10 Big Problems That Brought HP to a Decision to Split Up

by Don Reisinger

For quite some time, HP was the world’s top PC maker. In recent years, however, that has changed. Lenovo is now the world’s top PC vendor, scoring 19.2 percent of the PC market in the second quarter, according to Gartner. HP came in second place with 17.7 percent market share. During the same period in 2013, HP stood at 16.2 percent share, compared with Lenovo’s 16.7 percent. In other words, Lenovo is pulling away, and HP needs to do something about it.

Lenovo has already proven its ability to take on and beat HP in the PC space, and now it’s building it server market share. The company recently closed a $2.1 billion deal to buy IBM’s low-end server unit. In an interview with The Wall Street Journal recently, Lenovo CEO Yang Yuanqing said that his plans for his newly purchased unit are simple: “win more market share from competitors.” HP is still a prominent player in servers, generating billions from them each year. Analysts say Lenovo has a solid chance at giving HP a run for its money. Too bad HP didn’t acquire the IBM unit before it gave Lenovo the opening to take it on.

Global PC sales and shipments have declined for eight straight quarters. While there are some signs that PC sales have reached a plateau and might even start growing again, it remains to be seen whether HP can build up PC sales and take back some of the market share it lost during the lean years.

Buyer preferences for small computers have changed significantly in the past few years. Enterprises and consumers bought more tablets, rather than more notebook PCs. Consumers spent more money on smartphones than they did on PC upgrades. Enterprises held on to their stocks of older PCs, particularly those running Windows XP far longer than expected. Windows 8’s unpopular design failed to jump-start new PCs as businesses and consumers preferred to buy and retain Windows 7 machines. Now HP and the rest of the PC makers have to hope that Windows 10, due for release in 2015, will stimulate a new round of strong PC purchasing.

HP has had to contend with a lot of turmoil in its senior management and on its board of directors. Former CEO Mark Hurd was ousted amid a scandal. Next, the company hired former SAP co-CEO Leo Apotheker to run the company. But he lasted barely 10 months in office. Finally, Meg Whitman was brought in to fix the problems in 2011, but she has spent most of her time at the helm trying to find a way to fix the problems she found when she arrived.

HP announced in November 2012 that it was taking an $8.8 billion accounting charge against its acquisition of U.K. data analytics and knowledge management company Autonomy due to “serious accounting improprieties.” HP had acquired Autonomy just a year earlier for $10.2 billion but quickly became aware of alleged issues that made the company’s value much lower. Not surprisingly, shareholders hammered HP’s management and directors for failing to perform a “due-diligence” investigation of Autonomy’s financial statements. Litigation in the matter is continuing.

Despite the sheer size of HP and the fact that it’s a Fortune 50 company, the firm could be doing better. When Meg Whitman came on in 2011, HP generated $127.2 billion in revenue during its fiscal year. During its last fiscal year, ended Oct. 31, 2013, its revenue was $112.3 billion. What’s worse, HP’s profit declined from $7 billion in 2011 to $5.1 billion in 2013. There was no sign that HP has found a way to reverse this downward trend.

Let’s not forget that this isn’t the first time HP has floated the idea of breaking off its PC business. Leo Apotheker came up with the idea before his ouster in 2011, which was one of the main reasons he quickly lost his job. Apotheker might have had the right idea, but he didn’t know how to get board and market buy-in. When Whitman came in, she said she wouldn’t spin off the PC business. Now she will. And once again, it’s calling into question whether HP’s management can find a successful turnaround strategy.

Let’s not forget that HP was one of the first companies to embrace tablets a few years ago. However, the company couldn’t decide whether it wanted to appeal to consumers or enterprise customers with the mobile devices and after repeated failures got out of the business for a while. HP is back in the space now, with its Stream line of slates, but it might be too little, too late.

When HP acquired Palm to bolster its position in the smartphone business, there was some hope that the company’s Pre line could be successful. Instead, it failed miserably, and now the operating system those devices were running on, webOS, is open source and under the control of LG. HP’s inability to even make a mark in smartphones has left billions of dollars on the table.