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Will the Split of Hewlett-Packard Increase 'Real' Value for Investors?

Zacks Research Staff

Hewlett- Packard (HPQ) has decided to split into two companies after about a year of consideration. HP will make the split between its enterprise-facing hardware and service business, and its consumer-facing computer and printer segments with both companies being publicly traded. The business-oriented company will be called Hewlett-Packard Enterprise, and the PC company will be called HP Inc.

HP stated, “Strategic Step Provides Each New Company With the Focus, Financial Resources and Flexibility to Adapt Quickly to Market and Customer Dynamics While Generating Long-Term Value for Shareholders”.

Highlights:

  • Hewlett-Packard Enterprise will build upon HP's leading position in servers, storage, networking, converged systems, services and software as well as its OpenStack Helion cloud platform

  • Meg Whitman to be President and Chief Executive Officer of Hewlett-Packard Enterprise; Pat Russo to be Chairman of Hewlett-Packard Enterprise Board

  • HP Inc. will be the leading personal systems and printing company with a strong roadmap into the most exciting new technologies like 3D printing and new computing experiences

  • Dion Weisler to be President and Chief Executive Officer of HP Inc.; Meg Whitman to be Chairman of the HP Inc. Board

  • Company reiterates fiscal 2014 non-GAAP diluted net earnings per share (EPS) outlook of $3.70 to $3.74 and updates GAAP diluted net EPS outlook to $2.60 to $2.64

  • Company issues fiscal 2015 non-GAAP diluted net EPS outlook of $3.83 to $4.03 and GAAP diluted net EPS outlook of $3.23 to $3.43


Management Structure

Ms. Whitman will still retain most of the power in both companies and will be the 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 Enterprise

HP Enterprise will focus on the "enterprise technology infrastructure" and "software and services business." HP plans on implementing a multi-year innovation roadmap that will allow the software and service business to focus on customers by growing service products such as cloud, big data, security and mobility in the new style of IT.

The biggest benefit for HP in splitting its’ two business will be the ability to focus on the core fundamental business, in turn growing real value for the shareholders. The separation will allow more room in completing the turnaround of Enterprise Services and strengthening the company’s go-to-market capabilities.

HP Inc.

On the other side of this transition, HP Inc will continue to focus on its consumer focused PC, tablet, and printing efforts. In Meg Whitman’s interview with CNBC, she emphasized that the company has grown a healthy balance sheet in the time since she has been CEO. With this new “healthy” balance sheet, the company will enable investments in growth markets such as 3-D printing and new computing experiences.

Transaction Details

The separation transaction is intended to be tax-free to HP shareholders for federal income tax purposes. The transaction is currently targeted to be completed by the end of fiscal 2015.

Bottom Line

This decision by HP is a monumental move by the company, but is part of a similar story that has been told by companies such as Motorola (MSI) in 2011, Kraft (KRFT) in 2012, and most recently eBay (EBAY) splitting from PayPal. These companies are hoping to gain more focused organizational structure within both business that will eventually return real value for the shareholders.

These recent splits in business are intended to notify shareholders that the company will attempt to tap into high-growth businesses such as the 3-D printing business that will hopefully return sustainable cash flow and earnings multiples for years to come.

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