Everybody is talking about the latest news out of HP. Okay, maybe not everybody, but plenty of folks in the office imaging industry. That seems to be the case whether this affects them directly or not.
In case you missed it, here’s an excerpt from the New York Times on Monday, Oct. 6:
Hewlett-Packard confirmed on Monday that it planned to break into two companies.
The company, considered a foundational institution of Silicon Valley, said in a news release that it intended to divide itself into a company aimed at business technology, including computer servers and data storage equipment, software and services, and a company that sells personal computers and printers.
Both companies will be publicly traded. The business-oriented company will be called Hewlett-Packard Enterprise, while the PC company will be called HP Inc. and will retain the company’s current logo. The transaction is expected to be completed by October 2015, the end of HP’s fiscal year, the company said.
In a statement, Meg Whitman, HP’s chief executive, said the company was splitting up to “more aggressively go after the opportunities created by a rapidly changing market.”
While Ms. Whitman, who became chief executive in 2011, depicted the historic decision as a natural part of her five-year turnaround plan, she had previously resisted the idea of breaking up the company. HP was one of the world’s top buyers of semiconductors and other computer parts, she had argued, giving it pricing power superior to its rivals.
Dividing in two, she said on Monday, “will provide each new company with the independence, focus, financial resources, and flexibility they need to adapt quickly to market and customer dynamics.” This will make HP more competitive, she said.
Ms. Whitman will retain much power at both companies. She will be chief executive of Hewlett-Packard Enterprise and will serve as nonexecutive chairman of HP Inc. Patricia F. Russo, currently a director of HP, will be chairwoman of Hewlett-Packard Enterprise. Dion Weisler, now head of HP’s printing business, will be president and chief executive of HP Inc.
HP’s split is not the first time the company has hewed itself in two to cope with changing times. In 1999, its test and measurement equipment division was started as a separate company, called Agilent. Shares in Agilent rose 41 percent on their first day, and the company was completely spun off HP in 2000. The stock was already declining by then, however, and today Agilent has a market capitalization about equal with its first day’s value.
Agilent, as the name suggests, was also split off in the interests of agility, at that time in the face of the first Internet boom. While HP benefited in those years from PC and server sales, management also felt the company was not moving fast enough for a changing world.
Meanwhile, The Wall Street Journal reported that same day that investors seemed pleased with the move, as shares of Hewlett-Packard were up 5.9% at $37.28 in afternoon trading Monday. The Journal added that HP stock has risen sharply since the beginning of last year, but shares remain well below their highs in recent years—and the even-loftier levels they reached during the 1990s technology boom.
In a separate move, HP raised on Monday the number of expected layoffs it has planned by 5,000 to 55,000, after identifying “incremental opportunities for reductions.” According to The Wall Street Journal, HP had previously projected its job cuts to be between 45,000 and 50,000, and it already has shed 36,000 employees under the restructuring program as of the end of the most recent quarter.
Fortune magazine described the breakup this way:
In HP’s case, it’s not clear what the business motive for the split is. It may be true that HP’s corporate computing business doesn’t have a lot of overlap with its personal computer and printing divisions, but that also makes it unlikely that the two divisions are holding each other back. HP CEO Meg Whitman says the split is needed so the two companies can be more nimble. But even when they are broken up, the two companies will remain, by most scales, behemoths, with over $55 billion in sales each.
But the main problem is that once HP’s businesses are sent off on their own, they may not be as valuable as investors currently think. On Monday, HP had a market capitalization of $69 billion.
HP says on that its personal computer and printer segment would have had sales of $57 billion in the past year if it were considered a standalone entity. That’s roughly the size of computer maker rival Dell when it went private last year. That deal valued Dell at $25 billion, or a little less than half its sales. But Dell has an operating margin of 21% and operating profits of $12 billion. HP’s operating profits are less than half that, just $5.4 billion in the past year. Adjust for that, and HP’s computer business could be worth around $12 billion.
