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Should HP spin off its PC unit?

When Hewlett-Packard (HP) announced its plan to spin off its Personal Systems Group (PSG) and get out of the PC business, customers and analysts were asking why would a company give up its leading position in a major hardware segment – especially if the business is still profitable?

Aside from the spin off announcement, Former HP CEO Leo Apotheker also announced that HP will stop selling its HP Touchpad and smartphones plus it will drop WebOS, the operating system HP acquired from Palm for $1.2 Billion sometime 2010. Leo also announced HP’s acquisition of enterprise software Autonomy ror $10.2 Billion in cash. These announcements caused HP a lot of problems. Leo was relieved of his post and HP board said the company had to make a leadership change because HP has been missing financial targets, botched communications, lost credibility with Wall Street. But I think Leo was relieved because of the announcements he made.

So what triggered the spin off announcement? Is HP PC unit losing money?

HP recently released its third-quarter earnings, net revenue of $ 31.2 billion, and last year’s $30.7 billion, an increase of 1%; net profit of $1.926 billion, and last year’s $1.773 billion, an increase of 9%. In addition, the company also significantly reduced the fiscal 2011 outlook. Expects fiscal 2011 revenue of about $12.72 billion to $12.76 billion, down from its previous forecast of $12.9 billion to $13 billion; expects full-year GAAP diluted earnings per share from $3.59 to $3.70, lower than originally expected at least $4.27; non-GAAP diluted earnings per share from $4.82 to $4.86 U.S. dollars, lower than originally projected at $5.00.

According to Todd Bradley, EVP of the personal systems group at Hewlett-Packard, HP’s PC business brings in more than $40 billion in revenues. That is a third of HP’s total sales. Bradley added that He does want to run the HP’s PC business, if the company does indeed spin it off.

If HP do decide to spin off its PC unit, the company will face a lot of problems. This observation was echoed by network company Cisco. In a memo entitled “HP’s PC Business Divestiture”, Cisco enumerated the following possible problems:

  • Negative impact on remaining enterprise hardware business due to reduced purchasing power
  • Reduced economies of scale and leverage with partners and small and medium enterprises
  • A significant uphill battle in enterprise software
  • Undefined strategic approach
  • Unclear future for networking

At the Oracle OpenWorld, Dell CEO Michael Dell said that if HP moves ahead with a PC spinoff that price increases on other HP products such as industry standard servers would be inevitable. “The client business provides really enormous scale and if you give up that scale you go from being one of the largest buyers in the world of those components to not really being in the top five or perhaps even the top 10,” said Dell. “That is a huge problem. It means the price of those products has to be raised.”

Dell’s statement mirrored the internal memo from Cisco that an HP PC spinoff would result in “lower gross profits, price increases” and a weakened brand that will make it difficult for HP to compete in its remaining hardware businesses.

So should HP spin off its PC unit? I say NO. Why? Because to me, HP has the most complete end-to-end solution – from consumer to enterprise, they have the most complete offering there is. From PCs, netbooks, notebooks, servers, storage, networking, monitoring software, printer, tablet, operating system and a lot more. The success of HP can be attributed to the fact that they have all the offering a company needs. Companies prefer to talk to one provider for their I.T. needs and HP best suit this need.

There is nothing wrong with HP as a company and its products. With all due respect, I think its a leadership problem. Just recently, it was reported that HP might have a change of heart in letting go of its PC unit. I really hope that with a new CEO in the person of Meg Whitman, HP will be back on its track. Whitman will present her economic recovery plan and will also decide the fate of HP’s PC division soon.

On another note, if HP do decide to spin off its PC division, to the best of my knowledge, there are only a couple of companies who can afford to take over the PC unit of HP – and they are Lenovo, Samsung, Microsoft and Oracle. But that’s another story.

(Article written by Jerry Liao)

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