In part one of the article, I proposed the idea that large cap technology companies should strongly consider breaking their companies up into smaller pieces in an effort to produce better shareholder returns over the next decade. Please note this is an intellectual exercise and I have no knowledge that any of these companies are considering such a corporate action. Now lets take a look at Hewlett-Packard (HPQ) and Dell (DELL).
Hewlett Packard and Dell are very similar in many respects as they sell the same product lines -- especially with personal, and notebook (laptop) computers.
Let's take a look at Hewlett Packard's most recent quarter company wide results.
|2012 Q3||2011 Q3||Year Over Year Change|
|Operating Margin Pct (GAAP)||(29.7)||8.1||-37.8%|
|Net Earnings (GAAP) (loss)||(8.9)||1.9||-568%|
|Earnings Per Share (GAAP)||(4.49)||.93||-583%|
|Operating Margin Pct (Non-GAAP)||9.2%||9.8%||-.6%|
|Net Income (Non GAAP)||2.0||2.3||-14%|
|Earnings Per Share (Non-GAAP)||1.00||1.10||-9%|
(All financial information provided by Hewlett Packard)
Now let's look at each business segment to see how they contribute to the total results.
|Net Revenue||3 months Ended 7/31/2012||3 Months Ended 4/30/2012||3 Months Ended 7/31/2011||Q/Q Change||Y/Y Change|
|Imaging and Printing||6,017||6,132||6,183||(2%)||(3%)|
|Enterprise Servers, Storage, and Networking||5,143||5,211||5,348||(1%)||(4%)|
|HP Financial Services||935||968||932||(3%)||0|
|Eliminations of Intersegment Net Revenue and Other||(792)||(889)||(953)||11%||17%|
|Total HP Consolidated Revenue||29,669||30,693||31,189||(3.4%)||(4.9%)|
|Earnings Before Taxes||3 Months Ended 7/31/2012||3 Months Ended 4/30/2012||3 Months Ended 7/31/2011||Y/Y Change|
|Imaging and Printing||949||808||879||7.9%|
|Enterprise Servers, Storage, and Networking||562||585||690||(18.6%)|
|HP Financial Services||97||96||88||10.2%|
|Total Segment Earnings From Operations||3,093||3,133||3,290||(6.1%)|
|Corporate and Unallocated Costs and Eliminations||(314)||(203)||(114)|
|Unallocated Cost due to Stock Based Compensation||(150)||(168)||(130)|
|Amortization of Intangible Assets||(476)||(470)||(358)|
|Impairment of Goodwill and Purchased Intangible Assets||(9,188)|
|Interest and other, net||(224)||(243)||(121)|
Here are Dell's most recent financial results-
|3 Months Ended 8/3/2012||3 Months Ended 5/4/2012||3 Months Ended 7/29/2011||% Sequential Change||% Yr/Yr Change|
|Operating Margin Pct||6.2%||5.7%||7.3%||.5%||(.9%)|
|Earnings Per Share||.42||.36||.48||17%||(13%)|
(All financial information provided by Dell Inc.)
Now we will see how each segment fared:
|Product Categories||3 Months Ended 8/3/2012||3 Months Ended 5/4/2012||3 Months Ended 7/29/2011||% of Total Net Revenue||% Sequential Change||% Yr/Yr Change|
|Servers and Networking||2,332||2,017||2,054||16%||16%||14%|
|Software and Peripherals||2,338||2,386||2,569||16%||(2%)||(9%)|
|Total net Revenue||14,483||14,422||15,658||100%||0||(8%)|
Unfortunately, Dell does not break out their operating income on a segment by segment basis. Still, the next step is to look at how I would break up these large enterprises in an effort to improve shareholder returns.
How to Break These Giants Up
Dell and HP both suffer from the explosion of popularity in the tablet and mobile phone sectors. In the last quarter, HP saw year over year revenue growth decline by 10%, and Dell's total revenues declined by 8%. Operating margin at HP decline .6%, and at Dell it increased by 15 basis points.
I believe each company should be broken up into three basic companies, but Hewlett Packard would have these basic groups, and a printing division as well. The core businesses would be one with a combination of desktops, notebooks, software, and services. The next would center around mobility, including mobile phones and tablets type products, including software which is applicable to those products. The third enterprise would have storage, servers, and networking based products.
You could imagine reconfiguring each company in different ways, with different divisions included in various combinations. Certainly, the job of investment bankers and management would be to figure out what makes for the most efficient groupings.
Again, the key point investors should take away from the article, especially shareholders of any of these companies, is to consider how management might rethink the structure of their enterprises as public holdings in an effort to have better equity performance over the next ten years. Thank you for taking the time to read the articles.