Split today, merge tomorrow

HP breaks itself up to dodge the “conglomerate”

WHEN Hewlett-Packard said this week that it would split into two firms, one selling personal computers and printers and another selling servers and other business equipment and services, there was a touch of déjà vu. Three years ago HP’s then boss, Léo Apotheker, said he would sell the PC division (though not printers) to focus on higher-margin software and services. But Mr Apotheker was sacked before he could execute his plan, and the one big move of his brief tenure—the $11.7 billion purchase of Autonomy, a software firm—turned into a disaster when accounting irregularities surfaced.

His successor, Meg Whitman, abandoned the break-up plan, arguing that HP would be stronger as a single entity, using its size to extract better terms from suppliers and to spread overheads. Now Ms Whitman is arguing that the company is better prepared for a split. Its balance-sheet is stronger, which means HP’s offspring can be endowed with the means to flourish on their own. And the printer and PC divisions have been merged, into an entity to be known as HP Inc.

However, the timing of the split may have been determined by market conditions. In 2011, amid uncertainty about America’s recovery and fears about the euro zone, investors valued the safety provided by sheer size; now they prize the agility needed to fend off nimble startups. Moreover, HP’s various assets appeal to different types of investor: those who want dividends now may prefer the mature printers and PC side, whereas those ready to trade safety for growth potential may prefer the enterprise business. HP’s shares rose 5% when the split was announced.

Unlike many similar spin-offs, the racier half of HP, which will be called Hewlett-Packard Enterprise and maintain Ms Whitman at the helm, is unlikely to deliver strong growth immediately on being unshackled. Revenues at those businesses have shrunk by 4% in the past year, and competition to sell servers, data storage, software and services to businesses is fierce. Lenovo of China, which last year overtook HP as the world’s leading PC seller, recently bought a low-end server business from IBM. And in enterprise software, despite the purchase of Autonomy, HP is still far behind competitors like Oracle.

What is more, some of the contract manufacturers HP uses to build its equipment are cutting it out of the loop and offering unbranded products directly to HP’s corporate customers. The shift to cloud computing is accelerating this: smaller firms, which hitherto might have preferred a trusted brand of server, are increasingly renting capacity from giant server farms, which are happy with unbranded ones.

A broader shift illustrated by HP’s break-up is that diversification is something only the brightest tech stars can get away with. Investors have given Silicon Valley’s reigning royalty carte blanche this year to buy tangentially related firms—witness Apple’s purchase of Beats, a headphones maker, Facebook’s deal for a messaging service, WhatsApp, and Google’s acquisition of Nest Labs, which sells thermostats and smoke detectors. But as tech firms age (HP is 75) and their growth tails off, they begin to have the dreaded word “conglomerate” applied to them, with its negative implications for the share price.

To escape that fate, as in other industries, diversified tech firms have to break themselves up, and concentrate on being first or second in their core businesses. In Ms Whitman’s old job running eBay, she bought Skype, an internet-telephony provider, and PayPal, a payment processor. Skype has since been sold, and a spin-off of PayPal was announced on September 30th, giving eBay’s shares a 7.5% boost.

Among the other long-established technology firms which have investors wondering whether the whole may be worth less than the sum of the parts are Microsoft, whose products range from operating software to applications to mobile devices, and Yahoo, whose main assets are its stakes in Alibaba of China and Yahoo Japan. Another is Symantec, which this week was reported to be contemplating a separation of its two main businesses, internet security and data storage.

The markets’ preference for focus, however, does not mean they are averse to scale. In fact, the slimline Hewlett-Packard Enterprise will probably need to grow quickly by acquisition to survive on its own—particularly in software, which accounts for just 7% of the new firm’s revenues. HP says it cannot talk about potential purchases because it possesses “material non-public information”, suggesting it has something brewing. One oft-rumoured target is VMware, a cloud-computing specialist, or indeed its parent, EMC, a data-storage firm. Now that Ms Whitman no longer has to fret about the stagnant PC business, she can dedicate her full attention to plotting the enterprise company’s next big move.

Source : http://www.economist.com/news/business/21623697-hp-breaks-itself-up-dodge-conglomerate-tag-split-today-merge-tomorrow

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