New York City, New York – (StockNewsDesk) – 10/06/2014 — Hewlett-Packard announced over the weekend that it would complete a long rumored move to split its personal computer, laptop, and printer business from its enterprise serviced oriented business.
Reasons for the Split
One of the biggest reasons for the move is that while both units are contributing equally to sales and earnings, the computer and laptop business is in a secular slowdown with margins under pressure. On the other hand, the enterprise business is growing rapidly and finding success selling hardware, data-storage equipment, and software and consulting services.
Synergies no longer exist within the two divisions. Both units are large enough to be legitimate businesses on their own and value will be unlocked by this maneuver. The enterprise segment will most likely be given a generous valuation based on its growth over the last couple of years, while the printer and computer company will be given a single-digit P/E because of its low-growth growth prospects going forward.
Meg Whitman’s Role
Current HP CEO, Meg Whitman, will play a role in both companies. She will lead the new enterprise division as CEO, which is being called Hewlett-Packard Enterprises. She was also named as chairperson of HP, Inc., which is the new name for the printer and computer business. There was some speculation the enterprise group would completely disassociate itself from the HP brand, but so far, this does not seem like it will happen.
Whitman has been a long-time champion of splitting HP in two, and this is her latest move to shape the company to her liking. She took over at a bad time for HP with the stock trading under $10, and many were questioning the viability of HP’s future, as its PC and printer business was under pressure. Whitman pivoted to a focus on the enterprise division, betting the future on it. So far, this decision has been a success, with HP reaching a new 52-week high in premarket trading at $37.40.
A Storied History
HP is one of the oldest companies in Silicon Valley, as it was founded in a Palo Alto, California garage in 1939 by Bill Hewlett and Dave Packard. The name still commands respect in tech circles, despite its recent struggles. This is a testament to the work of the founders in creating semiconductors that became the standard for the following decades.
Eventually, HP became the world’s largest supplier of personal computers and sold other computer-based equipment used by various business customers. This dual focus between business customers and consumers is nothing new for HP. However, there was less tension with both groups growing equally. In recent years, HP has been unable to keep up with the fastest-growing segments, such as tablets or mobile phones. HP’s efforts in both directions have been disastrous and, for the first time in decades, HP’s name was not relevant when it came to personal computing products. It goes without saying that HP bravely tried to stay relevant but was unable to and this is a reason for HP’s stock being crushed and Whitman’s elevation to CEO.
This failure created the seeds of the current split into what is now HP, Inc. and HP Enterprises. The stock market is rewarding companies that maintain a singular focus and high growth rates with generous valuation, rather than lumbering corporations with different, unrelated businesses. HP, Inc., with its value proposition, will appeal to a certain type of value investor, while HP Enterprises will be in play with growth-oriented investors. Overall, the decision is in the best interest of HP’s current shareholders.