Why HP's Loss Should Be Dell's Or Cisco's Gain

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Includes: AAPL, CSCO, DELL, GOOG, HPQ, IBM, LNVGF
by: Richard Saintvilus

Last week we learned how quickly the competitive landscape can change on Wall Street. Google’s (GOOG) acquisition of Motorola Mobility (NYSE:MMI) told investors how fierce some rivalries can get when a dominant company such as Apple (AAPL) obtains a certain status. Apple has made the word “ecosystem”; once known as an environmental term dealing with science, has now become a technical advantage; particularly from the standpoint of a unification. In some circles it’s called “killing off the competition.” One of Apple’s advantages has always been its unified platform whereas until recently, other manufacturers, as well as Google’s Android, had more of a fragmented platform. Google realized this and thus acquired Motorola Mobility in an effort to cultivate its own unified platform of having ownership of both the hardware and software.

Speaking of “killing off the competition”, one recent casualty is Hewlett-Packard (HPQ) who essentially admitted during its most recent conference call that it is unable to compete with the Likes of Apple and Google; not only in the tablet market, but potentially in the PC market as well. HP’s CEO Leo Apotheker suggested that the company is set to take on a multi-quarter “transformation”, during which it indicated plans to abandon its PC business. HP also said that it is dropping its long-term earnings goal of $7 per share in profit in 2014.

Apotheker said the company needs to sharpen its focus and its consideration of options for its PC business. This realization came after his first nine months on the job, during which time he “examined each of the company’s businesses in depth” and “carefully considered the path forward.” However, one of the most poignant statements that I read was where the CEO simply offered, “The tablet effect is real and sales of the TouchPad are not meeting our expectations,” Apotheker said.

We see the opportunity for PSG to compete and win in the PC marketplace and our board has authorized to us explore strategic alternatives for PSG. To contemplate the direction is an important component of our strategy to sharpen HP’s focus of clients, solutions and software accessible to any type of device while we continue to expand and leverage our strong technologies including hardware, software and services.

The velocity of change in the personal device marketplace continues to increase as the competitive landscape is growing increasingly more complex especially around the personal computing arena. There’s a clear secular movement in the consumer PC space. The impact of the economy has impacted consumer sales and the tablet effect is real and our TouchPads has not been gaining enough traction in the marketplace. For our PC business to remain the world’s largest personal computing business it needs the flexibility and agility to make decisions best for its user direction. Due to market dynamics, significant competition, and a rapidly changing environment — and this week’s news only reiterates the speed and nature of this change — continuing to execute our current device approach in this marketplace is no longer in the best interest of HP and HP shareholders.

While the market did not take too kindly to HP’s decision, I think the company deserves a lot of credit here for realizing what everyone has already known: The smart phone/tablet market has destroyed PC sales and it will only get worse. Apple’s iPads and Google’s Android platform are now the dominant standards in that arena and it will likely stay that way for the foreseeable future. But considering how Cisco’s (CSCO) restructuring was able to transform the company, HP just might deserve the benefit of the doubt here.

What does that mean for Dell (NASDAQ:DELL)? Is it possible that HP and Dell could work on a deal that allows Dell to acquire HP’s PC business? I would even throw Cisco into the mix. Consider that ever since Cisco entered the server space two years ago, they have made significant strides to the point that they are now third in terms of market share. Acquiring HP’s PC business will allow them to further their dominance in the enterprise environment. I think this makes perfect sense. Where I once proclaimed that HP should acquire a company like Research In Motion (RIMM) to maintain its viability, it is now clear that perhaps it is best to move in a different direction.

Summary

HP says it is going to explore options for its PC side of the business. Selling it might be the likely outcome. This comes 10 years after HP acquired Compaq to create the #1 PC business in the world. It is worth noting that just seven years ago, IBM (NYSE:IBM) decided to sell its PC business to Lenovo (OTCPK:LNVGF); while it arrived as a major surprise, it is one that has turned out to be a tremendous strategic move.

The fact of the matter is HP now fully realizes that its PC business neither provides growth or significant margins. While it will require some time to transform itself into the direction it feels it needs to go, investors will likely continue to punish the stock until management offers more clarity as to exactly what that direction is. Both Cisco and Dell could help make the decisions for HP’s management very easy.

Disclosure: I am long CSCO.