HP — breaking up the place

Posted: 08.23.11

HP’s Personal System group, PSG, is a $41 billion dollar company. It is, IMHO, a jewel, but I may be a bit biased because I have a lot of old friends there. And, like any large organization, it’s not just one thing. In macro scale it’s a desktop PC company, a notebook PC company, a workstation company, and maybe a mobile devices company. It also makes and sells monitors. In other words its five companies and anyone of them could be further subdivided.

Now if HP really wants to get rid of this prize which still boggles my midget mind, would they sell it as a whole or as parts? There are pros and cons both ways. Selling it as parts might actually yield more for the pieces than the whole (Carl Icahn has proved this rule several times.) However, selling it in pieces multiplies the transaction costs (lawyers, due diligence, etc.)

HP’s PSG was, and sadly I do mean was, a tightly run extremely efficient operation. You don’t get to be number in workstations, number one in PCs in general, and number one in notebooks without having the finest-running organization in the business. To get to that level of performance and efficiency HP was an all hands on deck all the time operation. Now the hands are distracted. Management has to worry about other things now, and employees are updating their resumes. In short, the company has been forced to take its collective eyes off the ball—not a good thing. The PR team is busy now doing damage control and reshuffling appointments.

Making what sounded like an offhand comment as Apotheker did to apparently titillate investors is one of the most bone-headed things I’ve seen in a long time. Apotheker said the company was looking at new plans for the PSG group including a spin-off. The only thing that comes close is when SGI's CEO at the time, Rick Belluzzo said in a similar off hand way at an investors meeting that SGI would be getting out of the workstation business. Belluzzo, who had forgotten to mention his plan to the troops or to the customers, gave HP and Dell the best gift they had ever gotten—SGI’s customers. Now HP has done the same thing for Dell, Lenovo, and to a lesser extent Apple—the mouse that seems to scare the hell out of Apotheker. And just a side here—if the PC business is so bad, then how come Apple and Lenovo are doing so well?

In any case, who are the likely buyers for the company or the parts of the company?

I doubt Dell would be smart enough to make a bid for the workstation business, and I’m sure the price would be heart stopping for Lenovo. Apple wants nothing to do with the workstation business, so that leaves Fujitsu and Boxx, and maybe Penguin Computing. Fujitsu could, and maybe should pick it up, Boxx and Penguin would have a hard time coming up with the cash. SGI, as laughable as the notion is, couldn’t raise the money either. HP’s workstation group did about $3 billion in sales for the year, and that would make it worth at least $10 billion in a sale.

The company could probably get another $40 to $45 billion for the desktop group, more if you tossed in the monitor stuff, and notebooks would probably fetch $60 billion. The mobile stuff might bring in one or two billion, but most likely would be bundled in with one of the others unless someone showed up that just had to have it. Canon comes to mind.

It’s highly unlikely Dell or Lenovo would do a Fiorina-like grand play move and pick up PSG in total, and it’s also questionable if the FTC would allow it.

Microsoft would be an interesting candidate. They’ve got the checkbook, they will be impacted the most if HP fritters away its legacy, and Microsoft could take WebOS off the map once and for all (cue the FTC again).

And then there’s a management buy-out scenario. Deep pocketed investors have shown a fancy for such things in the past, e.g., Nexperia, Freescale, etc. If PSG went private for a while and then floated a public offering it could be a really big deal—on Wall Street. And that’s what this is all about isn’t it? Pimping shares to the public so the management and investors can get richer.

HP’s PSG now has a new diversion, er, I mean, project, investigating strategic alternatives for the division, including a public spin-off, sale of the business, or keeping it within HP. HP’s management, financial and legal advisers are now thrust into exploring alternatives—the full process could take 12-to 18 months.

Companies consider such things all the time, in the privacy of their conference rooms and private jets. Seldom does a company go public before a decision of such magnitude has been made. In addition to the turmoil it creates within the company and among its customers, it also weakens the company’s negotiation position. You can get a much better price if the buyer doesn’t think you’re desperate. That card has been tossed in the dust bin with yesterday’s issue of the Wall Street Journal and Financial Times.

Poor Todd Bradly, he’s living the “it’s tough to remember your goal was to drain the swamp when you’re up to your ass in alligators.” You couldn’t find a more able guy, and if anyone can manage this mess he can, but boy I’ll bet he ain’t going to be fun to be around for a while.

With a perspective, I’m Jon Peddie