HP to Transform the Company: Plans to Spin Off PC Business

HP to Spin Off or Sell Personal Solutions Group

by Anton Shilov
08/18/2011 | 04:26 PM

There is a time to scatter stones and a time to gather them.


Hewlett Packard, one of the world's largest IT companies, announced on Thursday that its board of directors has authorized the evaluation of strategic alternatives for its Personal Systems Group (PSG), including the exploration of the separation of its PC business into a separate company through a spin-off or other transaction.

Fundamental Transformation Ahead

HP is implementing a plan to fundamentally transform the company. An important component of the plan is focusing its investments, resources and management attention to drive higher value solutions to enterprise, small and midsize business and public sector customers. HP believes that the exploration of alternatives for PSG will help the company accomplish its strategic goals and pursue profitable growth and enhanced shareholder value. A post-transaction HP would continue to help its customers manage the information explosion and address their most critical needs through a portfolio that spans printing, software, services, servers, storage and networking.

"In March we outlined a strategy for HP, built on cloud, solutions and software to address the changing requirements of our customers, shaped heavily by secular market trends that are redefining how technology is consumed and deployed. Since then, we have observed the acceleration of these market trends, which has led us to evaluate additional steps to transform HP to meet emerging opportunities," said Léo Apotheker, HP president and chief executive officer.

PC Business Becomes Unsuitable

The personal computing market is quickly evolving with new form factors and application ecosystems. Given these realities, HP believes it is in the best interests of the company and its shareholders to explore ways for PSG to position itself to address these rapid changes and maintain its technological and market leadership positions.

HP's PSG is the leading manufacturer of personal computers in the world and had annual revenues of approximately $41 billion in fiscal year 2010. PSG enjoys leading global market positions in consumer and commercial PCs. But those leading positions come at a cost of very thin margins. Furthermore, given the size of HP, it is hard to keep the PC business unit competitive as the decision making processes take a long time, which leads to lost opportunities and long time-to-market.

To make the matters worse, consumer and PC businesses have long became commodity businesses with poor margins, low profitability and limited growth amid high risks. Meanwhile, HP wants to concentrate on more profitable businesses that have bright growth prospects, including cloud computing technologies, services, highly-integrated solutions and so on.

"Their focus is on being more of a software and services company and not dependent on the hardware businesses. The hardware business has become a difficult business. In many ways it’s a commodity-driven business. This is a major strategic shift for HP," said Michael Gartenberg, an analyst at Gartner.

But removing PC and consumer hardware businesses from the company will not immediately help HP to achieve its strategic goals. It will still have to integrate all of its businesses and be able to provide vertically-integrated solutions.

"Removing all or part of its low-margin consumer PC business and the expense of fighting its way into the mobile and tablet markets with a fourth offering (after Apple, Google, and Microsoft) will improve HPs margins in the short term. The company will be challenged, however, to morph into a highly profitable purveyor of software, services, servers and storage - a goal it has pursued for some time," said Beau Skonieczny, research analyst of computing practice at Technology Business Research (TBR).

PSG's Fate to Be Decided in 1 - 1.5 Years

HP management, together with its financial and legal advisers, will explore strategic alternatives, including the exploration of the separation of its PC business into a separate company through a spin-off or other transaction that would likely be tax free to U.S. shareholders. HP expects that the process could be completed within approximately 12-18 months. There can be no assurance that any transaction regarding PSG will be pursued or completed.

The big question now is who may buy HP's PSG group that generated $41 billion last year.

TBR believes Samsung is one prime candidate to purchase HP’s PSG, as it maintains large cash reserves and an established base for component manufacturing. In addition, Samsung’s limited global PC presence, where HP maintains broad traction, presents an added benefit to Samsung making such a strategic acquisition.