Hewlett-Packard Will Split into Two Companies

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Summary: Hewlett-Packard has announced that the company will continue as two entities, HP Inc. and Hewlett-Packard Enterprise.

  

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On Monday, Hewlett-Packard Co. announced that it will split the company into two parts, according to the Wall Street Journal. Executives explained the split is necessary so that the company can stay current with ever-changing technology.

The technology company, which was started in a garage in 1939 by Bill Hewlett and Dave Packard, will split into two segments: HP Inc. and Hewlett-Packard Enterprise. HP Inc. will continue as the company’s personal-computer and printer businesses. Hewlett-Packard Enterprise will go forward with sales of software, consulting operations, data-storage items, computer servers, and other corporate-technology services.

The two new companies will be roughly the same size. Each has more than $50 billion in annual revenue.

Meg Whitman, HP’s Chief Executive, said that although the companies will be the same size, they have very different paths. HP Inc. will be “milked for cash” which will then be earmarked for stockholder returns. As for the enterprise company, which Whitman will run, it will be operated for growth through faster investment paces in new products, as well as acquisitions.

Whitman admitted that the splitting of the company was the opposite of what she wanted for the company just a few years ago. Three years ago, Whitman took over as the chief executive and shut down a potential spin-off of the company’s personal-computer business. “Together we are stronger,” she had declared. She explained that at that time, it was the right move for the company to stay together, primarily because the company was not strong enough financially to split into two parts. However, under her guidance, Whitman stated the company became stronger, and that current technology favors fast-moving companies. “Being nimble is the only path to winning,” Whitman added.

Shares of Hewlett-Packard were up 5.9% at $37.28 in afternoon trading on Monday, signaling the approval of investors. Since the beginning of last year, Hewlett-Packard’s stock has continued to rise, although shares are still significantly lower than their highest prices, reached during the technology boom of the 1990s.

Hewlett-Packard also revealed on Monday that the number of layoffs it expects to incur has jumped up by 5,000 positions. The company had originally predicted layoffs of 45,000 to 50,000, but now estimates a layoff of 55,000 employees after identifying “incremental opportunities for reductions.” As of the last quarter, around 36,000 employees have already been laid off under the company’s restructuring plan.

Whitman stated that Hewlett-Packard has worked hard on rebuilding its cash stockpile, repaying debt, introducing new product lines in up-and-coming areas such as cloud computing, and improving its executive-leadership lineup.

Whitman commented that the board began seriously discussing a “breakup” a few months ago as part of the directors’ annual strategy review. Until recently, Whitman explained that the focus had been on repairing Hewlett-Packard’s financial health, offering new products, and gaining back the trust of investors.

The technology company is not alone in its decision to split. eBay Inc. recently chose to “break up” for similar reasons, in the belief that corporate entities with varying growth outlooks should be managed as separate entities.

The split of Hewlett-Packard will be made through a tax-free distribution of its shares to stockholders by next November.

Over a great deal of the past year, Hewlett-Packard had discussed merging with EMC Corp., a data-storage equipment maker. This merger would have created an “industry giant” with a market value of around $130 billion. The negotiations did not reach fruition, the corporate hardware and services business may eventually merge with EMC.

Whitman and Chief Financial Officer Cathie Lesjak emphasized that the split will allow Hewlett-Packard Enterprise to strengthen through acquisitions. Any deals, they explained, will put shareholder returns first. Lesjak said, “I don’t think it’s binary to say getting smaller is a contradiction to getting bigger.”

Whitman will also take over as chairman of HP Inc., the personal-computer and printer business. The CEO will be Dion Weisler, who currently servers as an executive in the PC and printer operation. Pat Russo, the Hewlett-Packard lead independent director, will serve as chairman of the enterprise company.

Hewlett-Packard predicts per-shares earnings of $3.83 to $4.03 for the fiscal year 2015. This does not include charges connected to the split.

During the last fiscal year, which ended in October 2013, the Printing and Personal Systems Group stated it earned $55.9 billion in revenue, which was about half of Hewlett-Packard’s total. Sales dropped 7.1%, as opposed to 6.7% for the entire company.

Hewlett-Packard slipped from the top spot as the largest PC maker by shipments last year. Lenovo Group Ltd took over the top position.

Whitman and Lesjak added that the company is working to cut costs and recreate sales strategies in the weak tech-consulting business. They predict that software will strengthen Hewlett-Packard Enterprise financially. Software is only a fragment of the current Hewlett-Packard.

Such splits have been encouraged by shareholders. In fact, some shareholders have suggested such company divisions. Many feel that a narrower focus will allow a company to perform better. For example, last week, when eBay announced it will spin off its PayPal payments-processing division, company shares increased by 7.5%.

Photo credit: Wall Street Journal