HP Announces Big Restructuring: What Does It Mean?

The technology industry continues to make business headlines. Google is acquiring Motorola Mobility to protect and grow its Android franchise, and now HP's new CEO Leo Apotheker makes his big decision to unravel what former HP CEO Carly Fiorina built. Here's a quick summary of HP's actions:

  • HP is either spinning off or selling its PC, laptop, tablet, smartphone, and webOS businesses.
  • HP is acquiring British software company Autonomy for £7 billion (about $11.6 billion). Autonomy's software helps businesses search unstructured data, such as e-mails.
  • The company is providing new, lower financial guidance reflecting additional weakness in sales and profitability. HP also expects restructuring charges.

Wall Street is reacting quite negatively to HP's announcement. As I write this, HP's stock is trading about 18% lower than yesterday's closing price, which was already beaten down as some of the news broke.

Most analysts have focused on HP's exit from the PC business, declaring Apple the victor in that battle. I think that's a little overwrought. Nobody except Apple, Intel, and Microsoft can seem to make much of a profit in the PC business. In what's looking like the most brilliant business decision of the decade, IBM exited the PC business in 2005. In the process, IBM got some extra cash when the business was valuable, cash which the company used to invest in other, more profitable businesses, including software. (That cash covered at least one mainframe model's R&D, for example.) IBM also won significant business respect in the fast growing Chinese market, generating a lot of goodwill for the company as it sold one of the world's most iconic PC brands, the ThinkPad. Even though HP's PC business is the world's biggest in volume and revenue terms, it'll be interesting to see whether HP can get anywhere near the value IBM got ($1.75 billion in 2005 dollars, excluding goodwill). The PC market is a lot different six years later, and HP isn't offering its brand as part of the deal.

There are some analysts who are realizing that HP is belatedly trying to mimic IBM's business model. I think that's HP's clear intention, but I also think Wall Street is correct. The odds are long that HP will be able to pull it off. Instead, I think HP may come to more closely resemble Xerox, with HP's printing business anchoring an IT services and relatively small software business. For example, HP is missing a credible enterprise server strategy given the Itanium meltdown, and that's one of IBM's critical factors in its highly successful business model. Moreover, even if HP can replicate IBM's business model, IBM's management has repeatedly demonstrated an exceptional ability to move to where the ball will be, not where it is today.

That said, I admire Apotheker for trying. Oracle dealt him a serious and perhaps near-fatal blow just as he joined HP, and he had to do something dramatic. HP may attract some bidding interest for its webOS technologies, including Palm's patent portfolio. HP's nascient tablet business won't be at all interesting given lethargic sales, so I would expect that part of HP to be more or less liquidated and disbanded. (You might see some closeout $99 HP tablets soon.) I think HP is overpaying for Autonomy, but, as I mentioned previously, there just aren't too many game-changing enterprise software companies still available for acquisition, especially at reasonable valuations. And Autonomy by itself certainly won't be enough for HP to emerge as a significant enterprise software company. It took IBM over a decade to build its software business, and IBM acquired scores of significant software companies along the way, most much more important than Autonomy. HP has a long road ahead.

UPDATE #1: HP may keep webOS but license it to others. Good luck with that. Perhaps LG and HTC will ring up HP to buy some mobile platform insurance if the price is near zero, but Android is still free and Microsoft has deep and desperate pockets. Also, $99 may be too high a price for an HP tablet. Apple's iPads are so good that they run webOS twice as fast.

UPDATE #2: As I continue to read reactions to HP's announcement, I am finding some more interesting questions. For example, would many people buy HP PCs, laptops, or Itanium servers now? When IBM exited the PC business, a deal was struck in private. In late 2004, IBM announced that Lenovo, already a major PC company, was buying the business. There was a lot of detail immediately available about how Lenovo would run that valuable business, including their plans for expanding the ThinkPad line, specific IBM executives who would join the company, investments in the U.S., etc. All of that detailed transition information reassured current and potential customers as soon as the news broke, and both companies kept their promises. In contrast, the #1 volume PC maker has just announced that they're exiting the business, but there's almost complete uncertainty about where that business will end up and what it will look like. The only decision that has been made is that the HP brand won't be part of the spin-off or the sale, which is hardly reassuring. (Lenovo had rights to the IBM brand for up to five years, and customers knew that IBM would zealously guard its valuable brand.) Dell, Toshiba, Sony, and of course Apple make wonderful PCs and laptops, so there are plenty of other options besides HP. Why did HP announce a business exit without any transition plan? It's weird and confusing.

by Timothy Sipples August 19, 2011 in Current Affairs
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Posted by: ubbnetwork1 | Aug 20, 2011 5:04:25 AM

It is really a good decision by HP. By taking this decision they will get more customers. So their business will increase.

Posted by: Refurbished Computers | Aug 25, 2011 2:33:56 PM

good to see that a company as big as HP is open to restructuring

Posted by: VC Independent | Sep 1, 2011 11:54:04 AM

We’ve published a 21-page free pdf “e.Paper” that analyzes the business model that Hurd imposed on HP why Apotheker will move back to a system that looks more like the old HP. The download and a related blog post can be accessed here http://www.domicity.com/?p=782.

Posted by: Marc Brien | Sep 12, 2011 6:35:38 PM

I agree as well that it's good to see such a large company open to restructuring. As a franchise I think that HP will get more business with this move.

Posted by: Tim Hargis | Jan 9, 2012 6:08:17 PM

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