Wednesday, February 6, 2013

Breaking Up HP: A Bad Idea Rears Its Head Again

Back in October 2012, with HP's stock price testing the 52 week lows, we made two points:

  1. HP's customers are telling the company that separating computing hardware and printing from the rest of the company was not something desirable from their point of view, and
  2. The company's lengthy analyst day presentation and the multi-year turnaround make little sense if the company were contemplating the classic Wall Street breakup.
Today, based on one report from Quartz Media, recycled by the Wall Street Journal, the idea that the HP board is reconsidering the breakup has resurfaced.  

One of the fundamental arguments for declaring the end of the PC era is the "tablet."  Have you ever watched what people do with their iPads?  They take low quality videos of their child's band concerts or soccer games.  They look up useless information on Google and search for restaurant reviews, or check NBA box scores.  These are certainly not "value added" activities.  

There are certainly interesting and useful apps for specific tasks, like running a virtual sound board for a concert band.  However, to say that corporate users will all migrate to tablets is a bit premature. Before that happens, the tablets themselves will have to become more powerful.  And, at the end of the day, users who want to work on data analysis will need more than touch screen typing.  If they want to collaborate across geographies on a new prototype in a software application, it won't be done on an iPad. 

Tablets will evolve and converge towards something farther away from an iPad and closer to a notebook.  Look at some of the reviews for the Microsoft Surface Pro with Windows 8. The hybrid of the future shouldn't require a hard disk drive, as storage should be on something like Sky Drive; applications can also reside on the Web, being accessed in a SaaS mode, again doing away with a drive.  Business users won't require a DVD drive.  

Whatever this device looks like in the future, a company that has a long history with a corporate client in delivering devices and software, will have a decided sales advantage.  It will also have a global supply chain in place, and it will also have be able to redeploy cash flows to develop these future products.  

The Enterprise Business, which would be left over after HP ostensibly got rid of PCs and Printers, would face its own challenges from declining hardware margins for servers.  As HP software grows, the margin rates could stabilize before eventually turning north.  For now, the HP software business is too small, and it needs time to grow.  Again, all of this can happen by reallocating cash flows from within the large leviathan. 

Paying down debt and restoring the credit rating should be a high priority, and share repurchases should move to the bottom of the list. A split of the company with the current structure would not be considered a "bondholder friendly" action.  Research and truly new product development expenditures have to be carried out efficiently and with a sense of urgency.  

The sales organizations will hold the key to putting a face on the company's strategy with customers. 

Walt Kelly's Pogo said it best.

Historically this has been the case for HP management and its board of directors.  Let's hope things have really changed.  

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