HP to split in two

_NC07040_HPFollowing rumours over the weekend, HP has confirmed its intention to split itself into two parts. The press release contains a lot of rubbish about defining the “New Style of IT” and empowering people, though my personal favourite is the claim that “HP has reignited its innovation pipeline” – really with such inspired language it’s hard to see what could possibly go wrong.

The reality is that this move has been forced on HP, which has been dogged by sluggish growth, particularly in the personal computer market. It was first suggested back in 2011 by the then CEO Leo Apotheker, and led directly to his leaving the company. His replacement, Meg Whitman, considered the idea but instead announced a five year turnaround plan, which now appears to have been simply preparing the company to split apart. The acquisition of the British software company Autonomy didn’t help matters, with HP forced to settle with angry shareholders and taking the Autonomy directors to court.

Under the plan, the managed services with data storage, servers and business computing bits of HP will be split off to form Hewlett-Packard Enterprise, while the personal computers and printing business will become HP Inc, and keep the current corporate logo. According to HP, both companies will be well capitalized and both will be publicly traded Fortune 50 companies. Whitman will continue to run the Enterprise business as President and Chief Executive Officer and will also be non-executive Chairman of the HP Inc. Board, while Dion Weisler handles the day to day running of HP Inc as its President and Chief Executive Officer.

Immediately following the transaction, which is expected to be completed by the end of fiscal 2015, HP shareholders will own shares of both Hewlett-Packard Enterprise and HP Inc. The transaction is intended to be tax-free to HP’s shareholders for federal income tax purposes. It’s a little more painful for the 5000 employers that will lose their jobs, a number in addition to the 29,000 redundancies already announced this year.

As far as the financial outlook goes, for fiscal 2014, HP reaffirms its non-GAAP diluted net EPS outlook range of $3.70 to $3.74, and updates its fiscal 2014 GAAP diluted net EPS outlook to be in the range of $2.60 to $2.64.

For the 2015 fiscal year, HP estimates non-GAAP diluted net EPS outlook to be in the range of $3.83 to $4.03 and GAAP diluted net EPS outlook to be in the range of $3.23 to $3.43. HP’s outlook does not include one-time GAAP charges the company is expected to incur in connection with the separation, including advisory and tax costs which will be calculated later.

But the numbers don’t take account of the chaos that will most probably engulf HP. It’s an extremely large company, with some 300,000 employees spread around the globe. There’s a lot of truth to former CEO Lew Platt’s joke: “If only HP knew what HP knows, we would be three-times more productive.”

This news has generally been seen as a positive step for the Enterprise business, resulting in the share price rising. But it’s difficult to see what the future holds for HP Inc, despite HP’s optimistic talk of enabling growth markets like 3D printing. Personal computing is by far the weakest part of the HP business. The market was already shrinking before the sudden advent of tablets like the iPad gave it a good kicking (apart from HP’s own Touchpad tablet, which failed dismally). IBM and Sony have already given up and left the market to nimbler Chinese companies that could cope with the lower prices and profit margins.

The printing business is generally strong, but is a drop in the ocean compared to the Enterprise offerings. It seems almost inevitable that some of the printing portfolio will be sold off. Indigo, for example, is a complete business unit in its own right, with many good people and a first rate leader in Alon Bar-Shany. Then there is HP Scitex, which has earned a good reputation for its large format flatbeds. But, having visited Scitex’s Israel headquarters a couple of times I’m not convinced that anyone at HP really likes the Scitex business or would fight to keep it. I certainly can’t see that the personal computers add any value to the printing business, or that the printing division can help turn around the steady decline in personal computers.

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