By Shira Ovide and Rachael King
Large companies can benefit by breaking up into smaller pieces,
but Hewlett-Packard Co.'s split exposes an uncomfortable reality
for Chief Executive Meg Whitman: Her new, slimmed-down company will
be on no steadier footing than the current H-P.
H-P said Monday it will cleave itself in half. The new HP Inc.
will carry on H-P's personal computer and printing operations while
milking them for cash.
The other part, Hewlett-Packard Enterprise, will sell H-P's
products and services for large companies, including computer
servers, data-storage equipment, software and consulting.
In a conference call announcing the breakup, the company billed
Hewlett-Packard Enterprise as a growth engine. However, that side
of H-P, which Ms. Whitman is slated to run, is stalled. Revenue in
the enterprise portions of H-P slipped 3.2% in the nine months
ended July 31, compared with a year earlier. Earnings before taxes
fell 6%.
Ms. Whitman said the breakup would make the new company more
nimble and enable it to invest in products and acquisitions to
better address its market.
In an interview Monday, Ms. Whitman said the breakup would
sharpen executives' ability to attack the enterprise company's
challenges. "I believe that this focus will actually help us," she
said.
The new company--like the current H-P businesses it
absorbs--will be squeezed by price-chopping hardware vendors such
as Lenovo Group Ltd. on one side and high-end software specialists
like Oracle Corp. and VMware Inc. on the other.
H-P's bright spots are in areas like so-called converged
systems, or hardware platforms that unite storage, networking and
computing. And H-P is a promising new entrant in networking gear
that funnels Internet traffic, putting pressure on market leader
Cisco Systems Inc., said Neil MacDonald, vice president at
Gartner.
The catch, he said, is Ms. Whitman's enterprise company will
need more money to invest in or buy its way into other emerging
areas of business technology. She no longer will have the steady
flow of cash generated by the PC and printing group.
"H-P on the enterprise side, they've been behind the eight ball.
The jury is still out as to what this strategic move does for their
growth," said Daniel Ives, a technology analyst with FBR Capital
Markets.
Wall Street reacted warmly to H-P's breakup, as it did to eBay
Inc.'s announcement last week to split its auction business from
the PayPalpayments business. H-P shares rose 4.7% Monday to
$36.87.
However, where PayPal gained opportunities by separating from
eBay, dividing H-P confers few such advantages and may create
problems. Without the PC-and-printing operation under the same
roof, H-P can't as easily sell packages of computing gear, servers,
consulting services and software to corporate-technology
departments.
The slimmer companies that result also may lose clout and
pricing power with suppliers of computer chips and other hardware
parts.
The breakup of the 75-year-old Silicon Valley pioneer is the
latest in a series of dramatic steps taken by some of the world's
biggest sellers of corporate technology. The current market leaders
achieved dominance by displacing formerly entrenched rivals. Now,
however, they are threatened by younger competitors as they
struggle to adjust to tectonic shifts in how companies buy and use
technology.
Larry Ellison stepped down last month from the CEO role at
Oracle after 37 years, as his company navigates tumult in its
product lines. Michael Dell last fall grew frustrated with
investors and led a $25 billion deal to return Dell Inc. to his
control. Both Intel Corp. and Microsoft Corp. in the past 18 months
turned to a new generation of leaders for a fresh eye on their
challenges.
H-P may not be standing pat after the breakup, either. H-P and
data-storage company EMC Corp. recently discussed a potential
merger, and a separation of H-P's PC-and-printer operation was a
part of those talks, according to people familiar with the
matter.
H-P and EMC could continue to explore a tie-up, though the odds
of such a deal ultimately occurring aren't high, people familiar
with the matter said.
Ms. Whitman on Monday declined to address discussions with EMC
or other potential merger candidates.
Executives said Monday that H-P was restricted from repurchasing
shares of the company's stock, because it had "material, nonpublic
information"--a sign H-P has been discussing acquisitions or sales.
People familiar with the matter said the statement referred to
possible deals, including with EMC.
If Ms. Whitman keeps the hand she was dealt, Hewlett-Packard
Enterprise will inherit a tough competitive position.
H-P has been slower than most other corporate-technology sellers
in pushing into emerging areas such as cloud computing, mobile
technology and services to help organizations modernize.
H-P is the world's largest seller of the most popular type of
computer servers, according to research firm Gartner Inc., but that
business is facing lower margins and greater competition.
The H-P division anchored by servers, storage gear and other
corporate hardware reported a 7.4% decline in earnings before taxes
during the nine months ended July 31.
That division will be Hewlett-Packard Enterprise's biggest
revenue contributor. At the same time, Lenovo and Dell have pledged
to win market share in servers.
H-P has introduced software tools to help companies manage their
sprawling data centers and link them into clouds.
The company's high-margin software business remains small and
troubled. Software has accounted for less than 4% of H-P's total
revenue, and sales in that business fell during the most recent
quarter from a year earlier.
H-P also has acknowledged hiccups in its outsourcing and support
operations, which mostly consist of the EDS business H-P bought for
$13 billion in 2008. H-P faces a squeeze there, as well, between
high-end consulting operations like IBM's and software exporters
such as Wipro Ltd. H-P said revenue from services fell 6.9% over
the past nine months.
Dana Cimilluca and Joann S. Lublin contributed to this
article.
Write to Shira Ovide at shira.ovide@wsj.com and Rachael King at
rachael.king@wsj.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires