HEWLETT-PACKARD RETHINKING SPINNING OFF THE PERSONAL COMPUTER BUSINESS

Hewlett-Packard Co. is rethinking its plan to spin off its personal-computer division, as fresh analyses show the costs might outweigh the benefits, according to people familiar with the matter.

Newly-installed chief executive, Meg Whitman, is crunching the numbers of the proposal by her predecessor, Leo Apotheker, to split the world's biggest computer company in two.

Neither Ms. Whitman nor the company's board have made a final decision, according to some of the people. She has said publicly that she would like to make a decision by the end of October.

The Palo Alto, Calif., company said in August that it was considering strategic alternatives for its PC business, including spinning off the division into an independent company.

 

Marc Andreessen, co-founder of Andreessen Horowitz, talks about the challenges that Hewlett-Packard's board of directors has faced over the past decade. He talks with WSJ's Alan Murray at the Viewpoints West event in San Francisco, Tuesday.

But the new analyses, which Ms. Whitman and other executives are now studying, suggest the company is better off keeping the division, which contributed $40.1 billion in revenue and $2 billion in operating profit in H-P's last full fiscal year, these people said.

In particular, separating the PC division would significantly diminish H-P's buying power with component makers because H-P would lose economies of scale. It could complicate H-P's supply chain and decrease profit margins on some products, the analyses suggest.

One of these people said.

"If you lose purchasing power and other advantages, then a spinoff isn't worth it." 

Some H-P executives still favor a spinoff, one of the people familiar with the matter said.

An H-P spokeswoman said. 

"The analysis is underway now.  We said we would explore all options and that Meg would make a decision based on the data."

Mr. Apotheker announced the possible PC separation along with several other moves in August. He said in an interview then.

"Our default option is to see if we can spin this business off to our shareholders." 

Ms. Whitman has served on H-P's board since January, and in that capacity approved the decision to seek a spinoff.

In advertisements, the company called a spinoff "our preferred course."

Going ahead with a spinoff would present several challenges for the remaining parts of H-P. For instance, H-P would continue to make server computers, but would likely lose the price advantage that comes from buying microprocessors and hard drives in bulk.

While H-P is the biggest seller of both types of machines, it sells vastly more PCs—14.9 million in the second quarter of 2011 compared with 720,000 servers, according to researcher Gartner Inc.

There's a precedent for a profit hit: International Business Machines Corp. said that profit margins on its servers fell following its decision to exit the PC business. Profit margins for the business group that includes servers fell from 41.6% in 2004, the last full year IBM was in the PC business, to 37.7% in 2006, the first full year it wasn't, according to regulatory filings. By 2010, margins for the group had rebounded somewhat 38.5%.

Some at H-P still argue, people familiar with the matter said, that separating the PC business would boost the company's overall profit margins, and possibly its share price, which has dropped 38% since the beginning of 2011.

In one scenario, H-P and an independent PC company could strike a deal allowing them to buy components together, which could lock in lower costs for the H-P's server business.

H-P studied the implications of getting out of the PC business under Mr. Apotheker, too. But some people close to the company said the former chief, whose background was in the software business, seemed predisposed to getting rid of it.

Mr. Apotheker justified a spinoff by arguing the PC division was on a different track than the rest of the company, in particular its focus on consumers. He said developing cutting-edge consumer devices requires funds that within H-P had a higher return when invested in other areas.

Mr. Apotheker didn't immediately respond to an email seeking comment.

COMMENTARY:  If a gross profit margin of 5% is the best that HP's personal computer business can do AFTER economies of scale, then you are not generating real economies of scale.  By my measurement yardstick, a 5% profit margin  is a total disaster.  HP's low profit margins on its PC's is hurting rather than helping the brand's image.  It says, "We make cheap computers".

If the HP brand were truly strong, it would be commanding premium profit margins. HP should get out of the "iron" business, but make simple, beautifully designed and elegant computers that enhance our daily lives.  

HP is definitely underperforming.  Companies with higher profit margins than HP include Dell, Lenova and Apple with profit margins of 18.5%, 10.94% and 39.4% respectively.   Obviously, something is really wrong with that picture.

In a blog post dated August 21, 2011, and after doing the financial analysis, I came to the conclusion that Mr. Apotheker's decision to spinoff the HP's personal computer business was the right decision.  Personal computers are a bad business for HP.  All this talk of economies of scale is just a poor execuse for keeping this subpar performing division.   

Bottom line, I am beginning to really question HP's decision-making.  That HP board is also part of the problem.  Listen to Marc Andreessen interview.  He never admits that the HP board fucked up. It's one excuse after another.  He was on that board during Hurd and Apotheker, so he should accept part of the blame.  

The HP board also approved the decision to get into the tablet business when they introduced the HP TouchPad, only to take it off the market after poor sales. Then they set a record for selling tablets during their $99 fire sale.  Why did they get into the market in the first place?  The TouchPad was a superior tablet.  They just gave up on a huge potential market.  Management should've had more patience and thought longterm.  I fault the board of directors for this.  The same punks (Meg and Lane) agreed with Leo to take the TouchPad off the market and spinoff the personal computer business, and now they need more time take to think it over. You would think Meg would have a plan before taking this job.

There appears to be a complete lack of longterm vision and innovation at HP.  The acquisition of Palm's technology, the TouchPad and WebOS were a huge step in that direction for HP, and they squandered that opportunity.  They should've stuck it out.  I would've hired a bunch of mobile device programmers and developed my own beautiful and fantastic apps for the TouchPad.   

Having said this, there are three possible alternatives to increase profit margins which need to be carefully examined:

1. Renegotiate parts and components contracts from major suppliers in order to increase profit margins.
2. Acquire major suppliers of major components to reduce costs and increase margins.
3. Outsource all manufacturing like Apple did after Tim Cook came onboard after being hired by Steve Jobs. 

Anybody have a better idea, bring it up now, or forever hold your piece. 

Courtesy of an article dated October 12, 2011 appearing in The Wall Street Journal 

 

Comments

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