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| Breaking HP up isn't hard to do – but PC and printing arms will be left behind | Breaking HP up isn't hard to do – but PC and printing arms will be left behind |
| (35 minutes later) | |
| “HP, eBay, Nokia, Motorola,” remarked the business analyst Horace Dediu on Twitter. “Splitting a business is never a sign of prosperity.” | “HP, eBay, Nokia, Motorola,” remarked the business analyst Horace Dediu on Twitter. “Splitting a business is never a sign of prosperity.” |
| The announcement from Meg Whitman, chief executive of HP, that the company would be sundered into two – Hewlett-Packard Enterprise, with its cloud and services offerings for big business, and HP Inc, containing its PC-selling Personal Systems Group and its printing business – is portrayed as one made from strength, now that HP is beginning to turn around. | |
| But it looks more like an effort to spin off two dying businesses – the PC and print divisions – and focus on the more profitable ones. As Dediu points out, PayPal’s ejection from eBay isn’t being interpreted as a good sign; Nokia sold its mobile phone division to Microsoft because it had almost died; Motorola in 2011 split into “Mobility” and “Solutions” as it couldn’t executive a turnround in a business that pioneered the mobile phone. | But it looks more like an effort to spin off two dying businesses – the PC and print divisions – and focus on the more profitable ones. As Dediu points out, PayPal’s ejection from eBay isn’t being interpreted as a good sign; Nokia sold its mobile phone division to Microsoft because it had almost died; Motorola in 2011 split into “Mobility” and “Solutions” as it couldn’t executive a turnround in a business that pioneered the mobile phone. |
| Whitman won’t see it that way. But it’s an idea that was already tried and rejected. In August 2011, just as Google was negotiating to take over the loss-making Motorola Mobility, Leo Apothéker, then HP’s brand new chief executive, suggested that it sell off its PC business (Personal Systems Group, as it is known in the company). | Whitman won’t see it that way. But it’s an idea that was already tried and rejected. In August 2011, just as Google was negotiating to take over the loss-making Motorola Mobility, Leo Apothéker, then HP’s brand new chief executive, suggested that it sell off its PC business (Personal Systems Group, as it is known in the company). |
| His logic was clear. Despite being one of its biggest divisions by revenue, PSG had the worst profit margin. (It still is, and still does.) On average at that point, its PCs had an average selling price (ASP) of $630, and it made $36 of operating profit (after cost of sales and so on) on each. | His logic was clear. Despite being one of its biggest divisions by revenue, PSG had the worst profit margin. (It still is, and still does.) On average at that point, its PCs had an average selling price (ASP) of $630, and it made $36 of operating profit (after cost of sales and so on) on each. |
| Removing the PSG business would immediately lift HP’s overall operating profit margin from about 12% to nearly 16%. The future was in cloud-based business and services. Hardware was over. | Removing the PSG business would immediately lift HP’s overall operating profit margin from about 12% to nearly 16%. The future was in cloud-based business and services. Hardware was over. |
| However, Apothéker’s was too early with his insight. The horrified board showed him the door, to be replaced by Whitman, who insisted that PSG would stay. She however led the acquisition of another service-based business - the British data indexing company Autonomy, which despite a huge writeoff (and ongoing legal row about whether its profits were overstated) looks increasingly like a core business. | However, Apothéker’s was too early with his insight. The horrified board showed him the door, to be replaced by Whitman, who insisted that PSG would stay. She however led the acquisition of another service-based business - the British data indexing company Autonomy, which despite a huge writeoff (and ongoing legal row about whether its profits were overstated) looks increasingly like a core business. |
| But this year Whitman oversaw a reorganisation that brought the printing and PC businesses closer together, a prelude to the announcement on Monday that HP will split into two companies: Hewlett-Packard Enterprise, containing the services businesses which sell to big businesses; and HP Inc, containing PSG and the printing business. Those also serve the “enterprise” market as well as the consumer – so one might wonder why Whitman has done this. | |
| The reasons are clear enough. The PC business is in trouble - as all Windows PC companies are. Since Apothéker’s brainwave, HP’s PC ASP and operating profit margin have both worsened - to $557 and $24, according to HP’s financial results and PC shipment data from IDC. | The reasons are clear enough. The PC business is in trouble - as all Windows PC companies are. Since Apothéker’s brainwave, HP’s PC ASP and operating profit margin have both worsened - to $557 and $24, according to HP’s financial results and PC shipment data from IDC. |
