plans were unclear, and investors felt the deal was overpriced. As fund manager Pat Becker of Becker Capital Management, who sold his HP shares when the buy was announced, puts it, "Acquisition at any price is a bad strategy."
But one of the reasons HP was shopping for a software company in the first place was that it had lost the ability to innovate from within, in part by discarding its engineer-driven culture for a sales orientation. Kimberly Elsbach, a professor at the University of California at Davis who co-authored last year's paper titled "The Building of Employee Distrust: A Case Study of Hewlett-Packard from 1995--2010," traces the beginning of the end to the appointment of CEO Carly Fiorina, an outsider who downgraded techies and upgraded herself, centralizing corporate control and even starring in an ad campaign. She also began a series of layoffs--ramped up after a merger with Compaq in 2001--that took the company further away from its original culture.