Time to Split Up Hewlett-Packard

| About: HP Inc. (HPQ)

When industries mature, one traditional way to extract value is to buy-up a company and split it apart. Find the pieces that work, sell the pieces that don't, strip the assets.

As a tech analyst, this is a course I've always opposed. Tech companies have a lot of cash for a reason. They need to invest ahead of demand, to take big risks, in order to remain relevant. Answering to bankers (or investors looking for a fast profit) is a sure-fire failure strategy.

That said, there have been repeated calls over the last decade for Hewlett-Packard (NYSE:HPQ) to be split. These calls reached a crescendo when Carly Fiorina was dumped as CEO, with most assuming the highly-profitable printer and ink business could stand while the enterprise computing arm would fail.

There was even precedent, the 1999 spin-off of the old testing and measurement business (the heart of the original company) under the name Agilent Technologies. Investors have done OK there.

The calls for a break-up rose again after Mark Hurd was let go. HP was called a "sprawling, ungainly conglomerate" and this time a three-way split was suggested – computers, printers, and services.

Instead the company hired Léo Apotheker, who himself had been let go by SAP, and he has just announced an executive reshuffle, taking more direct control of the enterprise computing space, where he insists profits can still be found.

Over the last decade HP has become a place where old technologies went to die. The list of such failures is a history of 20th century technology – Digital Equipment, Compaq, Tandem, Palm. In each case the company bought more problems than it bought profitable cash flow. One motive to split the company up might be to keep it from wasting more cash on such bad bets and concentrate on making money from operations.

Personally I think the best way to go about a break is to emulate former IBM (NYSE:IBM) Chairman Lou Gerstner, who reinvented that company as a services business starting in the early 1990s. Rather than focusing on products, today's IBM focuses on customers. I own a little IBM myself in my retirement account and it's done well for me.

When Apotheker says he sees profit in the enterprise space, what he's talking about is not the PC business, and not the older HP problem children. He's talking mainly about data servers. These are the systems where the money is, as companies turn their mainframes into clouds and seek to link with public clouds to handle spikes in demand. So HP Cloud is one business – let Apotheker have it. If that unit bought Red Hat (NYSE:RHT), the profitable Linux and cloud software outfit wouldn't be getting swallowed by a behemoth -- its management team could be well placed to run the joint when Apotheker retires.

Printers and printer supplies still make money for HP, but it's clear that is a gravy train that will soon run dry. (I know my own demand for printing services has been on a downward track for years.) While it's still worthwhile, spin it out.

HP still has substantial market share in the PC area , but this is where its biggest problems lie. It's betting heavily on its webOS Touchpad. It's getting killed in the smartphone market, and the tablet uses the same OS as the phones.

If I'm an investor, I don't want widows-and-orphan money (HP's current P/E is under 9) going into long shots. Sell it – maybe Lenovo (OTCPK:LNVGF) can make some money with it. The business is big enough that a stock deal could give HP a significant share in Lenovo, with its low-ball Chinese costs and its ties to the government there.

What's left is mainly the old EDS unit, bought in 2008. Since the acquisition HP has focused on cutting costs there, but so did Gerstner in his early IBM days. The firm may now be ready to grow. Outsourcing remains a good business, and if you add the financial arm to it you've got the old IBM. (Fiorina brought back the HP founders' garage in an ad a decade ago -- the new HP can trot out old Ross Perot.)

So there you have it. Concentrate on the cloud. Sell the PC business. Spin out printers and data servers. Become IBM. Unlock the value and make investors happy.

HP used to be good at that.

Disclosure: I am long IBM.

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