H-P to Pay $108M to DOJ and SEC - Analyst Blog

Hewlett-Packard HPQ resolved its long-standing federal investigation by paying $108 million to the U.S. Department of Justice (DOJ) and U.S. Securities and Exchange Commission (SEC). H-P's questionable practices of securing and retaining government contracts in Poland, Mexico and Russia were the prime reasons for the investigations.

Both the federal agencies were investigating the second-largest PC vendor for violation under the U.S. Foreign Corrupt Practices Act (FCPA). The Act deems any payments made to foreign government officials to secure or retain business as illegal.

Allegedly, in Russia, H-P paid approximately $2 million between 2000 and 2007 to retain a certain contract with the federal prosecutor's office. These dealings took place through various agents and shell companies. Similar practices were followed in Poland and Mexico where H-P officials paid bribes worth $600k and close to $1 million, respectively, to obtain government contracts.

H-P claimed that the officials conducting these malpractices had left the company and agreed to take on a strong compliance and internal anti-corruption measure to ensure that such incidents are not repeated.

H-P, however, is not the sole offender since bellwethers such as Juniper JNPR and Alcoa AA have come under the scanner for similar malpractices. Reportedly, Alcoa settled its dispute by paying $384 million in January this year.

From a broader perspective, despite the FCPA keeping a keen eye on malpractices of U.S. companies on foreign soil, such incidents are not rare. Moreover, the companies are usually charged with penalties that are miniscule compared with the revenues generated from these contracts. Large corporations generally pay and move on.

In H-P's case, though the current settlement will affect short-term results, the company's restructuring plans and turnaround strategies will continue to improve its cash flows. We remain encouraged by H-P's increased focus on high-margin software and services, which is expected to boost results over the long term. H-P's decision to take a software-and-service centric approach is a strategic move, in our view.

The cannibalization of traditional PCs by tablets and other mobile Internet devices makes this transition imperative. H-P is witnessing growth across its converged infrastructure and the emerging area of software-defined data centers. Moreover, solid demand from its cloud, security and big-data solutions and services are expected to drive revenue growth.

Nonetheless, continuing macroeconomic challenges, tepid IT spending and competition from International Business Machines IBM and Oracle remain headwinds, going ahead.

Currently, H-P sports a Zacks Rank #2 (Buy).