H-P Plans to Split Business in 2 Separate Entities
Hewlett-Packard (HPQ) is splitting its business into two separate entities: the PC and Printing business, and the corporate hardware and services business.
Earlier in 2011, the then CEO Leo Apotheker had put forward the idea to spin off H-P’s PC business and focus on high-margin enterprise hardware and software services business. However, after Meg Whitman took over the reins, the spinoff idea was shelved.
The current separation of the units comes at an opportune moment for the company as it is trying to diversify its revenue base from its legacy PC and printing operations to the enterprise segment, which consists of computer servers, data storage devices, networking, software and services.
Notably, the PC and printing segment contribute approximately 50% of H-P revenues and the rest come from Enterprise Group, Enterprise Services, Software and HP Financial Services. Nonetheless, the PC and printing business contribute less towards profits.
Also, the PC industry has been going through tough times over the past couple of years, which had impacted H-P’s overall results. Of late, the PC scenario had improved as a result of system refreshes and enterprise system migrations beyond Microsoft's (MSFT) XP operating system and slowing down of the cannibalization by tablets in mature markets. However, the PC market scenario in emerging markets still remains dismal.
The company has been restructuring operations due to softening demand in the PC market. By the end of the third quarter, H-P’s workforce was slashed by 36,000 positions. H-P expects another 41,000 job cuts by fiscal 2014-end and 45,000 to 50,000 layoffs by the end of fiscal 2015, ensuring a lean cost structure for the company.
On the other hand, H-P has done considerably well in the enterprise class server and storage markets. The company is focusing its resources on the high margin software and security markets as well.
We believe that H-P’s traction in the cloud, security and Big Data segments will be the growth catalysts, going forward. Thus, splitting the business would enable a customized approach to two different kinds of businesses, which might not have been possible as a single entity. Nonetheless, H-P’s enterprise segment will now compete directly with IBM (IBM) and Oracle (ORCL), which means that a lot still depends on execution.
Currently, H-P has a Zacks Rank #2 (Buy).
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