October 09, 2012
Now arriving: Calls for an HP breakup
Hewlett-Packard's stock took another tumble today, the latest bit of insult added to the injuries of the year 2012. Shares closed at $14.37, a low that HP hasn't seen in more than a decade. The sell-off was triggered by an HP analyst briefing you can watch for yourself on the Web. The financial experts are edging toward a consensus that HP ought to become two companies -- with just one of them focused on your enterprise dollars.
More than 150 million shares traded hands at the end of the last week -- Monday was a market holiday -- a volume that HP had seen only once in 50 years of trading: in the shadow of the Mark Hurd ouster of August 2010. All of the high-volume days of trading since then have hammered the stock into the mid-teens. HP has found a way out of this before -- by purchasing EDS and muscling its way into top spots for PCs and servers. Those services and PC plays are gone for good. That chart above only shows the stock slide from February onward.
The breakup calls include a remarkable one from an analyst who says even Bill and Dave would push for an HP dedicated only to enterprise computing. At the Forbes.com website, UBS analyst Steve Milunovich said that activist investors or private equity buyers are likely to split up HP.
In our view, full value won’t be realized by just improving operations -- structural change is required. Based on HP’s history, we think Bill Hewlett and Dave Packard would support this approach.
But the current HP strategy is to try to reorganize its way out of a free fall dripping with quarterly red ink and slipping sales. A full split, Milunovich wrote, would at least push HP's shares to $20. Usually an analyst briefing like last week's produces a modest bounce in share prices. HP seemed to confirm just the opposite, even though its presentation included "The Great Things About HP."
In the past we've reported on HP's stock and fiscal woes with an eye toward warning buyers of HP's enterprise products. You might not want to invest strong in a company drifting into equity buyout or takeover territory. But if a full-on split between PCs, and products like Integrity and ProLiants, takes place then the enterprise might lift up its future at HP.
CEO Meg Whitman has already told the world HP is doing too much and needs to focus. A split up would inject dedication to the kind of customer who owned a 3000 and moved onto other HP platforms. When your only stream of operating income arrives from datacenter customers, their every need becomes a vendor's desire.
Without the split at hand, even Whitman had to admit these woes to the analysts:
- Lack of competitive focus.
- Cost structure not aligned with revenue trajectory
- Accountability and compensation linkage not optimized
- Significant underinvestment in R&D and IT impacting the businesses
- Direct and partner go-to-market model need renewed focus
HP's chief competitors seem to be Apple on the consumer and PC end, as well as IBM on the enterprise end. These companies have something in common. They don't try to spread themselves as thin as HP has. There's no certain floor for the stock at this point -- the rock bottom was $12.20 in the bleak quarter after 9/11. Bill and Dave might have steered clear of selling printers and PCs at all in this kind of competitive market. After all, the company was reluctant to sell computers in 1971, and it didn't discover Windows as an enterprise tool until the late 1990s.
A split-up HP might be selling $50 million less without PCs, and $70 million less if printers got spun off. But as things stand today, the lack of extra cash for R&D because of low-margin PC sales is dragging down enterprise innovations. Things like an Intel-based HP-UX would be a slam dunk for an enterprise-focused HP. Becoming smaller could be the first step to make its enterprise action bigger.
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