What Will Happen When HP Splits?

Oct 07, 2014

The Strategist's Chris Middleton explores what the division of 75-year-old HP into two new companies means for its customers and shareholders.

On 6 October 2014, Hewlett-Packard (HP) confirmed Wall Street speculation that it is to split into two, separating its PC and printer business from its software, services and corporate hardware operations. Both sides of the company currently turn over roughly $55 billion.

The former will be known as HP Inc, headed by Dion Weisler, and the latter as Hewlett-Packard Enterprise, under the leadership of current HP CEO Meg Whitman, who will also chair HP Inc.

Strategically, the split will enable the more commodity-hardware-focused HP Inc to take on the likes of Dell and Chinese giant Lenovo – which acquired IBM’s PC business in 2005 – and the Enterprise unit to compete more directly with the likes of IBM and Oracle.

The Lady Is For U-Turning

The move is an about-face for Whitman, who rejected a similar proposal put forward by her predecessor Leo Apotheker when she replaced him three years ago. At the time, Wall Street regarded Apotheker’s strategy as a mistake. However, times have changed and the break-up is part of a trend for large, poorly differentiated conglomerates to split into leaner, more focused business units.

Since taking over at HP, Whitman has steadied the company’s finances – principally by laying off tens of thousands of employees – if not its investors’ nerves. The repercussions of the Autonomy deal are still being felt, and the rumour mill over its long-term strategic plans has been churning ever since HP was linked with EMC.

The fact that discussions with EMC were reported to have lasted for months and ended in disagreement over financial terms suggests that the newly announced break-up is a recent decision – unless the new Enterprise company plans to restart that conversation. If so, the window of opportunity is small and there is now the matter of a major business split to consider.

The division of HP into two public companies also – for better or worse – resolves the identity crisis that HP has had since the purchase of Compaq 13 years ago.

HP's Identity Crisis

The challenge for HP now – together or apart – is that the complexity and lack of focus in its business has existed for all of this century.

It is no longer the world’s biggest PC maker, it lacks a convincing mobile strategy, and it has none of the consumer cachet of an Apple or a Google (or a Samsung, from a mobile hardware perspective). Enterprise customers don’t perceive HP as a services company that’s in the same league as IBM, nor as a hardcore enterprise software company to rival Oracle, SAP, or Microsoft. Neither is it seen as a major cloud player, nor as a venture that is ‘born’ of the internet, as Google is.

In short, HP’s core problem is that it has long been neither fish nor fowl: it’s the company that isn’t Microsoft, Oracle, IBM, Apple, or Google, despite being one of the oldest and most respected names in the business: a company that, like many of its progeny, started with two guys in a garage with some big ideas.

Yet it has a huge portfolio of IP, major contracts – it’s the UK government’s single largest supplier in any field – a respected marque, and many success stories, but its lack of a convincing ‘story arc’ is the real reason why its market capitalisation is much smaller than IBM’s, Microsoft’s and Apple’s, despite healthy revenues.

HP has also long been culturally conservative at a time when charisma and big, forward-thinking ideas are associated with the industry it operates in. As a leader, Whitman’s decision to join HP from eBay, in the wake of the eccentric Apotheker and the disgraced Mark Hurd, promised much, but now she has to do something unusual: make a corporate divorce look like a bold, single-minded step into the future, after 75 years of history.

The long-term strategic risk is that neither of the new companies will have its better half to support it: HP’s in-house mix of hardware and services has helped it clinch major public sector deals, for example, while the PC and corporate hardware businesses have long shared technologies.

And that’s not all: each of the new companies will be left with an inherent problem: the PC business is significantly less healthy than HP’s profitable printer lines, while HP Enterprise faces an uphill battle to convince as a services play, minus the PC business that has bolstered its acceptance among enterprise buyers.

As a dis-integrated company, the internal props that have held HP together, and aloft, for so long will no longer exist. And whatever happens next for the two new companies and their separate strategists, the credit or blame will be placed at Whitman’s door.

So: A bold move, or a desperate one? That is the question. Whitman’s decision to hold onto the corporate mantle shows where her heart really lies, and the commodity hardware unit must now innovate, sink, or swim.

During the transition, Whitman’s strategic challenge lies in convincing enterprise buyers that the break-up is a long-considered strategy, and not a recent toss of the coin. After the split, her challenge will be in convincing Enterprise’s largest customers that HP has a vision that can compete with IBM, and a technology stack that can stand up to Oracle, Microsoft, and the pack.

Author: Chris Middleton

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Published under license from The Strategist

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