Muddled Thinking Sinks HP

Is Hewlett-Packard Co. (NYSE: HPQ) spinning off, selling, or keeping its personal computing business? A review of business stories since the company announced a $10 billion acquisition and plans to conduct a strategic review of its operations Thursday would seem to imply HP had already concluded the PC division would no longer be a part of its business. Is that really the case? Here's what CEO Léo Apotheker said on the subject during a conference call to discuss the fiscal third-quarter results:

I want to make sure that people understand that we are going to look at all of our options [regarding the Personal Systems Group]. And I also want to make sure that people understand that when we say this, all outcomes are possible, including a potential nontransaction.

Did I read that right? "A potential nontransaction?" What kind of muddled talk is that from the head of a company with $126 billion of revenue? What exactly is going on at HP, and why is it announcing a strategic action that may or may not occur?

Effective leaders announce a definitive action (a spinoff or a sale, certainly not a "potential nontransaction"). While Apotheker and his team are conducting a review of "all of our options," the market is already abuzz and sure that HP is getting out of the PC business, killing the WebOS operating system it acquired when it bought Palm Inc. last year, and shifting its focus solely to software.

HP isn't sure it will really exit the PC business or spin it off. The company is certain it wants to expand software revenue, though. I wanted to write this blog yesterday, but I waited for additional information, because too many things just didn't feel right about the way this was handled, starting with the leaking of details to Bloomberg News and the Wall Street Journal. How the heck did HP allow reporters to steal its thunder, forcing market regulators to halt trading in the company's shares? The premature announcement was an omen for what would come next.

Investors don't like HP's plan to spin off or not spin off its PC business. They may believe the company's decision to purchase the enterprise information management software vendor Autonomy Corp. is a step in the right direction. But there are already grumblings that the buyer is overpaying and expending too much of its market value for a company that would initially represent about 1 percent of HP's annual revenue.

HP is already feeling the heat. In premarket trading, the stock sank almost 16 percent from the previous day's level of $29.51 to $24.85. I can imagine why. HP injected too much confusion into its operations with the deal-or-no-deal it announced Thursday about the personal systems group (the PC unit). And the argument the company made for the future of that business was perplexing, tortuous, and unconvincing. Here's Apotheker again:

We're looking at all of our options. That's what the board has authorized us to do. We'll be looking at all of the various dis-synergies [and] supply chain mitigation issues. And once we are done with that work, we'll report back to the board, and a decision will or will not be made.

I am stumped. Investors must be feeling dizzy, too. But the market understands one thing: The uncertainty fueled by this move was unwarranted. HP computer sales will suffer as consumers and enterprise customers worry over continued support if the company ditches the line. This is why the market for HP's shares is swooning. The shares tumbled even more in regular trading Friday, sinking almost 21 percent and hitting a 52-week low of $22.75.

Investors know there are only two possible options for the PC business: an outright sale or a spinoff. A sale is unlikely, because very few companies have the resources to purchase an operation that is currently the world's biggest PC vendor. In the latest quarter, this business accounted for about a third of the company's revenue, and it is valued by some analysts at between $10 billion and $12 billion, according to Reuters.

The better alternative is a direct spinoff, and that is what HP should have simply announced if it were that sure it no longer wanted to be in the low-margin PC market. That's what IBM Corp. (NYSE: IBM) did when it sold its PC operation to Lenovo Group Ltd. (Hong Kong: 992).

HP dropped the ball on this one, and its shareholders will pay a hefty price for the mess.