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With all the speculation around the potential Dell (NASDAQ:DELL) buyout, which has sent the computer company up 18%, why isn't Hewlett-Packard (NYSE:HPQ) getting more attention? Why is no one talking about a potential buyout of HP? Well HP's stock does appear to be cheaper than Dell, but a buyout seems infeasible. HP is, however, up 20% since the news first broke that Dell could be going private. Dell is up 26% over the same time period. Billionaire Ray Dalio of Bridgewater Associates and Seth Klarman are just two of HP's notable hedge fund investors (check out all the hedge funds loving HP).

HP has seen its market value plunge over the past few years, losing over 65% in the last three years thanks to a fundamental decline in the PC market. Given the Dell deal is considered unfeasbile to some, an HP deal should be considered well out of reach. HP's market value is over 50% that of Dell at $33.8 billion. The full enterprise value of HP comes out to $44.3 billion. With even just a 20% premium and a 30% down payment, the cash required would be $15.9 billion, compared with Dell's $4.1 billion.

Based on a quick LBO model the valuation shows over 50% upside from the current market value for HP, where the Dell upside might only be 6%. There are problems, however, that come with a potential buyout.

Projected Fiscal Year

2012

2013

2014

2015

2016

EBITDA

15,670

15,514

13,563

16,141

10,584

Plus: Synergies

-

-

-

-

-

Less: Integration Costs

-

-

-

-

-

EBITDA

15,670

15,514

13,563

16,141

10,584

Less: Depreciation & Amortization

4,477

4,433

4,521

4,612

4,704

EBIT

11,193

11,081

9,042

11,529

5,880

Less: Taxes

3,593

3,557

2,903

3,701

1,887

Tax-Effected EBIT

7,600

7,524

6,140

7,828

3,992

Plus: Depreciation & Amortization

4,477

4,433

4,521

4,612

4,704

Less: Capital Expenditures

(3,358)

(3,324)

(3,391)

(3,459)

(3,528)

Change in Working Capital

3,570

4

(8)

(8)

(8)

Unlevered Free Cash Flow

12,289

8,636

7,262

8,973

5,160

Terminal Value

55,035

PV of Free Cash Flow

$ 28,292

PV of Terminal Value

$ 24,737

Present Value

$ 53,028

Implied EV/EBITDA

3.4x

After going on an acquisition spree, it now appears what might be more useful for the company is selling off some businesses. HP made a big bet on the consumer computer business with a $17 billion acquisition of Compaq. Activist Carl Icahn has been rumored to be considering a stake in the struggling PC company (read more about the speculation).

HP's problems are wide-reaching, trying to execute a turnaround and cut costs, while also trying to hedge a fundamental demand decline in the PC market. This decline has come in large part due to the company's failing to hedge a decrease in IT spending and shift from PCs to tablets and smartphones.

The company is still a revenue generating machine. Its 2011 revenue is upward of $120 billion, compared with Apple at $156 billion. What is more likely than a buyout is the scenario in which HP spins off segments or breaks up parts of its company. Taking the company apart would include selling off its printer and/or consumer computer business to perhaps refocus on the corporate serve business. The computer and printer businesses account for almost 50% of HP sales.

Its printer business could draw the most buyers thanks to its ability to generate cash flow. UBS believes the stock could pop to $20 on a separation. This would still be upside of 17% for the stock. UBS also believes that...

Based on the current stock price, the printer and computer segments are being offered to investors for free.

HP's shipments have been in steady decline over the years, but it does have leading positions in all of its markets. The computer company continues to own 16.2% of the consumer PC market and also holds a top spot in the server markets with over 30% of the market share. With a such diverse product portfolio, much of the speculation about the computer company's poor performance is blamed on management.

The price-to-earnings multiple for HP has ranged from a five-year low of 3.2 to a high of 17.3. The stock is now trading at five-year lows with a price-to-earnings multiple (on forward earnings) at 4.9 times. The depressed multiples are in part due to CEO Meg Whitman's resilience on keeping the divisions together. Whitman is insistent that the advantages are greater with the company intact, including purchasing power.

The majority of HP's planned restructuring benefits are expected to be recognized after 2014, where the savings could be upward of $3 billion to $3.5 billion annually. The key to the cost-saving initiatives include the laying off of 27,000 workers by the end of 2014. Worth noting is that the savings will be reinvested in higher growth markets, namely the cloud computing market.

While HP's cash flow generating abilities and product portfolio make it a value play, the catalyst to unlock that value in the interim remains limited given the company's size. Billionaire Jim SImons increased his stake in HP by over 3,500% during the third quarter (check out Jim Simons' top picks).

Source: Is Hewlett-Packard Being Left Out In The Cold?