Monday, January 22nd 2018

HP Charts A New Course As Two Separate Companies

November 30th, 2014 in Business by

HP picture1

By Kacper Szumiec

Recently, the hard drive on my HP Envy DV6 crashed during what should have been a routine HP software update. But after less than two years of ownership, the computer simply froze up entirely. Every piece of data stored on the hard drive got erased. Customer service was sympathetic and pleasant, but the best they could do was mail me a disk to refresh the drive to its original store-bought status. Any personal data that I didn’t save to the Google cloud was lost forever!

That frustrating experience is why I think HP’s decision to spin off the PC business into a separate company is a good thing. The Silicon Valley computer conglomerate is joining a growing list of companies splitting up in order to produce better products for their customers and to adapt to an evolving marketplace. On October 6, 2014, HP Chairman and CEO Meg Whitman announced a plan to divide the company into what she expects will be two separate Fortune 50 companies. The Printing and Personal Systems division (PCs and tablets) is set to become HP Inc, and the server, storage, networking, services and software units will combine into Hewlett-Packard Enterprise (HPE).

This move will allow HP–whose sales slumped 2.5% from the year prior to $28.4 billion in the fourth quarter reported Nov. 25th–to become more flexible and keep up with competitors such as Dell, Lenovo, and Toshiba on the PC side and with the likes of IBM on the enterprise services side. HP has been losing ground to all of those players in recent quarters. The spin-off process is estimated to take until next October, when Whitman would become CEO of HPE and non-executive chairman at HP Inc.

Personally, I believe that spin-offs in today’s economy lead companies to bigger and more innovative ideas, not to mention better execution.  However, companies should look at all available options before actually spinning off a business unit.  Joe Cornell, a spin-off expert, estimates that 62 U.S. companies will complete a spin-off in 2014, up from just 37 in 2013. Companies across the United States feel that because the economy is stabilizing, now is the right time to spin-off into separate divisions.  Shareholders believe that when a company splits in two its value and stock will rise. In fact, the Bloomberg Spin-Off index is up 540% since December 31, 2002, topping the 123.7% gain by the S&P 500 over the same period.

When Motorola completed its split into Motorola Mobility (for mobile phones) and Motorola Solutions (for enterprise and government networking) on January 4th, 2011, it created two simple businesses instead of one complex business.  Since splitting into its own company, Motorola Solutions has seen its stock rise from $34.37 in 2011, to the $65-range today.  But sometimes returns take a while to materialize. From January 2011 to March 2011, Motorola’s stock dipped as investors struggled to grasp the new focused strategy. In fact, the company is still focusing its business. Amid intense competition in the enterprise space, Motorola Solutions sold its enterprise networking business to Zebra Technologies, and now targets the government and public safety sector entirely.

In some cases, spin-offs don’t work out as successfully as the company hoped for.  In March 2005, automotive parts company Delphi faced bankruptcy after it struggled in the wake of a spinoff from GM. Similarly, Visteon looked to Ford Co. for its second bailout in nearly two years.  The reason these companies failed at becoming independent businesses is that they never completely severed ties with their parent company.  Visteon, for example, paid Ford to take care of its payroll and information technology, according to a Businessweek article.

To avoid their own failure, companies have to be spun off in a way that allows them to function independently, without reliance on their former sister or parent company. eBay, for example, recently announced that it plans to spin off its PayPal digital payment business, creating two separate companies in 2015. An internal study done by eBay on the payment landscape, determined that PayPal needed independence and flexibility in order to compete effectively.  By spitting from eBay, PayPal will become a publicly traded company that can build partnerships in the e-commerce space without the weight of eBay, which might help it seize market share from other payment startups. Furthermore, by by spinning off PayPal, eBay becomes more flexible and able to give better service to its customers.  Investors have responded favorably. Before eBay announced its plans shares were worth about $52, but since the announcement eBay has seen shares rise 7.5% to more than $56.

In today’s rapidly changing market, companies need to do what is necessary to stay ahead.  By spinning off from one another, a company will have a better opportunity to fulfill the demands of customers.  I’m hoping that without the responsibility for enterprise server and storage customers, HP’s computer business can focus on making awesome products that don’t breakdown. As an independent company, they might just have a better shot at keeping consumers like me loyal and the share price up.