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HP Splitting Itself In Two: Which Garbage Truck Do You Want To Own?

Chuck Jones, contributor

Irony: Chuck, a long-time IBM employee, was my neighbor in Menlo Park for five years recently.  He never worked for HP; I never worked for IBM.  His investment commentary is usually about consumer products, something IBM struggled with too.  His numbers cited below are accurate, if a bit dry.

The title is borrowing a quote from Scott McNealy, Sun’s ex-CEO. When HP and Compaq were merging he described it as ‘two garbage trucks colliding’. This sounds like the reverse which is ‘which garbage truck do you want to be hitched to’?

The Wall Street Journal reports that HP is going to split itself into two companies: one focused on PCs and Printers and the other on corporate hardware, software and services.  This sounds like the same plan that Meg Whitman’s predecessor, Leo Apotheker, proposed along with the ill-fated Autonomy acquisition. HP’s Board, including Whitman, killed the split three years ago when she became CEO but now feels like its time to do it. We may find out if it is official on Monday morning (Jones penned this Sunday afternoon; it became available after the story was confirmed Monday).

Which garbage truck would you want to own?

While this is a harsh statement lets look at some of the numbers. For Fiscal 2013:

•   Total revenue of $112.3 billion was down 7% year over year (still, except for Apple, the biggest company around in high-tech.  Cisco is down the same percentage, IBM nearly so)

•   Enterprise business

•   Enterprise systems revenue of $28.2 billion fell 5% year over year

•   Its operating margin increased from 13.9% to 15.3%

•   Enterprise services revenue of $23.5 billion was down 8% year over year

•   Its operating margin fell from 6.9% to 2.9% 

•   Printer and PC business

•   Printing revenue of $23.9 billion fell 3% year over year

•   Its operating margins increases from 14.6% to 16.3%

•   Personal systems revenue of $32 billion fell 10% year over year

•   Its operating margin fell from 4.7% to 3.0% 

It got better for the first three quarters of fiscal 2014 but not exciting (ended in July)

•   Total revenue of $83 billion was essentially flat year over year

•   Enterprise business

•   Enterprise systems revenue of $20.5 billion was flat year over year

•   Its margin has declined from 15.5% for the first three quarters of fiscal 2013 to 14.3% in fiscal 2014

•   Enterprise services revenue of $16.9 billion was down 7% year over year

•   Its operating margin was about 2.4% for both nine month periods 

•   Printer and PC business

•   Printer revenue of $17.2 billion was down 3% year over year

•   Its operating margins increased to 18.2% for the first nine months

•   Personal systems revenue of $25.4 billion increased 8% year over year

•   Its operating margin increased to 3.6% for the first nine months 

HP also has about $20 billion in debt and over $14 billion in cash and investments. It will be interesting to see how management splits those between the two companies.

At least HP has two segments with strong margins, Enterprise systems and Printers, even though their revenues have been declining over a few years. Unfortunately it has a very competitive, always going to be low margin PC business and a Services business that is still struggling to generate even mid-single digit operating margins (of the three M and A disasters, this EDA acq is the biggest, by Hurd.  Compaq merger, by Carly, widely assailed, still makes money; Autonomy, by Apotheker, never had a chance, just a dumb move with a dumb company.  The current work may resurrect this, though, which will be the surprise for everyone when it happens).

Ten years behind IBM

In December 2004 IBM announced that it was selling its PC business to Lenovo for $1.75 billion, which was completed in 2005. More recently in January this year IBM announced it wanted to sell its x86 server business to Lenovo for $2.3 billion and seems to be close to finalizing the sale. (So, lessee here, HP's PC unit did $32 Billion last year in a shrinking business, and IBM's pair of units are worth $4.05 Billion.  Good thing they sold 'em, huh?  The facts are, IBM never could do low-margin business well, any more than HP could do M and A.  So they had to bail ten years ago, they were badly beaten even by Acer, let alone HP and Dell.  Check the margins for Microsoft and Intel and Lenovo.  There still is a modest PC business of $100B+).    

Over the past ten years IBM has been selling off its low margin hardware businesses and focusing on services and software so it looks like HP is trying to look more like IBM. However its not as if IBM is tearing up competition with revenue declining 1% in the first half of 2014 (adjusted for divested Customer Care business) and its only been able to keep revenue from declining even more by being a serial acquirer, not something in HP’s power alley.

Hard to disagree with this glum analysis, but it doesn't measure either heart or passion, nor for that matter innovation.  All qualities that the 'old HP' had in quantity.  And has been in modest supply for two decades.  Is there a chance to rekindle it?  We'll see....