Hewlett Packard Enterprise Faces Elliott Management Stake, 16% Stock Drop

Hewlett Packard Enterprise (HPE) is currently facing a significant challenge as activist investor Elliott Management has acquired a $1.5 billion stake in the company. This investment poses a threat to CEO Antonio Neri, given Elliott's history of ousting CEOs from companies in which it has taken a stake. The situation has been met with silence from both HPE and Elliott Management, leaving the specifics of their negotiations unclear. However, several clues suggest what Elliott might be seeking from HPE.

One of the most glaring issues occurred during HPE's Q1 earnings report in March, when the company admitted to a pricing error in its inventory accounting. This mistake significantly impacted the company's profitability and resulted in a nearly 16% drop in its stock price. CEO Antonio Neri acknowledged the error, stating that the cost of inventory was higher than anticipated, which affected the company's pricing strategy. This blunder wiped over $3 billion off HPE’s market capitalization, drawing attention to the company's underperforming stock.

Analysts have pointed out that HPE's share price has been lagging behind its peers. For instance, JPMorgan analyst Samik Chatterjee noted that Elliott's involvement likely aims to address the discount at which HPE's shares trade relative to competitors and to improve the company's execution and efficiencies. Chatterjee compared HPE's performance to that of Dell, Cisco, and NetApp, highlighting that HPE generates significantly less revenue per employee than its competitors. Despite a recent upward trend in HPE's stock following the Department of Justice's decision to drop an investigation into its proposed acquisition of Juniper Networks, the company's stock has underperformed the broader market since 2018.

Elliott Management's strategy typically involves avoiding proxy battles and instead seeking mutual agreements with companies. In a previous instance with Phillips 66, Elliott emphasized its preference for collaborative solutions over proxy contests. This approach suggests that Elliott might be seeking a seat on HPE's board and a strategic plan to turn the company around, rather than immediately ousting Neri. The long tenure of HPE's board members, including CEO Antonio Neri, who has been in his role for seven years, and the chairman of the board, Patricia F. Russo, who has been there since 2015, indicates that there might be a need for new leadership and fresh perspectives.

HPE has acknowledged the importance of shareholder input, stating that it values the constructive input of all its shareholders. While the company has not provided specific details about its communications with Elliott, it is likely that negotiations are ongoing. The outcome of these discussions will determine the future direction of HPE and the role of its current leadership. The situation underscores the challenges faced by companies when activist investors take significant stakes, often leading to demands for strategic changes and improved performance.