PC business spin off: not easy for HP, for prospects

by Anurag Agrawal    Aug 25, 2011

1Hewlett Packard recently announced that its board of directors has authorized the evaluation of strategic alternatives for its Personal Systems Group (PSG), including the exploration of the separation of its PC business into a separate company through a spin-off or other transaction.

The company’s intention seems set on implementing a plan to fundamentally transform its business to drive higher value solutions to enterprise, small and midsize business and public sector customers and went as far as describing the HP of the future “through a portfolio that spans printing, software, services, servers, storage and networking.”

The company has also announced a strategic withdrawal on WebOS and the prospect acquisition of Autonomy Corporation [Cambridge -UK], a data mining software company.

It seems that the HP is aiming to get out of the commodity hardware business and focusing on becoming a software & solutions company. New CEO Leo Apothekar seems interested in transforming HP for the future but we think this is done without some fundamentals of the past.

Such a move will be pleasing to financial markets, since a possible withdrawal from PC business will undoubtedly ensure better financial ratios [year-to-date PSG represents 30% of segment total revenue and 16% of segment operating profits but is the lowest OP generating segment at 6%] but such a move is unlikely to create strategic advantage.

Whilst delivering higher value solutions is a key survival aim, less than 10 years ago, HP had paid $25 billion [Compaq Computers acquisition] to become the undisputed market leader worldwide. A new PC brand [and company] can be readily made, but the synergies sought then, and what the current HP can benefit from, will largely be lost in a new outfit.

A broad portfolio benefits SMBs

Techaisle research shows that SMBs rely heavily on the expertise of others with regards to the ICT needs. This support requirement takes many shapes and forms but single brand sourcing is a major aspect of this “peace of mind”. By spinning off the PC business, this powerful lever will be lost – with probable consequences also affecting other printing and networking businesses.

Channel Management Lock In

HP over the last two decades has built one of the best channel partner networks in the industry. Our research shows that these channel partners have been very loyal to HP, partly due to the brand, but also due to HP managers’ ability to capitalize on the range. By laying out partner business plans that neutralize competition, many IT vendors have simply been unable to attract sufficient interest on volume sales by resellers – locked in on a combination of bonuses and accelerators spanning the overall range, thus making it not worthwhile to really push other brands. Take away the PC share, and now the game is more open for all. Epson, Ricoh, Xerox, Lexmark all can have a stab at the mixed channels.

Spin-Off / Sell-Off?

For the reasons above, a spin-off would be tough but a sell-off might just end up being the stuff of nightmares. There are not many suitors that have the interest and clout to take on such business and so the list is short – and we think all are likely to bite back. Rumored Korean giant could benefit as much as HP did when they acquired Compaq, but Compaq was taken whole and no longer exists. Passing just the PSG business may well make the rest open for flanking strategies – and Korean ICT vendors are world master at that.

The Move to Services

When IBM spun off its PC business, it made sense because IBM already had all the IT stacks in place and its PC business was never really focused on consumers. The third quarter filing of HP puts services almost as important to PCs and with the undergoing shift in computing mode [from client/server based to power everywhere] perhaps a refocus can be good – but Oracle, IBM, Fujitsu, Cisco and HP are all focusing on the software & services markets which will soon become very crowded again. This is, however, “a soon” and not “a now” – so profitability is still there.

Web OS
Power everywhere also demonstrates that HP can lose out. WebOS’ attempt to compete in the mobile OS world seems uncertain and the market is well set on the iOS, Android and WP7 triad. HP today also announced they will stop production of devices loading WebOS and that is a clear sign of loss of faith in this arena.

Our Take
Although based on our researched facts, we acknowledge that our analysis is limited by the lack of internal soft guidance on matters such as politics or personnel skills. To fully evaluate the risks, these are just as key ingredients but, structurally, either spin-off or sell-off of its PC business seems a very risky decision. HP’s strategy is a clear nod for IBM’s successful software and services strategy but then IBM was never so fully entrenched in the consumer and small business markets.

Finally, if a new PC company is formed, at current data this will be the most profitable PC company on the planet. A company capable of operating with the sole purpose of PC business but without the CIOs relationships it has today. Things will not be easy.

Anurag Agrawal

Anurag Agrawal is the CEO of Techaisle, a global market research and consulting company focused on SMBs and Channels. Prior to Techaisle, Anurag headed Gartner’s Worldwide Research Operations and before that was with IDC.