Monday, October 6, 2014

HP splits the company

HP splits

HP announced that by the end of 2015 they plan to split the company in two. One of the companies, “HP enterprise”, will focus on business requirements and will contain the server business, HP's cloud offering –Helion, HP's enterprise services, and HP financial. The other company, “HP Inc.” will contain the printer and PC business. HP financial will continue to provide financial services to both companies.

Several key points

HP ran a conference call to discuss this announcement and answer questions. Several nuances of the announcement became clearer during this call. One of the reasons that Meg Whitman, HP CEO, had decided against splitting off the PC business several years ago was that the cost advantage from HP’s supply chain would be greatly reduced. That argument would seem to apply to the current split. After all one of the justifications that IBM gave for selling the x86 server business was that the Lenovo supply chain would give a cost advantage. Is HP was throwing away its current advantage of the unified supply chain? Meg Whitman, HP CEO, says she expects the two companies would arrange some joint agreements to cover this issue. In other words, the server folks would be able to leverage the component purchases of the PC company to get the most favorable prices.

The Wall Street Journal broke the story only yesterday (Sunday, 10/5) --, although rumors were rife towards the end of last week. This points to very good management discipline on the part of HP since they were able to keep this blockbuster story secret until almost the last minute. The dead story about HP’s negotiations with EMC did leak. Perhaps, this was part of the management plan to conceal the real story? So far, it appears that HP has planned properly.

Meg Whitman stated that there would be three transition offices set up, one in HP corporate and one for each of the two new companies, keeping the transition teams separate from the team that is running the day-to-day business. HP wants to ensure that the 2015 results are good so that the two new companies get off to a good start.

Finally, HP noted that they have suspended their stock repurchase plan because they are in possession of non-public information that requires them to make this suspension. When questioned they said that their M&A activities were involved. It seems that they think that this issue will be resolved by the end of the year but it is intriguing to speculate on what this “non-public” information might be

Customer Impacts

We do not see any immediate customer impacts from this announcement. However it is ironic that HP has pointed out the potential disruption for customers from the IBM sale of its x86 server business to Lenovo. Now HP will have to justify the far larger transition that it is going to go through to split itself in two. In 2016, customers who were buying products across HP will have to adjust to dealing with two companies. Both will still be named HP but as time goes by they will be different companies. 

HP management thinks that since the two companies have the same name (although the consumer company will have the HP logo) that this solves the branding issue. The branding issue would have been a huge cost if HP had spun off the PC business several years ago into a new company with a different name. We are not so sure about the branding issue being resolved because in the long run having two companies with essentially the same name may cause some confusion in the marketplace.

Competitive Factors

It was not mentioned in the call but we think that HP has decided that they need to position themselves to compete with the new Lenovo. Meg Whitman emphasized the value of agility in a fast changing marketplace. We think that HP considered how they will be competitively positioned against Lenovo going forward. They obviously think that the new structure with two companies competing with Lenovo instead of one would be an advantage for them. Time will tell but it’s clearly important for HP to make the right call here.

We have heard from some people in IBM that HP and IBM are not going to be competitors going forward. We think that is a serious mistake by IBM. The HP enterprise company is going to double down on the Cloud and other areas such as enterprise services where they will be directly competing with IBM for the customer’s business. It would be an error for IBM to underrate them.


HP has announced a major restructuring of the company. We think that HP management carefully considered this change. It’s too early to judge how successful this new structure will be. However, Meg Whitman, has built a track record of successful change at HP. We would not bet against her. It was notable that the company’s CFO announced during the briefing that they were going forward with plans to eliminate 14,000 more jobs. They have hit their target of 36,000 but they have identified the additional positions. They plan to reinvest the savings in sales and R&D. They believe that these investments will strengthen the two new companies as they go forward.

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