HPQ's Spin Off: Here's Why Investors May Face Tough Challenges Ahead

Hewlett-Packard may be at a disadvantage by focusing on selling to the consumer market in 2015. 2014 was perceived as a year of the corporate spin off in America, as enterprise companies such as Hewlett-Packard turned heads in both Wall Street and Silicon Valley. This year, corporate spin offs are expected to deliver another success.

Spin off fever in corporate America is also being looked at as a growing trend to reach Europe within the next twelve months. As investors are seeking ways to maximize their investment returns, U.S. mergers have paved way to having bankers look at predicting that same activity as likely to span across Europe in 2015.

“There may be more opportunity for these moves on the European continent”, said Severin Brizay, head of mergers and acquisitions in Europe, Middle East and Africa at UBS Group AG.
(UBSG) to Bloomberg. “Companies are looking to become more nimble and focused, and there are still more conglomerates in Europe than the U.S.,” he said. “The trend has been largely U.S.-dominated, particularly in tech, and will continue to expand in Europe.”

HP announced on October 6, its split into two separate, publicly traded entities. The split follows the abandonment of a five-year turnaround plan which may have indicated is failure in long term goals. HP plans to have one company dedicated to software, servers and cloud technology dubbed as Hewlett-Packard Enterprise, while the other will be focused on its existing traditional PC and printer businesses which will be named HP Inc.

Signs of leadership within any of Hewlett-Packard's two individual business units appear to be challenging from numerous angles. According to HP's recent financial statement, its PC and printer businesses increased to 3.1 percent in sales from November ending July 31, 2013. HP's enterprise hardware and services unit generated only $31.4 billion in revenues falling 19 percent below its revenues from November ending July 2013.

Not every spin off works. HP's intentions to sell to its businesses to consumers may perform worse than expected. The company lost market leadership to its rival, Lenovo and is competing with lowered costs of PCs to its other rivals. The addition of printers to HP Inc. could have the potential to scale, yet at the same time mitigation might cause damage.  Investors are skeptical that Hewlett-Packard Enterprise may grow as fast as Meg Whitman stated.

M&A may see its way through after the multi-billion dollar split has been finalized as rumored acquisitions are also unfolding. EMC is said to acquire Hewlett-Packard Enterprise. It is still uncertain how growth would be financed with Hewlett-Packard Enterprise when cash flow from printer sales and the personal computer take a loss.

HP's slow growth-fast growth strategy is also not a fit.  Both of its new companies have had slow to no growth operations. The company's revenues grew faster from its personal computers than its enterprise businesses. Many investors also worry that HP's Itanium service business performance has had a decline with many of its maintenance operations and service contracts. Lower cost alternatives have caused the Itanium services installation to falter.

The company reported an 18 percent decline in revenues for its business critical systems unit and a 6 percent decline in enterprise services. HP did show revenues of up to 12 percent with its personal systems, as it predicted personal technology could be a strong growth driver for its business.

HP faces many economic risks with scaling for growth. This was even one of the main points why the company decided to reverse its efforts to spin off its personal computer business a few years ago. When the company had made the drastic change, HP cited that synergies could account for nearly $1 billion in revenues.

By presenting each new company as two separate units, the 75-year-old technology giant has promised to provide the financial resources, flexibility, focus and independence required for successful customer dynamics and ability to quickly adapt to the market. HP stated that the companies may even me in a better position to compete within the market, support its partners and customers and also deliver the maximum value to its shareholders.

In summary, HP has struggled with many problems, specifically in storage, technology and business critical systems services. Selling to consumers on behalf of its enterprise areas may provide new opportunities for managers of these units to find ways to better compete against rivals. HP's existing traditional PC and printer businesses does appear to be in better condition to compete in comparison with the company's software, servers and cloud technology unit. It is still unclear whether the tech titan is able to grow faster in the enterprise industry while having profitability.
Published on Mar 16, 2015
By Jennifer Lynn

Copyrighted 2016. Content published with author's permission.

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