BREAKINGVIEWS - HP says goodbye Compaq, hello IBM

Fri Aug 19, 2011 11:24am IST

A HP Invent logo is pictured in front of Hewlett-Packard international offices in Meyrin near Geneva August 4, 2009. REUTERS/Denis Balibouse/Files

A HP Invent logo is pictured in front of Hewlett-Packard international offices in Meyrin near Geneva August 4, 2009.

Credit: Reuters/Denis Balibouse/Files

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

By Robert Cyran

NEW YORK (Reuters Breakingviews) - Hewlett-Packard is saying goodbye Compaq, and hello IBM. The U.S. tech giant may spin off its PC unit and stop making mobile devices running its own operating system. It has also made a surprise offer to buy UK software group Autonomy for a hefty $10 billion. Leaving the cutthroat hardware market for higher margin software can work, as IBM's success shows. But it won't be quick or easy.

HP is the biggest PC firm in the world partly thanks to its merger with Compaq back in 2002, and the division accounted for close to a third of the firm's $130 billion-odd revenue in the year to October 2010. The unit did wring out $2 billion of profit last year. But long run profitability is poor, due to multiple rounds of expensive restructuring.

Moreover, things are getting worse. If corporate customers have cash to spend on new gadgets they currently prefer to spend it on cell phones and tablets, as HP concedes. The company's efforts to crack these markets with devices using the WebOS operating system it bought with Palm last year aren't working. That's partly why HP also had to slash its revenue and earnings estimates for the rest of the year.

Spinning off the PC division should help. IBM did something similar several years ago, and benefited from concentrating on more profitable businesses. Pulling the plug on efforts to compete directly with Apple in mobile devices also is sensible. It's expensive, and rival operating systems are well entrenched. Selling the associated patents could bring a cash windfall if recent deals are a guide.

While dismantling is easy, however, building HP back up will be more difficult. Buying Autonomy takes a page out of IBM's strategy of focusing on software. Autonomy's business of managing and searching things like e-mail, video and audio has years of 15 percent or higher growth ahead of it, according to Redburn Partners. Yet HP is paying a rich cash price -- 11.5 times last year's revenue, a whopping 64 percent premium to Wednesday's market price.

HP will probably need a slew of such acquisitions if it wants to reach IBM's 30 percent software margins, and that could prove a quick way to drain its cash resources. HP's shakeup makes sense, but it's only the beginning and the chances of mis-steps are high.

CONTEXT NEWS

-- Hewlett-Packard said on Aug. 18 that it may spin off or sell its PC business and that it has offered to buy Autonomy for 2,550 pence ($42.11) per share, or about $10 billion in total. The UK-based Autonomy is best known for software that manages and searches unstructured data such as emails, audio and video.

-- HP's PC group had sales of $40.7 billion in the fiscal year ending in October 2010. Profit from these operations was $2 billion.

-- The firm also announced it will stop production of its WebOS powered phones and tablets and explore options to optimize the value of the mobile operating system software, acquired as part of its purchase of Palm last year.

-- HP also reported revenue of $31.2 billion for the quarter ended July 31, an increase of 2 percent from the same period last year. Earnings per share rose 24 percent to 93 cents.

(Editing by Richard Beales and Emily Plucinak)

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