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Muddled Thinking Sinks HP

Is {complink 2376|Hewlett-Packard Co.} 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 {complink 549|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 {complink 2470|IBM Corp.} did when it sold its PC operation to {complink 9284|Lenovo Group Ltd.}.

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

11 comments on “Muddled Thinking Sinks HP

  1. Anand
    August 19, 2011

    HP isn't sure it will really exit the PC business or spin it off.

    Bolaji,

     Why do you think HP is planning to spin off its PC business ? Is it because of low margins or is it because demand for PC is waning ?

  2. Clairvoyant
    August 19, 2011

    It will be interesting to see what the outcome of all this is, and what the full story is behind it.

  3. hwong
    August 19, 2011

    It's very easy to understand why HP is spinning off its computer product line. It wants to follow suit as IBM did in the 90s when it decided to realign the vision. True. the Technology consulting and hosting services are gaining traction in the market place because it doesn't require  R&D, manufacturing or keeping inventory. However, I think that HP may have a more harder time because their brand mostly came from printers and computers. They just started to get into to hot areas like Cloud computing or IT consulting. So it will be some time before they can re-image themselves.

  4. Anna Young
    August 20, 2011

    @ Clairvoyant, I agree, it will be interesting to see the outcome of HP's indecision. Like bolaji wrote, it will be hard for HP to sell off it's PC division. Perhaps we might just see a spinoff.

     

  5. Houngbo_Hospice
    August 20, 2011

    HP has been struggling as many other companies in this difficult time. By dropping PCs and WebOS-based phones and the TouchPad tablet, HP will be concentrating on faster-growing technologies. They certainly have good reason for investing $11.7 billion to buy British software maker Autonomy Corp. But the future will tell if this was a good decision.

  6. Parser
    August 20, 2011

    In the world financial crisis companies cannot add additional confusion about their own direction. This offends all investors. It will be very intersting to see their next steps. 

  7. JADEN
    August 22, 2011

    HP has said it will be considering exiting the PC business, spinning off its PC unit and doing some kind of play in the software and systems space.  In fact, if you look at what seems the Plan of the Day, it seems as if HP wants to be Oracle; software-intensive, enterprise-focused.  In their spring quarter, HP was hurt by the soft consumer PC market where Dell did better.  Now with Dell taking an outlook hit and HP following suit, there was little the company could do except to admit that PCs were not now, nor ever in the future, what they used to be.

  8. Barbara Jorgensen
    August 22, 2011

    You are right, Bolaji, the language used by HP's CEO (potential nontransaction, dis-synergies) is not just confusing (as is HP's strategy) but just this side of laughable. The market is long past the day when terms such as “involuntary attrition” work with employees (it's a layoff, stupid) or market watchers. 

    Dis-synergies? Are you kidding me?! 

  9. elctrnx_lyf
    August 23, 2011

    I always heard leaders talking about synergy but this is the first time I hear opposite. I do not understand how companies like HP can operate without knowing where they want to go in the next 5 years.This is not definitely expected from leaders of such a huge organizations. But anyways it looks like we are going to see more and more interesting things in the near future for HP.

  10. Himanshugupta
    August 24, 2011

    Its hard to understand for me why HP is leaving (thinking of leaving) PC business even though 1/3 of its revenue is from this business. I do understand that the competition is tough but PC/smartphone market is on boom. HP can realign its startegy without PC business exit.

  11. Clairvoyant
    August 24, 2011

    I agree, Himanshugupta. The first thing I think of when I hear 'HP' is PC's.

    HP stocks (HPQ) on the NYSE have only increased slightly from the significant drop on Aug 19th.

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