Elliott Management takes a stake in Hewlett Packard Enterprise — How it may create value

Business: Hewlett Packard Enterprise is a global edge-to-cloud company. It delivers open and intelligent technology solutions as a service. The company offers cloud services, compute, high performance computing and artificial intelligence, intelligent edge, software and storage. Its segments include Server, Hybrid Cloud, Intelligent Edge, Financial Services, Corporate Investments and Other. Its Server segment offerings consist of general-purpose servers for multi-workload computing, workload-optimized servers, and integrated systems. Its Hybrid Cloud segment offers a range of cloud-native and hybrid solutions across storage, private cloud and the infrastructure software-as-a-service space. Its Intelligent Edge segment offers wired and wireless local area networks, campus, branch, and data center switching, and others. Its Financial Services segment provides flexible investment solutions, such as leasing, financing, IT consumption, utility programs, and asset management services.

Stock Market Value: $19.88B ($15.14 per share)

Ownership: ~7.4%

Average Cost: n/a

Activist Commentary: Elliott is a very successful and astute activist investor. The firm’s team includes analysts from leading tech private equity firms, engineers, operating partners – former technology CEOs and COOs. When evaluating an investment, Elliott also hires specialty and general management consultants, expert cost analysts and industry specialists. The firm often watches companies for many years before investing and has an extensive stable of impressive board candidates. Elliott has historically focused on strategic activism in the technology sector and has been very successful with that strategy. However, over the past several years its activism group has grown, and the firm has been doing a lot more governance-oriented activism and creating value from a board level at a much larger breadth of companies.

Hewlett Packard Enterprise (HPE) is a global edge-to-cloud company that delivers open and intelligent technology solutions as a service. The company was spun off from HP Inc in 2015. HPQ, the RemainCo, retained the PC, desktop and printer businesses, while HPE, the SpinCo, focuses on servers, storage and networking. The majority of HPE’s revenue (53.8%) is derived from its Server segment, which consists of general-purpose servers for multi-workload computing, workload-optimized servers, and integrated systems. Its Hybrid Cloud segment (17.88%) offers a range of cloud-native and hybrid solutions across storage, private cloud and the infrastructure software-as-a-service space. Its Intelligent Edge segment (15.04%) offers wired and wireless local area networks. The remainder of HPE’s revenue is derived from its financial services, investments and other activities. This comprehensive product portfolio sets HPE apart from peers like Dell or Cisco, which typically lack one or more of these pieces. Despite this unique marketing position the company is still undervalued to its peers. Currently, HPE trades at less than 5-times earnings before interest, taxes, depreciation and amortization, compared to its closest server peer Dell at over 7-times EBITDA, reflecting a 30% discount.

The primary driver of HPE’s undervaluation appears to be poor execution and a loss of credibility with the market. In Q1, HPE reported a net revenue decrease in its core Server business. The company attributed this loss to mispricing servers relative to inventory costs, which went unnoticed until late in the quarter. As a result, the stock sold off sharply in the days following the company’s earnings. Meanwhile, Dell reported beats on both revenue and margin for the same quarter. However, this is not an isolated incident, but rather the latest in a history of underperformance. Since Dell resumed trading on the NYSE at the end of 2018, it has outperformed HPE’s returns by over 200%.

While its Server business is the core business for HPE, much of the opportunity here revolves around the networking business. This is a higher multiple business that Dell does not have. HPE’s Intelligent Edge business accounts for one-third of the company’s profits, and networking peers like Cisco trade at 12-times EBITDA. If Intelligent Edge traded at that multiple it would be worth almost the entire enterprise value of HPE today. That leaves significant value from the company’s core Server business and its Cloud Storage business even if those businesses continued to trade at 5-times EBITDA. That value increases significantly with better management execution and efficiency, which should get those businesses to the 7-times multiple Dell trades at. Furthermore, while HPE’s differentiator is its high multiple networking business, Dell’s primary differentiator is a low-multiple PC and desktop business, so a case can be made that HPE’s analogous businesses should trade at a higher multiple than Dell.

There is also a major uncertainty that is hanging over HPE – its pending acquisition of Juniper Networks, a networking peer to HPE and Cisco. The $14 billion deal, originally announced in January 2024, has been stalled. Earlier this year, the Department of Justice sued to block the acquisition, saying it would eliminate competition. This uncertainty puts HPE at a crucial inflection point, something that markets inherently dislike – especially when management lacks a track record of savvy execution. The potential complications here are clear: If the deal is blocked, HPE would have over 25% of its market cap in net cash, prompting concerns that management may pursue a rushed and risky acquisition to compensate for this failed transaction. Conversely, if the deal goes through, given HPE’s recent executional missteps, investors may worry whether the company will be able to effectively integrate a business of Juniper’s size. So, even though acquiring Juniper would significantly improve HPE’s profitability mix to almost 50% attributed to the higher multiple networking business, many market participants may be looking at this as a lose-lose. But with the right oversight, it should be a win-win.

This is where Elliott comes in as a potential value creator for HPE. With sufficient shareholder representation on the board that restores confidence that the company will be keenly attuned to shareholder value, the uncertainty of Juniper could turn into a great opportunity for shareholders regardless of whether it closes or not. If the deal gets blocked and there is strong shareholder representation on the board, shareholders will have confidence that the large net cash position will be used wisely, whether through a diligent and disciplined value-creating acquisition or to buy back shares at these depressed values. If the deal does close, shareholders will have more confidence that a refreshed board will do a better job integrating Juniper. Elliott is one of the most prolific activist investors today with a history of effective and successful strategic activism in the technology sector. In the past 10 years, the firm has engaged 25 technology companies and has delivered an average return of 20.60% versus 8.56% for the Russell 2000 over the same periods. However, in the six of those 25 situations where Elliott received board representation, the firm returned an average of 45.53% versus 15.35% for the Russell 2000 over the same time periods. Importantly, Elliott has a deep familiarity with Juniper, having previously engaged the company from 2014-2015. In this engagement, Elliott called for a slew of capital allocation and strategic initiatives, ultimately settling for board seats for Gary Daichendt and Kevin DeNuccio. Notably, DeNuccio is still on Juniper’s board today.

While we believe Elliott’s activist campaign and the value at HPE is compelling over a full activist cycle on its own, given the economic climate today, we would be remiss not to mention something about tariffs. HPE is likely in a better position than Dell to face certain geopolitical headwinds. The majority of HPE’s servers comply with the United States-Mexico-Canada Agreement and are manufactured in Mexico. In contrast, a significant portion of Dell’s PC products are manufactured in China and are therefore significantly more exposed to tariff risks.

Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.