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Hewlett-Packard, the tech giant that has seen its share of struggles over the past few years, with the contraction in the global PC market and the rapid changes in the data center driven by such trends as mobile computing and the cloud, will look significantly different a year from now.
HP executives on Oct. 6 confirmed reports from over the weekend that the company will split in two by the end of its fiscal year 2015 next fall, with one company housing the PC and printer businesses and the other the enterprise solutions and services offerings.
They also will have fewer employees. Along with reorganizing itself into two companies, CEO Meg Whitman and Cathie Lesjak, executive vice president and CFO, said during an early-morning conference call with investors, analysts and journalists that HP—which has over the past year announced as many as 50,000 job cuts—will slash another 5,000 positions. And Whitman could not guarantee that the latest round of layoffs would be the last.
The announcement is fueling questions about the effectiveness of the five-year restructuring plan Whitman introduced in 2014, particularly in light of the company’s announcement earlier this year that revenues for fiscal year 2015 would be relatively flat and the CEO’s insistence over the past couple of years that—despite the ongoing drumbeat from some analysts that the company should shed its PC business—that HP worked better with its broad array of business under the same roof. HP was “better together,” Whitman often said.
However, during the conference call and subsequent media interviews, she said that the timing on the split was right because of the success of the turnaround effort, pointing to the improved financial numbers, the growing innovation efforts and the new leadership at HP.
“It is the right time now, and it wasn’t when I first got here,” Whitman said during an interview on CNBC. “I don’t even think it was a couple of years ago.”
HP has now reached the point where there are two strong businesses that can go out on their own.
“They go after quite different market segments, and we would have the opportunity to align rewards and results [and] to respond to customer needs faster with these two big companies.”
The PC and printer unit—the two businesses were merged into the Printer and Personal Systems group last year—will become HP Inc. The company’s enterprise business—from servers, storage and networking to cloud and services—will be called Hewlett-Packard Enterprise. Whitman said the two companies will benefit from continuity in leadership: She will be CEO of Hewlett-Packard Enterprise and board chairman of HP Inc., while Dion Weisler, executive vice president of HP’s printers and PC unit, will be CEO of HP Inc. Current HP Director Patricia Russo will be chairman of the enterprise business.
Whitman and Lesjak said the two companies each will start with businesses generating $57 billion to $58 billion in revenues.
Patrick Moorhead, principal analyst with Moor Insights and Strategy, said HP’s move could work. HP officials for the past few years have talked about the synergies having all the businesses in the fold has allowed, but beyond purchasing power in the supply chain, there is little to back that up, Moorhead told eWEEK. After “giving it their all to find synergies in the last three years under Meg, this could be good for them,” he said.
HP CEO Whitman: Turnaround Efforts Made Split Possible
A problem for the company has been that “fundamentally, they have two gears at HP. One is really, really big and works slower than the other gear … and those gears have been gnashing against each other,” Moorhead said.
The development, sales and distribution cycles in the PC/printer and enterprise IT industries are vastly different, making it more difficult for the company in such areas as administration, sales and innovation. In addition, it could make it harder for, say, the PC group to go in directions it may have wanted because it was tied so closely to a slower-moving IT enterprise business, he said. HP’s size was making it unwieldy.
“Splitting the two allows them to become more nimble,” Moorhead said.
Roger Kay, principal analyst with Endpoint Technologies Associates, isn’t so sure.
“The ostensible reasons for dividing the company are twofold: smoothing operations and ‘unlocking value,'” Kay said in a column on Forbes.com. “It’s true, HP is a large, difficult-to-wield company, but the philosophy of ‘better together’—espoused by Carly Fiorina, HP’s CEO in 2001 when the company picked up the former Compaq to form what became the industry’s largest PC company—has held until now. One of the key reasons for ‘better together’ was component costs, which decline with volume. By spreading purchasing across both PCs and servers, costs for the most expensive parts—displays, processors, memories and disk drives—can be kept to a minimum. HP will lose these synergies in a spinout.”
He also questioned whether it is easier having two CEOs running different companies rather than two division heads running separate businesses within the same company. In addition, customers that now have to deal with sales representatives from a single company will now have to work with people from two different companies.
In addition, Kay said the idea of unlocking value is more about stock price than anything else, including better operations.
HP’s decision mirrors a growing trend in the tech industry toward smaller, more narrowly focused companies over huge IT behemoths. Other major vendors also are spinning off parts of their business—auction site eBay is making its PayPal online payments business a separate company, IBM continues to shed businesses (most recently, its $2.1 billion deal to sell its x86 server business to Lenovo), Juniper Networks sold its Junos Pulse mobile security operation to private equity firm Siris Capital. In addition, storage giant EMC is under pressure to sell off the 80 percent stake it has in virtualization pioneer VMware. Recent reports indicated that EMC and HP over the past year had discussed merging the companies.
Whitman said the rapidly changing enterprise IT environment played a role in the decision. Trends like mobile computing, security, big data and the cloud are changing how businesses are buying and using hardware and software, and HP—like most major IT companies—is working to keep up with the pace of the change. That includes new products—like the hyper-efficient Moonshot servers—to cloud efforts to services aimed at helping businesses not only better run their current IT infrastructures but also to migrate to this new way of computing, she said.
HP CEO Whitman: Turnaround Efforts Made Split Possible
HP also faces growing competition in such areas as servers, where Lenovo officials hope to see the same results with their acquisition of IBM’s server unit as they did in 2005, when they bought IBM’s PC business, a move that helped propel Lenovo past HP to become the world’s largest PC vendor.
Moor Insights and Strategy’s Moorhead also noted that HP’s PC group faces its own obstacles, from challenging Apple in the high end of the market to addressing oncoming demands like the Internet of things and wearable devices.
This is not the first time HP executives have considered getting out of the PC business. Whitman’s predecessor, Leo Apotheker, announced plans in 2011 to spin off the PC business, a move that helped end his tenure after 11 months.
However, Whitman—who was on the HP board during Apotheker’s time as CEO—said there are stark differences between his plan and the current one. Apotheker’s proposal called for shedding the PC business but keeping printers and that it would have resulted as much as $1 billion in incremental costs to build up the new brand, she said. HP will keep the HP name and blue logo.
“We’ve actually solved the brand issue,” Whitman said.
There will be significant challenges going forward, Moorhead said. Competitors will use the transition over the next year as an opportunity to court HP customers—similar to what HP did after IBM and Lenovo announced their server deal in January—and its employees. At the same time, a joint supply agreement between HP Inc. and Hewlett-Packard Enterprise will enable the new companies to negotiate with suppliers from a position of strength, at least temporarily.
Whitman said the decision to split the company makes sense now, even if it didn’t just several months ago.
“Today is only possible because the turnaround has succeeded,” Whitman said during the CNBC interview. “We had a lot of work to do to get HP into fighting shape. There was a tremendous amount of repair work and gathering ourselves to be able to compete in this new world order. Now the time is right as we think about what is the next phase of this turnaround.”