HP PC unit’s future unsettled as Fiorina leaves

Now that Carly Fiorina is leaving the helm, the survivors at Hewlett-Packard Co. (HP) must decide how to move forward with a company that analysts feel is either weighed down by low-margin businesses or missing opportunities to reach customers.

One of the more contentious debates surrounding HP’s acquisition of Compaq Computer Corp. in 2002 was the reluctance on the part of long-time HP executives and shareholders to increase the company’s stake in a low-growth, low-margin business like PCs. PC market growth has hovered above 10 percent for the last several years, but is forecast to fall below that pace in 2005 and 2006 as consumers, HP’s strongest customers, slow their purchases of new equipment, according to IDC and Gartner Inc.

Fiorina believed that by acquiring Compaq’s PC business and lifting HP into a virtual market share tie with Dell Inc., the company could boost sales of higher-margin servers and services by selling complete packages of hardware to business customers. A company that ranked first or second in market share in several different categories across the IT spectrum could provide a top-to-bottom portfolio of products for customers, she argued throughout 2001 and 2002.

However, almost three years after the deal was completed, HP’s PC business is barely profitable. The Palo Alto, California, company’s PC business posted $6.5 billion in revenue during its third fiscal quarter but only $78 million in profits, which was its best showing in four years. By comparison, the company’s printer business recorded the same amount of revenue but made $1.1 billion in profits.

Fiorina consolidated the printer and PC businesses under printer executive Vyomesh Joshi in January, a move that was seen as a hope that Joshi’s profitable management techniques would rub off on the PC division.

Financial analysts, such as Steven Milunovich from Merrill Lynch & Co. Inc., have called upon HP’s board of directors to spin off the combined PC/printer businesses. Milunovich renewed those calls in a research note distributed Wednesday, noting that while a breakup of the PC/printer business is still out in the long term, the probability of such a move rose with Fiorina’s departure.

London research firm Ovum Ltd. on Wednesday agreed that HP should set its PC business free in order to divert resources toward more strategic businesses such as servers or services. And back in December, Gartner Inc. published a report just before IBM Corp. announced it was selling its PC business to Lenovo Group Ltd. that predicted large IT firms would grow tired of the PC market.

However, other analysts believe the company’s customers benefit from having access to PCs, printers, servers, storage and networking devices all from one company, analysts said. “Why does the PC business have to make money?” said Stephen Baker, director of industry analysis at NPD Techworld in Reston, Virginia. “Maybe this is the tuna fish of the computer world, the loss leader, something to generate business.”

HP would be better served holding on to its PC division and hoping that new management can increase the presence of the brand and the opportunities for server and PC sales teams to work on selling more products together, Baker said.

The two other PC vendors in the top three market share spots have different opinions on that strategy. IBM spun off its PC business in order to concentrate on higher-margin software and services businesses, despite objections from customers who wanted to purchase IBM’s ThinkPad notebooks along with their Power servers. Dell, on the other hand, translated its historical strength in selling PCs directly to businesses into fast-growing server, storage, networking and printer businesses.

Fiorina deserves credit for bringing all those products together by acquiring Compaq, but the combined company under her leadership was unable to capitalize on the combined expertise of some brilliant engineers and marketers, said Richard Doherty, director of research at The Envisioneering Group in Seaford, New York.

“Those divisions under new management are going to be more competitive, keep Dell and IBM on their toes, and make customers happy,” Doherty said.

One of the largest obstacles to a breakup of HP would be a lack of buyers for the PC/printer division, Baker said. A spin-off would make more sense, but it’s hard to see how a separate HP PC business would be any stronger or more profitable on its own, he said. However, HP’s new management will need to find a way to make the broad roster of HP products pay dividends across the company, as Fiorina originally hoped the Compaq integration would accomplish, or find another way to deliver returns to shareholders who have grown impatient with the company’s floundering over the past three years.

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