HP Hopes for IBM-Like Success as It Spins Off PC Business

By Jeffrey Burt  |  Posted 2011-08-19

HP Hopes for IBM-Like Success as It Spins Off PC Business

IBM's decision in 2005 to sell its PC business to Lenovo has proven to be an incredible boon for Big Blue, which has seen sales and profits steadily grow over the last few years, even during the depths of the recession.

Now executives with Hewlett-Packard are hoping for similar results as they prepare to rid themselves of their PC business.

CEO Leo Apotheker announced Aug. 18 that the company is looking to spin out its market-leading PC portfolio within the next 18 months to enable it to focus more of its money and time on its higher-margin commercial systems, software and services businesses.

At the same time, HP also is planning to shelve its webOS-based tablets and smartphones, and to buy infrastructure software maker Autonomy for about $10 billion, a move to further boost HP's enterprise software portfolio.

Overall, HP's decision will put it into even closer competition with the likes of IBM, Oracle, Dell and Cisco Systems in the converged infrastructure and cloud computing markets. And if it works out as well as IBM's decision did, getting rid of the PC business will be a smart move by HP.

"The move by HP to cut away from its consumer computing hardware business will position the company to more effectively compete with rivals such as IBM and Dell, as HP will be less encumbered by low-margin consumer PC sales," Beau Skonieczny, an analyst with Technology Business Research, said in a research note. "HP has aggressively invested in its converged infrastructure strategy and instant-on capabilities through 2010 and into calendar 2011, allowing it to cater to the growing demand for complex cloud solutions for both, large enterprises and SMB customers. TBR anticipates HP will continue to mold its enterprise organization towards high-demand, high-growth and margin-accretive areas such as big-data, analytics, cloud and sustainable IT technology. By divesting its [PC assets], HP will be able to allocate more resources towards driving growth and innovation in the areas that provide more profitable growth."

Gartner analyst Mark Margevicius said HP executives made the decision to ditch the PC business for the same reason IBM did six years ago: the financial numbers.

"It's about making money for HP," Margevicius said in an interview with eWEEK. "It's much the same reason IBM jettisoned its PC business off to Lenovo. They just didn't make enough [money] off of it."

HP's Personal Systems Group in the company's third fiscal quarter generated about $9.6 billion in revenues, a 3 percent drop, and generated profits f $567 million, a 21 percent increase.

However, there are some key differences between the two, one being the state of the PC market. The current PC market is under significant strain, to the point where Gartner analysts in June cut its shipment forecasts for 2011. They cited a continuing lack of consumer interest caused in part by the ongoing volatile worldwide economy, as well as the growing number of other devices, such as tablets and smarpthones.

"Moving forward, PCs will no longer be a market by themselves, but part of a larger device market that ranges from smart televisions to the most-basic-feature phones," Ranjit Atwal, research director at Gartner, said in a statement at the time. "Within this market, consumers and professionals will increasingly use the combination of devices that best suits their particular needs."

Is There Interest in the PC Business?

It's unclear how that environment will impact HP as it looks at options for spinning off the PC business. Some analysts have pegged the business at about $12 billion. Lenovo and Samsung have been mentioned as potential buyers. Whoever buys it will get a business that saw commercial revenue in the quarter jump 9 percent, while consumer revenue fell 17 percent.

"When IBM chose to [sell off its PC business], there was a high degree of interest," Gartner's Margevicius said. "Now what's the interest?"

IBM also had been building up its other businesses-particularly software-for years before selling off its PC business, dating back to 2000. Big Blue has continued that push, particularly in the field of analytics. At the time that it sold its PC business to Lenovo, it had the second largest software business, behind only Microsoft, according to the Wall Street Journal.

Since then, IBM has only grown the business. In its second-quarter, IBM saw its software business revenue grow 17 percent, to $6.2 billion. By contrast, HP had software revenues of $780 million, a 20 percent jump.

"HP had already adopted much of IBM's services-based hypothesis, now with its proposed spin out of the PC industry," Gartner analyst Mark McDonald said in an Aug. 18 blog post. "HP is going full bore on the commercial services market hypothesis, seeking to buy Autonomy and shedding its [webOS-based] tablet offering."

In Apotheker, HP now has a CEO with a deep background in enterprise software, given his previous position heading up software giant SAP. That will make a difference, according to Rob Enderle, principal analyst with The Enderle Group.

Selling the PC unit to Lenovo worked out "incredibly well for IBM and Lenovo," Enderle said in an email to eWEEK. "The best practice that HP is following is modeling the company around the skills of the CEO, which has worked very well for Apple and IBM. So, given IBM and Apple examples, this should result in a vastly stronger HP. However, like it did with Lenovo, it likely will take the spun-out company 18 to 36 months to hit its stride."

Not everyone is looking to get out of the worldwide PC market, which will still see 385 million units sold this year, according to Gartner. But it takes a particular kind of vendor-one that can live with the low profit margins and differentiate itself to some extent from its competitors-that will survive, Margevicius said.

"The PC business is still a good business for a lot of companies," he said.

One of those companies is Lenovo. In its most recent quarter, Lenovo saw PC shipments grow 23 percent, with the company's overall revenues jumping 15 percent and profits rising 51 percent.

However, few if any at IBM appear to be looking back in regret at the sale of its PC business to Lenovo. Mark Dean was one of a dozen engineers who help create the first IBM Personal Computer. Marking the 30th anniversary of that event, Dean said he was proud to be part of that group.

"It may be odd for me to say this, but I'm also proud IBM decided to leave the personal computer business in 2005, selling our PC division to Lenovo," Dean, now the CTO of IBM's Middle East and Africa group, wrote in an Aug. 10 posting on IBM's Smarter Planet blog. "While many in the tech industry questioned IBM's decision to exit the business at the time, it's now clear that our company was in the vanguard of the post-PC era." 

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