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26 NIVESHAK Article Cover Finsight of the Story Month Analysis of HP mitosis Sandeep G Y IIM LUCKNOW Introduction The business world in the US witnessed an interesting phenomenon in the last few months. Tech conglomerates like eBay and HP have split their companies citing reasons such as sharper focus required in the fast rising cloud computing and related services. A few experts received this phenomenon positively saying that these combined entities are plagued with ‘conglomerate discount’ and hence splitting into smaller independent chunks will make them nimble and agile enough to leapfrog in this competitive tech world. However, few others brushed this exercise as another attempt by the top management to cover up their inefficiency in exploring the growth opportunities and also as a hurried response to the demands of the activist investors like Carl Icahn etc. HP Split: Meg Whitman’s Announcement On Oct 6 2014, Meg Whitman, the Chairman, President and Chief Executive Officer of Hewlett- Packard, announced that Hewlett Packard (HP) would split itself into two companies: One focused on PCs and Printers, to be called as HP Inc, and the other on corporate hardware, software and services, to be called as Hewlett Packard Enterprise. The split is going to be completed by the end of the next year. HP Figure 1: Independent divisions of HP NOVEMBER 2014
NIVESHAK 27 Cover Classroom Finsight Story investors would receive a tax free distribution of shares in the new company. This move marks a reversal for Meg Whitman, the former eBay boss who was roped in three years ago to turnaround the then ailing technology conglomerate. One of her first acts was to ditch the plan to shed the PC division laid out by her predecessor, Léo Apotheker, though she has since then left the option open for more radical actions to deal with HP’s problems. With growth stuttering in the last few years post the merger of HP with the then noted PC manufacturer, Compaq, and the onslaught of tablet computers leading to the shrinkage of revenue from PC division, Meg Whitman felt that this is the best time to divide the company to prepare the company for the next stage of growth. A glimpse of the financials of HP Based on last year’s revenues, both parts of HP would have ranked among the 50 largest US companies. HP’s PC and printer businesses produced revenues of $55.9bn in its last financial year, almost identical to the combined $55.7bn of its enterprise computing, services and software divisions. HP’s finances in FY2013: • Total revenue of $112.3 billion was down 7% year over year • Enterprise systems revenue of $28.2 billion fell 5% year over year • Its operating margin increased from 13.9% to 15.3% • Enterprise services revenue of $23.5 billion was down 8% year over year • Its operating margin fell from 6.9% to 2.9% Figure 2: HP’s Recent acquisitions • Printing revenue of $23.9 billion fell 3% year over year • Its operating margins increases from 14.6% to 16.3% • Personal systems revenue of $32 billion fell 10% year over year • Its operating margin fell from 4.7% to 3.0% The last three quarters of 2014 are better but not exciting enough to match the turnaround efforts by the top management. Enterprise systems revenue was flat YOY at $20.5 billion and Printer revenue was down by 3% YOY at $17.2 billion. However, these divisions have higher margins at 15% and 18% respectively compared to the single-digit margins at other divisions of the company. HP has about $20 billion debt and $14 billion in cash and other investments. It is expected that debt would be transferred to HP Inc and make HP enterprise debt free, although the decision is yet to be finalized. Turnaround efforts The turnaround efforts at HP resulted in unsuccessful acquisitions notable among them was that of Autonomy, the UK’s largest software company by market capitalization. On Aug 28 2011, HP offered to buy Autonomy at 23x EBITDA valuing the company at $11 billion. However, within a year of acquisition, HP reported $5 billion write-down after being alerted by a whistle blower about the serious accounting improprieties at the software company. It resulted in a severe dent in the share price of HP as well as in the confidence of its investors. This ugly spat occupied the front pages of business dailies in that year. © FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG
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