October 13, 2014    5 minute read

Streamlining HP: Time for a Turnaround

   October 13, 2014    5 minute read

Streamlining HP: Time for a Turnaround

As the giants of the PC industry battle it out for the illustrious position of market leader, Hewlett-Packard has taken an unorthodox approach in hope of returning to the supremacy it held from 2007 to 2012. 

On the 6th October 2014, the CEO of Hewlett-Packard (HP) Meg Whitman announced the major decision to spin-off the personal-computer and printer arms away from its faster-growing corporate hardware and services operations. This major turning point in HP’s seventy-five years of history would mark another pivotal moment for the company’s long term future, alongside its notable $24.2bn merger with rival Compaq Computer Corp. in 2002 and the victorious bidding war against Dell Inc. for the acquisition of 3Par for $2.35bn in 2010.

The Blueprints

The separation of the two businesses will consequently result in two publicly traded companies: Hewlett-Packard Enterprise and HP Inc. This will be a tax-free distribution of shares to existing stakeholders in 2015 and will enable the ability for investors to choose which industry they believe shall outperform their counterpart in the near future.

The enterprise will offer a unique portfolio, covering technology infrastructure, software and services to allow customers to take full advantage of the opportunities presented by cloud, big data, security and mobility. Whitman will serve as the CEO of the enterprise alongside the support of Patricia Russo, as the Chairman of the Board.

HP Inc. on the other hand will look to become leader in the personal systems and printing markets, with new technologies expected on the horizon such as the exciting arrival of 3-D printing. Dion Weisler, the future CEO of HP Inc., adds: “customers are looking for innovation to enable workforces that are more mobile, connected and productive while at the same time allowing a seamless experience”. The new entity will look to tackle the other worldwide PC vendors, including the new market leader Lenovo Group Ltd. and a close competitor Dell.

Déjà Vu?

The move to spin-off the PC business is not the first of its kind to surface within the strategic planning of the iconic Silicon Valley Company. Leo Apotheker, Whitman’s predecessor, proposed in August 2011 to exit the smartphone and tablet market, focusing on ‘higher-margin’ priorities of cloud, solutions and software and finally to divest their PC division or even spin it off into a separate company. At a time of panic, where HP’s share price continued to drop by 40%, the decisions made by the former CEO, was deemed to be chaotic and thus scrapped. In the following month, Apotheker was replaced immediately by a fellow board member and former eBay Chief – Meg Whitman.

As we look to the present day, Whitman’s attempt to reshape Hewlett-Packard’s operations has been largely influenced by the 91% fall in HP’s net income in Q4 2011 – significantly due to the write-downs and charges for Apotheker’s choice of killing off the tablet and smartphone lines. Part of the reshaping has been accompanied by a number of new introductions of products and a vast amount of job lay-offs. Since 2011, HP has revised an estimated total number of 50,000 jobs to be cut, which equates to 15.7% of the 317,500 current workforce. Whitman said at the time, that the company is looking to be a more nimble and cost-efficient in order to successfully compete across a rapidly changing IT landscape.

The Future of HP

Despite a number of changes implemented by the CEO Meg Whitman over the past two years, it has been evident that Hewlett-Packard’s market share has been falling gradually against the other players. Following a stagnant year-on-year Q3 net revenue performance of only +1% coupled with the monstrous feat of China’s Lenovo edging past HP as the world’s number one PC supplier, Whitman’s decision to split the company may seem to be justified.

The CEO remarks in an interview, post the announcement, that the decision will make the firm more agile and thus capitalise on a faster-growing business. The two arms contribute equally to the overall revenue generated last year; PC and Printer are jointly responsible for $55.9bn, as opposed to the Enterprise Computing, Services and Software divisions’ $55.7bn. However, the corporate services division had an operating profit of $5.85bn which is 20.9% greater than the respective combined profits of PC and Printing, therefore indicating that it may be more lucrative for HP.

The future of Hewlett-Packard is very much dependent on the outcome of the proposed splitting of the company. As the project is due for completion by the end of 2015, there is a lot of time for HP to raise the confidence of potential and existing shareholders to invest in the two newly formed companies. This can only be done by providing evidence of strong sales performance and the ability to introduce new technologies which will hopefully captivate the consumers in this new digital age that we are in now. The next five years will be an exciting time for Hewlett-Packard as the announcement will have sparked fear in the other competitors within their respective PC and technological industries.

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