Break up HP — it’s the only way to save it

Maybe Léo Apotheker wasn’t so crazy after all. The former Hewlett-Packard CEO was fired 16 months ago after a mercifully brief reign for a multitude of sins, including what seemed like the worst idea of all: spinning off the company’s PC division.

Times have changed, and the idea of divesting parts of the struggling company is back on the agenda, HP informed investors in an SEC filing earlier this month. The filing offered no details of which parts might or might not go overboard. But that hasn’t stopped Wall Street, industry analysts, and academics from offering unpaid advice to current CEO Meg Whitman, who despite her huge salary, has one of the most thankless jobs in Silicon Valley.

[ Bill Snyder cuts to the heart of the issue in “HP’s big problem isn’t Autonomy: It’s HP.” | Get a digest of the key stories each day in the InfoWorld Daily newsletter. ]

What might a new HP look like? Break it in half, says Bill George, the former CEO of medical devices maker Medtronics and a professor at the Harvard School of Business. He envisions two HPs, one centered on the Personal Systems Group, which includes PCs and printers, and a company focused on enterprise systems, services, and software.

Other analysts believe HP should remain one redesigned, radically smaller company that focuses only on higher-margin businesses and the cloud. “There is no time to wait. There are issues in almost every division, meaning that the company needs radical surgery,” says Trip Chowdhry, principal analyst of Global Equities Research.

Radical as these proposals may sound, they are essentially optimistic in the sense that they see a road to recovery. By contrast, UBS analyst Steve Milunovich says the company has so much debt (more than $18 billion, he estimates) that nothing major could happen before 2014.

Why a once-crazy notion is now seen as rational Why was Apotheker pilloried in summer 2011 for floating the spin-off idea, while George’s ideas now get prominent play on CNBC and the New York Times? In a word: disaster. “Things have gotten so bad at HP that something that was crazy in 2011 is worth discussing” today, says veteran IDC analyst Bob O’Donnell.

It would take far more than one post to discuss all of the missteps of the past few years, including a revolving door in the corner office (four CEOs in five years), the collapse of the company’s mobile strategy, and the misguided, hugely expensive acquisition of Autonomy. But one statistic sums it all up: In early February 2011, HP was trading at just under $49 a share. Two years later, the stock is trading at around $15 a share, a decline of more than 65 percent — which means tens of billions of dollars of value has been vaporized.

The reaming of HP’s shareholders is bad enough, but even worse is the decimation of HP’s workforce. Tens of thousands (I’m not exaggerating) of jobs have disappeared since Carly Fiorina bet — and lost — the farm buying Compaq Computer in 2002. What’s more, the job losses are not going to stop. I hate to say it, but there is no credible scenario for recovery that does not include a further, radical reduction in the size of the workforce.

How to break HP in two to save it Despite the losses, HP is still a huge company: “With 330,000 employees and $120 billion in revenue, HP has become too big to manage,” wrote George. It is, in fact, two businesses: one a commodity personal computer and printer business, and the other an enterprise systems, services, and software businesses, he says.

HP execs have long argued that the two businesses are complementary, that getting the foot in the door with one product leads to sales of other products and services. Not so, says George: “The characteristics of these businesses are entirely different.” Here’s how:

• The commodity business requires low costs and aggressive distribution through multiple channels combined with rapid new product introductions — qualities incompatible with the company’s historically high cost structure and cumbersome organization.
• The enterprise systems business requires heavy investments in research and development, including very sophisticated software (an area where HP sorely lags behind IBM, Oracle, and SAP), high-touch customer service, and an expensive support structure to meet its customers’ complex needs.

The time is ripe to split the company into two businesses — enterprise systems and computer hardware — each with roughly $60 billion in revenue, positive cash flow, and solid profitability.

George would give Whitman the job of running the enterprise business and hand the PC/printer business to Todd Bradley, who runs that division now and was the CEO of Palm before HP acquired it.

Milunovich believes that Whitman deserves more time to turn the company around because yet another change at the top would be destructive. I agree. But at whatever point a split becomes indisputably necessary (to me, sooner is better), I’m not so sure Bradley, who has yet to find a mobile strategy that works, is a good choice to run a spun-off personal division. That’s a quibble. I believe George’s proposal makes a good deal of sense.

The other option: A smaller, more focused HP could thrive Chowdhry envisions an HP that is radically smaller than it is today but would still be one company. He says it must “stop dragging along the past and focus on the future,” which means focusing on growing, potentially high-margin businesses such as data analytics and the cloud.

Both Chowdhry and Milunovich would sell off the Infrastructure Technology Outsourcing BPO group, possibly to companies in Asia. Milunovich estimates that the move would net about $1 billion.

Chowdhry would look at service contracts and sell off any that carry a margin of less than about 10 percent. But would anyone want them? Likely, yes: “IBM and others can thrive on low-margin contracts.”

But selling off the PC and printer businesses would be a mistake, Chowdhry argues, because they are used in the enterprise. Instead, he would radically reduce the number of product lines, consider moving manufacturing to California to shorten and simplify the supply chain, and most important focuses on highly customizable products instead of the commodity boxes it now sells. “No more Tom, Dick, and Harry printers,” he jokes.

As to software, “there is so much junk floating around that company.” He would get rid of about 60 percent of it, but he’d keep at least part of Autonomy.

Where to start: A new board In the short run, HP needs a new board and must stop pouring money into more poorly considered acquisitions: The purchase of EDS under former CEO Mark Hurd led to an $8 billion write-down, while Autonomy cost $10 billion, a deal that might have been reasonable at half that price.

HP can’t be IBM, and it certainly can’t be SAP. But it can’t remain the HP of today. Only a radically rethought and reshaped company would have a chance to thrive.  

I welcome your comments, tips, and suggestions. Post them here (Add a comment) so that all our readers can share them, or reach me at bill@billsnyder.biz. Follow me on Twitter at BSnyderSF.

This article, “Break up HP — it’s the only way to save it,” was originally published by InfoWorld.com. Read more of Bill Snyder’s Tech’s Bottom Line blog and follow the latest technology business developments at InfoWorld.com. For the latest business technology news, follow InfoWorld.com on Twitter.