Diesel

28
NIVESHAK
Article Cover Finsight of the Story Month
Figure 3: Market Share of Worldwide PC Shipments
Is this split an acknowledgment of
failure of oft-repeated synergy story?
An emphatic No.
Companies talk about synergies as the drivers
behind mergers. Executives like to run big and
expanding companies. Mergers are often driven
by vainglorious attitudes of CEOs. Empirical
studies state that 70% of the mergers are
failures. When the companies split up, the
top management often cites lack of growth as
a reason. Lack of growth or divergent growth
among the divisions of a company result in a
discount called as ‘Conglomerate discount’
which has to be eliminated to keep the investors
excited about the growth prospects of the
company.
According to Emilie R.Feldman, a management
professor at Wharton,
“Divestitures and spinoffs are the ugly stepchild
of corporate strategy. They are viewed as
acknowledgements of failures, bowing to
pressure from investors and competitors. In
reality, spinoffs can be used very proactively,
as we are seeing in the HP case, to create value
for shareholders and separate businesses that
don’t belong together anymore.”
So, a spin-off is not necessarily an admission
that a mistake has been made. The prevalence
of acquisition to spin-off only indicates that the
promised synergies are rarely delivered.
In the case of HP split, the move could allow
the two divisions to focus on their core product
offerings and go-to-market strategies that are
decidedly different between consumer products
and the enterprise. The move could signal
renewed focus and commitment by HP with
respect PCs and Printers, while allowing the
Enterprise group more flexibility to react for its
own needs as well.
Figure 4: Worldwide PC Shipments (in millions)
Which division has more steam left?
The Chinese major, Lenovo, has taken over HP
as the company with the highest market share
in the worldwide PC shipments. The worldwide
PC shipment pie has stagnated at 75-85 million
in the last two years. So, HP will have a hard
time in improving the fortunes of its PC division,
absent innovation in its value chain or the
product itself.
The printing business - HP’s most profitable
division, accounting for a third of its profits –
is a cash cow that has been helping the other
divisions of the conglomerate. Its pre-tax profits
have fallen by less than 7% compared to the
other HP divisions where profits have fallen
by half in the last three years. The low growth
hardware business is likely to be valued at
very low multiples compared to the enterprise
division. This group may take most of its debt.
The key investments would largely be organic
to maintain the durability of the cash flow and
the investors would be benefited largely by
dividends. The caveat, of course, is the emerging
PC shipment scenario in the near future.
This leaves the other enterprise division debt
free which may look for acquisitions. Targeted
M&A was explicitly mentioned by Meg Whitman
on the eve of the announcement of the split on
Oct 6. Increased organic investments combined
with targeted M&A are the way ahead for the
enterprise division. The shareholders may be
benefitted by share buybacks in this division as
it gives leeway to the top management given
the investment needs.
Hence, in my opinion, the enterprise division
is a better bet for investment given its healthy
outlook, growth opportunities, and the
competitive scenario in the software and cloud
computing industry.
NOVEMBER 2014