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The HP split: Does half a dinosaur move twice as fast?

Op-Ed: HP's split may look good on paper, but it's years behind schedule.

by Sean Gallagher - Oct 6 2014, 3:00pm PDT

        

A breakup years in the making, and possibly at least three years too late.

Three years ago, almost to the day, as Meg Whitman was taking over as Hewlett-Packard’s CEO, I offered her some unsolicited advice on what to do to save the company. Now it looks like she’s taken that advice, albeit a bit too late for the thousands of employees that will now be released into the wild to do something else with their lives. Was this trip really necessary?

As we’ve reported, HP’s executive team has decided to split the company in two, setting the PC unit free—bundled with HP’s money-printing printer unit. That’s essentially the advice I gave in October 2011, when Whitman was trying to decide what to do with the wreckage left by her predecessor, Léo Apotheker. Apotheker had blown billions on the acquisition of the “big data” software company Autonomy, only to announce that HP would spin off or sell the personal computer business because “continuing to execute in this market is no longer in the interest of HP and its shareholders.”

Since then, Whitman has been through several revisions of a new strategic vision to turn the company around. Instead of following through on Apotheker’s urge to get out of the consumer hardware business and become more like IBM—a business model that now even IBM is having a hard time with _{emphasis CH} —Whitman pulled back from throwing away the PC business. She began a long process of trying to figure out what HP wanted to be when it grew up.

Shuffling the deck chairs

One of Whitman’s early moves was the combination of the PC and printer businesses under the Printing and Personal Systems Group. That shift wasn’t just accounting magic to make the PC business sustainable—though that was certainly a side effect. It put all of HP’s products that customers regularly lay hands on into a single chain of command.

The problem is that this new organizational focus didn’t turn HP’s most customer-centric products around. HP has slipped to the No. 2 PC manufacturer in terms of units sold, now trailing Lenovo. The newly combined unit’s revenues have slipped for the past three years, though they’re starting to nose up a bit now—and ironically, HP’s PC business is now in growth mode (with a 7.6 percent jump in PC sales so far this year in comparison with the same period in 2013) while the printer business continues to decline (actually, printer ink profits are still gaining). That’s not really good news for the soon-to-be-hatched new HP Junior, as the printing business is still the unit’s cash cow. It brings in nearly three times as much in earnings as the PC business does on a bit more than half of the revenue (this is important to note—six times the leverage on the bottom line).

This is why Apotheker wanted to cut HP’s PC business loose—even though it’s been making money all this time (at least in terms of earnings before interest, taxes, depreciation, and amortization EBITDA), PCs are a business of increasingly minuscule margins for HP.

Why is that? It’s because despite some interesting, if sometimes misguided efforts to glitz up its product for consumers (an all-Gorilla Glass notebook, anyone?) and some pretty interesting engineering on the business side, HP has failed to be a leader in the industry. It is the pre-bailout General Motors of PC manufacturers, letting others lead the way on technology and innovation while trying to compete based on well-worn corporate connections and price. Instead of giving the Personal Systems business the cash and freedom to truly push forward, the reorganization has left both the PC and printer brands languishing as the rest of HP figures out what decade it’s in.

Splitting the dinosaur

Now that HP has survived its passage through the valley of massive annual losses, Whitman and the HP board have decided that it’s time to cut PCs and printers loose—cutting even more jobs in the name of funding “investment opportunities in R&D and sales.” The PC business will retain the HP name as HP Inc.; the server and service business will keep the founders' names as Hewlett-Packard Enterprise. Neither can afford to retain the old HP mindset (could we say, the intermediate mindset?).

The question is whether simply cleaving the company in two will do HP any good, as it retains essentially the same leadership. Dion Weisler, the current head of the Printing and Personal Systems Group and a former Lenovo executive, will be CEO of HP Inc. In its presentation promoting the move, HP executives said that the split would create “simpler and more nimble organizations.” That will be true at least in terms of headcount, as HP plans to shed 55,000 employees “independent of the separation transaction.”

But the new HP Inc. is going to need a lot more than just a body count to make it more nimble. Yes, Whitman has said over the past few years that HP has been making investments in R&D that wouldn’t bear fruit for two to three years. But there’s little sign that those investments have been made in the PC business. To truly succeed as a company long-term, the new HP Inc. needs to stop trying to follow the trends in the device business and start making them.

When I wrote my first rant on the topic of HP’s PC business, I admitted to having an emotional connection to the company that went back decades. I am not an entirely impartial observer when it comes to HP, if only because I remember where the company has been. On the enterprise side, HP’s PCs have been more Volvo than GM—reliable, easy if not inexpensive to maintain, and solidly midstream in performance. But our relationship with our computing devices has changed over the past few years, and HP’s consumer products have not kept up.

It is my sincere hope that the breakup plan hatched by Whitman, Weisler, and HP's board pays off in more than a bump in stock valuation for the new Enterprise business. I hope that it's worth the thousands of employees shed and the loss of goodwill the company has suffered among many in the tech world—IT leaders who, as one told The Wall Street Journal, see the company as “at least two years behind in everything,” with products that have not evolved and product teams that have failed to involve customers. HP is three years late on this move, and there’s a lot of catching up to do.