If you’re unable to tell that Fortune is not all that positive about the breakup, these closing comments from the article ought to seal the deal: It looks like Wall Street’s wacky split-up math on HP is that two minus one equals three. Eventually, investors will realize that breakups aren’t all they are cracked up to be.
Analysts have been weighing in on the news, and before speaking to three office imaging industry analysts, let me share some comments analysts outside the imaging industry, from the Website Venture Beat (www.venturebeat.com).
Venture Beat reported that on CNBC, Roger McNamee, managing director at Elevation Partners, observed, “HP has gone from having two boat anchors tied together, each trying to float in the water, to two separate boat anchors trying to float in the waters. They have all the agility of a bag of cement.”
McNamee added that HP is two or three years behind every trend, and he said IBM made the right move years ago when it spun out its PC and server business as Lenovo.
“The only thing I’m certain about on this deal is that the executive compensation will be absolutely terrific,” McNamee said.
On a more positive note, Patrick Moorhead, analyst at Moor Insights & Strategy, said in the Venture Beat article, “Overall, this should be a positive for HP. They have two businesses with differing product life cycles, margin structures, distribution channels and sales cycles. After three years of looking for synergy outside of the supply chain, it’s apparent HP CEO Meg Whitman see benefits of the split that outweigh losing a supply chain advantage. I believe the two companies can be more nimble and be able to deliver better products and services on a faster pace. HP Inc. will need to accelerate into 3D printing, smart home, and premium PCs, maybe even a foray back into smartphones. The enterprise organization has a strong infrastructure offering, but will need to drive even more quickly into hybrid clouds, appliances, and address the giant sucking sound of public clouds.”
I also caught up with three office imaging analysts this week who offered these comments about the breakup:
“I believe the latest HP announcement will enable each company to better concentrate on their own industry, it makes sense logically. Our industry selfishly speaking, is better and healthier when HP is creating and innovating. To be blunt, I will mention three names what totally distracted their creativity in my opinion: Compaq, Palm (yes, someone actually paid money for Palm), and Autonomy. One they did to combat Dell, the other was going to be their push into mobile devices, and the last was to face off against SalesForce. Bottom line, none of this will matter if HP doesn’t get back to its roots of invention.” David Ramos, Director, Channel Strategy Service, InfoTrends
“While Wall Street appears to be mildly optimistic about HP splitting into two companies, I’m hard pressed to see how separating HP’s printing and PC businesses from its enterprise hardware, software and services businesses is good news for HP’s position in a rapidly changing hardcopy market or for the printing industry as a whole. For every potential upside for HP’s hardcopy business, I see more and bigger challenges coming from this strategy creates. The most likely beneficiaries I see in the printing world are HP’s competitors.” Brian Bissett, Editor & Publisher, The MFP Report
“Since the realignment of PPS, print-focused channel partners we’ve spoken with haven’t been happy with the level of support. The PC group has overshadowed the print specialty quite a bit, leaving more than a few partners feeling like HP doesn’t care about print anymore. As recently as the last HP earnings call, Meg Whitman indicated that HP had cut too deeply and signaled the company would bolster the print specialist ranks.
“Is this still the case, or will this be a bullet point that gets lost in the shuffle?
“It’s hard to tell, but I think print-only partners are going to fair much better than IT-centric partners who sell print. HP may have just shot itself in the foot with its channel MPS strategy. It’s MPS channel program was ideally suited for IT-centric channel partners partners to get into print, so there may be a lot of angst until things land? Meanwhile, Xerox just launched a new CPO strategy to shore up its focus in this key demographic.
“Timing couldn’t be better for competitors with strong channel programs to swoop in and play the ‘F.U.D. card.’ HP’s channel team is going to have to work doubly hard to ensure they keep their eye on the ball. But will they be more worried about keeping their job given the pending layoffs?
“If I ask my magic eight-ball, it tells me that the ‘outlook is unclear.’” Ken Stewart, Vice President of Services, Photizo Group.