| “There’s no real upside in terms of the PC side,” says Ranjit Atwal, PC analyst at Gartner, which will announce another quarter of in which worldwide PC sales showed near-zero growth later this week. “Along with printers, it’s a commoditised business that doesn’t feature in HP’s ‘solution-based’ approach.” | “There’s no real upside in terms of the PC side,” says Ranjit Atwal, PC analyst at Gartner, which will announce another quarter of in which worldwide PC sales showed near-zero growth later this week. “Along with printers, it’s a commoditised business that doesn’t feature in HP’s ‘solution-based’ approach.” |
| The Windows PC business is caught in a profit crunch: the number of PCs in use has stopped growing, meaning PC makers fight it out to win the replacement business, which is itself dwindling as companies and consumers take longer to replace their machines. Despite the short-term boost that the end of Windows XP brought this year - managing to generate what the analyst group Gartner memorably called “flat growth” in the second quarter, analysts expect PCs to show a gradual and continued decline. This year alone, Samsung, Sony and Toshiba have all cut back on their offerings, citing tough market conditions. Dell, the third-largest PC maker, was bought out in a private equity deal last year. | The Windows PC business is caught in a profit crunch: the number of PCs in use has stopped growing, meaning PC makers fight it out to win the replacement business, which is itself dwindling as companies and consumers take longer to replace their machines. Despite the short-term boost that the end of Windows XP brought this year - managing to generate what the analyst group Gartner memorably called “flat growth” in the second quarter, analysts expect PCs to show a gradual and continued decline. This year alone, Samsung, Sony and Toshiba have all cut back on their offerings, citing tough market conditions. Dell, the third-largest PC maker, was bought out in a private equity deal last year. |
| Analysing HP’s results since 2005, though, shows that as a standalone company, the printing and PC business would lean together sufficiently to look impressive. Their revenues are almost equal to those of HP Enterprise, and the operating profit margin too - mostly because the calamitous acquisition of Autonomy still appears to be a drag on HP Enterprise’s profits. | Analysing HP’s results since 2005, though, shows that as a standalone company, the printing and PC business would lean together sufficiently to look impressive. Their revenues are almost equal to those of HP Enterprise, and the operating profit margin too - mostly because the calamitous acquisition of Autonomy still appears to be a drag on HP Enterprise’s profits. |
| But the PSG business isn’t going to be a growth story. Even though printing is a growing business, and HP is getting more of it, if HP Inc had been set up in 2005 it would have peaked in 2008 and been heading downwards ever since. | But the PSG business isn’t going to be a growth story. Even though printing is a growing business, and HP is getting more of it, if HP Inc had been set up in 2005 it would have peaked in 2008 and been heading downwards ever since. |
| Together, the PC and printing business could make a juicy acquisition target for a company such as Lenovo - and would command a much higher price than for the PC business alone. In that sense, Apothéker was wrong: selling the PC business on its own was a mistake. But Atwal comments: “Maybe they’ve tried that [selling it] already and come back, and this is their solution.” | Together, the PC and printing business could make a juicy acquisition target for a company such as Lenovo - and would command a much higher price than for the PC business alone. In that sense, Apothéker was wrong: selling the PC business on its own was a mistake. But Atwal comments: “Maybe they’ve tried that [selling it] already and come back, and this is their solution.” |
| Whitman says in the press release that “Our work during the past three years has significantly strengthened our core businesses to the point where we can more aggressively go after the opportunities created by a rapidly changing market.” What she doesn’t quite say is what those core businesses are. | Whitman says in the press release that “Our work during the past three years has significantly strengthened our core businesses to the point where we can more aggressively go after the opportunities created by a rapidly changing market.” What she doesn’t quite say is what those core businesses are. |
| But make no mistake. Like IBM before it, which sold its PC business to Lenovo in 2005 and focussed on business hardware and services, HP is leaving the PC world behind. Whitman speaks excitedly of potential in 3-D printing markets. The one advantage the the new company will have is that it won’t be part of HP’s giant corporate structure which has crushed so many ideas. Perhaps, now, it will be able to come up with something better. But time isn’t on its side. | But make no mistake. Like IBM before it, which sold its PC business to Lenovo in 2005 and focussed on business hardware and services, HP is leaving the PC world behind. Whitman speaks excitedly of potential in 3-D printing markets. The one advantage the the new company will have is that it won’t be part of HP’s giant corporate structure which has crushed so many ideas. Perhaps, now, it will be able to come up with something better. But time isn’t on its side. |