HP to break itself into two companies

Hewlett-Packard's future laptops will come from the company to be known as HP Inc. Sarah Tew/CNET

Hewlett-Packard, one of the most prominent technology companies in the world, is splitting into two Fortune 50 companies, the firm announced on Monday.
By the end of its next fiscal year, which will end in October 2015, HP expects to officially become two companies. The first, which will include the company's enterprise services, software, and servers, will operate as Hewlett-Packard Enterprise. The other will be made up of its PC and printing businesses and will be known as HP Inc. The latter will retain the current logo, while the enterprise entity will receive completely new branding.
One key goal outlined for the new HP Inc. -- to invest in "growth markets such as 3D printing and new computing experiences."
HP CEO Meg Whitman will play a role in both companies. She will head up Hewlett-Packard Enterprise as president and CEO and serve on its board. She will also be non-executive chairman of HP Inc.'s board. Dion Weisler, current executive vice president of HP's Printing and Personal Systems business, will take over as HP Inc.'s chief executive.
On Sunday, the Wall Street Journal had reported on the breakup plans, saying they could be announced as early as Monday.
Wall Street firm Cantor Fitzgerald, responding to the Journal's report, hailed a potential breakup as "a bold and smart move" for the venerable Silicon Valley company.
"In our view, the enterprise IT market is becoming increasingly competitive and the PC market has been in a downturn since the iPad was unveiled in April 2010 but has shown improved trends this year," wrote Cantor Fitzgerald analysts Brian White and Isabel Zhu. "Given the challenges in managing a company the size of HP, the negative, long-term secular trends in the PC market that discourage investor attention, and the need for HP to focus more on the cloud (e.g., as Oracle did last week), we believe a separation into two companies makes sense, as we have suggested for quite some time."
In an investor presentation, HP also said Monday that it expects previously announced job reductions to be greater than anticipated, now likely reaching to a total of 55,000. That's up from the 45,000 to 50,000 the company had projected earlier this year.
HP shares rose after the stock market opened, edging up about 5 percent to nearly $37 a share.

A battle between HP and Lenovo

While Hewlett-Packard remains a major player for both consumer and enterprise dollars, in the PC market it has slipped to second place in worldwide shipments behind Lenovo. The move to split into two companies has been viewed by some as a way for HP to quickly focus on its core businesses and regain its top spot in the PC market from Lenovo.
Responding Monday to HP's news, Lenovo emphasized that it is "continuing to gain share in the $200B PC market ... [T]he market can expect we will launch more and more exciting PC, mobile, enterprise and ecosystem products in the near future and in the long term; and as we are consistent and clear with our strategy, which after we close both the IBM System X and Motorola deals, will give us 3 growth engines - PC, Mobile and Enterprise."
Whitman kept the finer points of the decision close to the vest in a statement on Monday, saying only that the move allows the company to "more aggressively go after the opportunities created by a rapidly changing market." She added that the decision to split into two companies "underscores our commitment to the turnaround plan."
It's rather surprising to hear Whitman say that a split is part of her turnaround plan. When she took over the company in 2011, she began a "multiyear journey" to revive the ailing HP brand. While the company was still financially healthy, it was experiencing a revolving door in the C-suite, with former CEO Mark Hurd resigning amid a scandal in 2010 and his replacement, Leo Apotheker, forced out as CEO in 2011.
Apotheker had announced plans in 2011 to spin off HP's PC division, which was quickly rejected by investors. Not long after, he was pushed out over the decision -- investors viewed the idea as reckless. When she became HP CEO in 2011, Whitman reassured investors that she would remain committed to the company's PC division. In three short years, that tune has changed.
In response to HP's news, PC rival Dell said the move will likely benefit shareholders more than customers.
"HP's decision to break apart its business is complex, distracting and appears to benefit HP and its shareholders more than its customers, which is ultimately the wrong priority," Dell said in a statement. "The HP separation will be complex and it takes time to unwind the commingled businesses and customer accounts. Other large separations like this have often taken years to complete."
HP's printing and personal systems division, which is essentially made up of PCs and printers, generated about $55 billion in revenue during the company's 2013 fiscal year. It posted a net earnings of $4.8 billion. HP's enterprise business, which comprises servers, cloud solutions, big data products, and other IT services, generated about $60 billion in revenue and $6 billion in net earnings.

Analyst: Breakup 'fueled by weakness at HP'

While those numbers appear sound, Bernstein Research analyst Toni Sacconaghi Jr. told investors Monday that the move appears to be one born out of anxiety more than confidence.
"The news underscores our belief that HP and CEO Whitman appear increasingly uncomfortable with the status quo and believe that a material shake-up/change at HP is needed going forward," the analyst wrote. "While on one hand the desire to drive change and incremental value creation is positive, on the other, the potential spin-off appears fueled by weakness at HP rather than strength."
If the announcement is approved by the board and the split occurs, current HP shareholders will retain ownership in both companies. Those shares will ostensibly be pro-rated based on the exact split between the firms and how much ownership investors currently have. According to HP, both firms will have enough cash and strong investment grade credit ratings that will allow them to operate independently.