Hewlett-Packard Breaks Into Two Units to Stay Competitive
IMAGE: Hewlett-Packard Co. »
Hewlett-Packard Co. (HPQ) is splitting into two companies, using a breakup to become nimbler after failing to keep up with the shift away from the printing and personal-computing businesses it pioneered.
Chief Executive Officer Meg Whitman will lead Hewlett-Packard Enterprise, a new company focusing on corporate hardware and services, while Dion Weisler, the vice president in charge of personal-computer and printer operations, will become CEO of that business, called HP Inc., Hewlett-Packard said in a statement today.
Whitman is reversing an earlier position that the company should remain a single enterprise. When she took the helm in September 2011, as the fourth CEO in 2 1/2 years, she ended plans by her predecessor to spin off the PC unit. Hewlett-Packard, which had set the pace in computers for decades, had embarked on a rapid expansion plan through acquisitions -- some of them controversial -- followed by tumultuous years of strategy shifts, cost-cutting and reduced profit targets. Now Whitman is pursuing the kind of spinoff plan that’s gathering steam at other technology companies.
“It puts them in a better position than they would have been yesterday or even a couple years before, but it’s still a very competitive marketplace,” said Peter Wahlstrom, an analyst at Morningstar Inc., who has a hold rating on the stock. “Enterprise is really where a lot of the growth is, and then you’ve got the PC-printing business which is a little bit more an annuity, a stable steady-eddie.”
Whitman said the board’s annual review of the company’s turnaround showed that its balance sheet and leadership were now strong enough to support the split. The breakup will let the two companies focus on the rapid changes in their respective markets, she said.
“Nimbleness and speed are going to be an important part of the future,” Whitman said in an interview. “By separating into two companies with quite distinct markets, with quite distinct customers, we’ll be able to move faster to take advantage of the changing customer needs and accelerating our product and innovation road map.”
Hewlett-Packard shares rose 4.7 percent to $36.87 at the close in New York. They have gained 32 percent this year, after almost doubling in 2013.
Other technology companies have undertaken similar transformations as they seek to keep up with a shifting market. Last week, EBay Inc. (EBAY) announced that it would spin off its PayPal unit. EMC Corp. (EMC), a maker of storage computers, is exploring strategic options that could include a full or partial sale, or a spinoff of VMware Inc. (VMW), and has also held merger talks with Hewlett-Packard, people familiar with the matter have said.
International Business Machines Corp. (IBM) has been shedding its hardware operations, including selling its PC unit to Lenovo Group Ltd. (992) in 2005 and its low-end server unit to the Chinese company this year.
Hewlett-Packard’s breakup will be a tax-free distribution of shares to shareholders. Whitman will also become chairman of the PC and printer company, while current lead independent director Patricia Russo will be chairman of the enterprise unit, Hewlett-Packard said.
Planned job cuts will increase to 55,000 and costs to restructure will be about $600 million. That’s compared with as many as 50,000 previously projected, Palo Alto, California-based Hewlett-Packard said in a presentation today.
Before Whitman arrived at the helm, Hewlett-Packard had been beset by management and strategic stumbles. Under CEO Leo Apotheker, her predecessor, the company acquired U.K. software maker Autonomy Corp., a deal that resulted in the company taking an $8.8 billion writedown in 2012 and mired the company in lawsuits to this day. Apotheker had succeeded Mark Hurd, who left in August 2010 after the board said Hurd violated Hewlett-Packard’s code of business ethics.
Carly Fiorina, Hurd’s predecessor and the first outsider hired for the CEO job, in 1999 sold Agilent Technologies Inc. (A), the electronic instruments division closest to the company’s roots.
Two years later, Hewlett-Packard bought Compaq Computer Corp., the PC manufacturer. Fiorina was fired in early 2005 after she missed Wall Street’s numbers too often.
The breakup announced today may partially vindicate Apotheker, whose plan to spin off or sell the PC division was poorly received by investors and contributed to his 2011 exit after less than a year.
The idea of Hewlett-Packard spinning off or separating the printers and PCs businesses has come up in the merger discussions between EMC and Hewlett-Packard, a person familiar with the matter said. The plan would have been to have a combined company focusing on areas such as storage, servers, software and security, the person said.
Whitman has been introducing new products and cutting jobs since she took over as CEO in September 2011, seeking to turn around the 75-year-old Silicon Valley company. The company has fallen behind in mobile computing at a time when consumers have migrated to smartphones and tablets, and last year lost its place as the largest maker of PCs to Lenovo.
“The consumer space moves like lightning speed,” Whitman said today. “What has been surprising is how fast the enterprise space is moving.”
Hewlett-Packard Enterprise may have to look to acquisitions to take on competitors such as IBM and Oracle Corp., Morningstar’s Wahlstrom said.
“I don’t see HP as really playing at the high end with IBM and Oracle,” he said. “You start wondering, does HP Enterprise then look to do another transformational acquisition or move, pair up with an EMC or someone else?”
Hewlett-Packard’s printing and personal-systems group reported $55.9 billion in revenue in the company’s latest fiscal year, compared with $55.6 billion for the technology solutions group, which provides systems support and consulting for other companies. The PC and printing units had a combined operating profit of $4.84 billion, while the corporate services division had operating income of $5.85 billion.
Earnings per share for the year through October 2015 will be in a range of $3.23 to $3.43, Hewlett-Packard said today. Profit in the current financial year will be $2.60 to $2.64 a share. HP expects to generate free cash flow of $6.5 billion to $7 billion in 2015 and expects to return at least half of this to shareholders.
The company estimates it will complete the breakup by the end of fiscal 2015, which ends in October of next year. The company will need to hire some employees to double up corporate functions to accommodate the separation, Chief Financial Officer Cathie Lesjak said in an interview, though she said these hires will be “fairly immaterial.”
The company said it has postponed a meeting with financial analysts scheduled for Oct. 8 in San Jose,California.
Goldman Sachs & Co. is Hewlett-Packard’s financial adviser and Wachtell, Lipton, Rosen & Katz is providing legal assistance.
At least one Hewlett-Packard rival, PC maker Dell Inc., was already attempting to make hay from the breakup.
“Dell is singularly focused on its customers and partners and is committed to providing end-to-end IT solutions that they need,” David Frink, a Dell spokesman, said in a statement. “HP’s decision to break apart its business is complex, distracting and appears to benefit HP and its shareholders more than its customers.”
Article Credit: Bloomberg