HP putting the Ink in Inc.

Meg Witman replaced Léo Apotheker as HP CEO in 2011, just after the former had announced that it was considering selling off its PC business. Evidently the idea didn’t die as she’s now announced the spin off of a new company ‘HP Inc.’, leaving the rest as ‘HP Enterprise’. What changed in the mean time was the combination of PC and printer businesses in the PSS division back in March 2012 under Todd Bradley – the one-time CEO of acquired Palm and his replacement by Dion Weisler in June 2013; Don is slated to be the new head of HP Inc. when the deal is completed by the end of HP’s Fiscal 2015 year in October next year. The 2 companies will continue to be linked however, with Meg becoming chairman of Inc.’s board.

The Figure shows HP revenues split by the 2 proposed companies. Enterprise revenues grew significantly with the acquisition of EDS in 2008 – just before Inc.’s were badly effected by the Credit Crunch. Although Enterprise revenues have been consistently higher ever since, both of the businesses have seen a gradual decline since then.

I thought you’d enjoy a quick look at HP and some ideas on the potential of the 2 residual companies.

The development of operational profits has been more dynamic than revenue – with Enterprise building from a low base in 2003 and having a tremendous boost from EDS before falling consistently from 2011. Inc.’s profits have always been heavily dependent on the printer business: they were substantially larger than Enterprise’s from 2007-2008, were hit badly by the recession before stabilising since. The profit of the 2 groups have been virtually identical this calendar year.

So does it make sense to split HP in 2? It’s certainly the organisational move of the moment with Meg’s old company eBay planning to break off PayPal and Symantec separating Security from Information Management. Perhaps it reflects the power of the stock market to affect major change in search of higher returns – something Dell has clever avoided by going private a year ago.

Lenovo is the largest PC supplier and Canon is now neck and neck with HP in the printer market. It wouldn’t be financially feasible to spin out HP Inc. without both businesses, although it doesn’t make sense to keep them together in the long run if focus becomes the new industry nirvana. I’m also sceptical about the chances for 3D printing becoming a big revenue earner any time soon.

The opportunities for HP Enterprise will bigger – it should be able to benefit from more relevant investments and retain consistency at a time of disruption for its competitors. It will need to continue to make the most of the shift in spending from hardware to software and services. However there will be downside in scale economies unless somehow HP retains volume discounts across both separated companies and it will have to adopt new strategies to compete with the rise of the Chinese.

The break up of HP into 2 companies reminds me of a conversation I had with Lou Platt – now sadly deceased – in 1999 before he stepped down as HP’s CEO. HP’s medium size at the time put it in a trough of poor profitability. He said that to improve it should either grow substantially or split itself up into smaller companies. Apart from offloading Agilent almost immediately HP has only grown since then, acquiring Compaq, EDS, 3Par, 3Com, Palm, Autonomy and many others along the way. The separation of Inc. and Enterprise is the first recognition that it might be better to go the other way.