HP to split in half

In 2012, a year after Meg Whitman took over as CEO of a shaky Hewlett-Packard, she told a report she believed in “creative destruction” in trying to overhaul the tech giant.

Apparently she’s given up — or is fulfilling her dream. Whitman has convinced the board of directors to split HP into two companies: HP Inc, which will have the once lucrative printer business as well as the declining PC business, and HP Enterprise, which will have software and infrastructure — that includes servers, storage, networking and cloud computing.

Whitman will be CEO of the enterprise company and chair of HP Inc., while  Dion Weisler, who is currently executive vice-president of the printing and personal systems business, will be president and CEO of HP Inc.

Both of the new companies will be publicly traded. HP hopes to complete the break-up by Oct. 15, 2015.

The split comes after a huge effort by Whitman to stabilize the company. As a result of restructuring some 36,000 people had left the company by the third quarter of this year, with perhaps another 9,000 cuts to come. As a result in its Q3 financials the company reported a profit of US$1 billion on sales of US$27.6 billion for the three month period ending July 31.

Hewlett Packard Enterprise will have annual revenue of US$58.48 billion and an operating profit (which is not a net profit) of just over US$6 billion. HP Inc. will have revenue of US$57.48 billion and an operating profit of US$5.48 billion.

Industry analyst Rob Ederle sees the split as an idea that was long coming. In fact he thinks Whitman had been holding back until the PC division showed good results in August, when the Q3 financial results were released (see below). Investors would have reacted negatively to a split if the Personal Systems division wasn’t doing well, he said in an interview.

“HP because of its breadth was really in competition with a lot people that IBM has been systematically partnering with — Lenovo and Apple, to name two, he said. “The combination of the companies always put them at war with everybody. By separting the two companies, the two entities will be free to partner with the folks they can’t partner with now, so back-end group can partner with device companies,while the client-side group can partner with back-end companies much more aggressively.”

Once a leader that battled IBM in all areas of technology — from printers to the biggest server systems — HP has been unable to find a clear direction after swallowing dozens of companies. Meanwhile IBM has pared itself down to a tight focus, selling its PC division to Lenovo in 2005, then its x86 business to Lenovo in 2006.

There are those who still wonder if IBM it making the right move — until its alliance with Apple this year it didn’t have a clear mobile strategy.

On the other hand, HP seems to go from bad decision to bad decision. What precipitated Whitman appointment to CEO, for example, was the controversial US$10 billion purchase of British infrastructure software vendor Autonomy, a price HP later claimed it was snookered on. Whitman had approved the Automony deal. It also wasted millions buying Palm, and trying to sell a webOS-based tablet.

“HP was just became too big to manage,” said Enderle. “The synergy between the units just wasn’t where it needed to be to justify them being together. In the end this is exactly what companies like eBay are doing, and what Sony should to do.”

Now HP Enterprise will look more like IBM, Enderle said, or the VCE partnership between Cisco Systems Inc. and EMC.

Whitman also took over the helm in 2011 in part because then CEO Leo Apotheker had — in addition to proposing the Autonomy deal — confused investors and HP partners by publicly ruminating about the future of the Personal Systems Group. Now she’s going to rid herself of it.

“Our work during the past three years has significantly strengthened our core businesses to the point where we can more aggressively go after the opportunities created by a rapidly changing market,” Whitman said in a release “The decision to separate into two market-leading companies underscores our commitment to the turnaround plan. It will provide each new company with the independence, focus, financial resources, and flexibility they need to adapt quickly to market and customer dynamics, while generating long-term value for shareholders. In short, by transitioning now from one HP to two new companies, created out of our successful turnaround efforts, we will be in an even better position to compete in the market, support our customers and partners, and deliver maximum value to our shareholders.”

The release said Hewlett-Packard Enterprise “will have a unique portfolio and strong multi-year innovation roadmap across technology infrastructure, software and services to allow customers to take full advantage of the opportunities presented by cloud, big data, security and mobility in the New Style of IT. By leveraging its HP Financial Services capability, the company will be well positioned to create unique technology deployment models for customers and partners based on their specific business needs. Additionally, the company intends for HP Financial Services to continue to provide financing and business model innovation for customers and partners of HP Inc.”, which will have the PC/printer business.

As for HP Inc., the statement says it “will be the proven leader in the personal systems and printing markets. The new company’s strong profitability and free cash flow will enable investments in growth markets such as 3-D printing, the statement says.

“This is a defining moment in our industry as customers are looking for innovation to enable workforces that are more mobile, connected and productive while at the same time allowing a seamless experience across work and play,” Weisler said in the statement. “

To get an idea of the company’s strengths and weaknesses, consider this from the Q3 financial report:

Of the two parts that will comprise HP Inc,, Personal Systems revenue was up 12 per cent year over year with a 4.0 per cent operating margin. Commercial revenue increased 14 per cent and consumer revenue increased 8 per cent. Total units sold were up in the quarter 13  per cent with desktops units up 9 per cent and notebooks up 18 per cent . Printing revenue was down 4 per cent year over year  (although printers had 18.4 per cent operating margin). Total hardware units were down 5 per cent with commercial printer sales  down 2 per cent and consumer hardware units down 6 per cent. Supplies revenue was down 5 per cent.

Of the parts that will be in HP Enterprise, Enterprise Group revenue was up 2 per cent year over year with a 14.0 per cent operating margin. Industry Standard Servers (x86) revenue was up 9 per cent. Storage revenue was down 4 per cent, Business Critical Systems revenue was down 18 per cent, Networking revenue was up 4 per cent and Technology Services revenue was down 3 per cent. Enterprise Services revenue was down 6 per cent year over year. Application and Business Services revenue was down 4 per cent and Infrastructure Technology Outsourcing revenue declined 8 per cent. Software revenue was down 5 per cent year over year. License revenue was down 16 per cent, support revenue was flat, professional services revenue was down 3 per cent and software-as-a-service (SaaS) revenue was up 8 per cent. HP Financial Services revenue was down 3 per cent year over year , although  a 14% increase in financing volume.

“Customers have had a love-hate relationship with HP software for eons,” said Forrester Research research director, Glenn O’Donnell. “There are great ideas there, but a failure to execute. However, there is hope. The Autonomy acquisition is starting to give the software portfolio value – slowly. It was a leader in Forrester’s Private Cloud Wave.”
Still, he said many stalwarts of the software unit have “languished, including its once premier operations and application performance families. HP needs to fix its software business or it is toast. Too much of this unit is still aimed at an IT agenda, rather than the business technology (BT) Agenda. It needs both. It lacks products that are appealing to the business side.”
Added O’Donnell: “HP’s data center hardware is excellent. The software to drive it is good, however still somewhat fragmented and convoluted. Hardware is important, but without the software and attention to a broader technology ecosystem, hardware alone is not going to win.
Howard Solomon
Howard Solomon
Currently a freelance writer, I'm the former editor of and Computing Canada. An IT journalist since 1997, I've written for several of ITWC's sister publications including and Computer Dealer News. Before that I was a staff reporter at the Calgary Herald and the Brampton (Ont.) Daily Times. I can be reached at hsolomon [@]

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