HP, a Silicon Valley icon, is ready for its break-up
Bye-bye HP, it’s the end of an era.
SAN FRANCISCO — One of the most storied tech companies in the United States will split in two this weekend, another casualty of seismic shifts in the way people use technology — and big-company sluggishness in responding.Meg Whitman long resisted a breakup of Hewlett-Packard, saying that selling computers to consumers and businesses was the best way to keep the Silicon Valley pioneer alive. Hewlett-Packard was an early pioneer of what became the model for Silicon Valley startups: Founded in 1939 by two Stanford graduates in a Palo Alto, California, garage, HP was long celebrated for its engineering know-how and laid-back corporate culture.
Now, with personal computer demand in decline and companies flocking to the cloud to run their operations, she is on board with the company’s split, which is effective Sunday. — When Meg Whitman, Hewlett-Packard’s chief executive, was preparing to cleave her company in two, she feared reliving a shoe disaster from early in her career. The chief executive’s biggest job is proving to customers, investors and employees that a smaller, enterprise-focused HP will be faster and more nimble against competitors.
This is not the first seismic shift to shake the storied tech pioneer—it spun out its bread-and-butter test and instruments division as Agilent A 0.16% in 2002 — but it is definitely the biggest. Whitman’s plan stands in stark contrast to Michael Dell’s $67 billion deal to combine Dell with storage maker EMC in the largest-ever technology merger. Whitman was an executive in charge of the Keds brand at Stride Rite a few decades ago as the company was making a transition to a new “high-tech” warehouse.
But after struggling to keep pace with recent trends like the rise of smartphones and cloud computing, HP’s board decided last year to create two smaller companies, each with a narrower focus. He’s betting that a single provider of enterprise computing technology will be stronger because it can offer everything a company might need to run its business under a single roof. “It’s quite unusual that you end up with companies that have taken such different approaches,” Whitman said in a recent interview. “Given the market, given the changes that are afoot here, you’re better off being smaller, more nimble.” Ever since she took over as Hewlett-Packard’s CEO, Whitman has had to come to grips with a company whose size was out of sync with demand for its products. Exactly when things went off the rails is subject to debate, but many point to the controversial acquisition of Compaq Computer in 2001 by HP’s then-CEO Carly Fiorina as the start of the decline. Whitman worried so much about a similar hiccup that during planning meetings for the HP breakup, “Can we ship Keds?” became a sort of shorthand for worrying about bungling. The other, Hewlett Packard Enterprise, or HPE, will sell the computer servers, data storage, networking, software and consulting services that run a modern company.
Since then, the company’s had to weather such self-inflicted wounds as a pretexting scandal in which a board member, an executive and HP-paid investigators faced criminal charges for spying on journalists; the $1 billion acquisition of Palm Computing in 2010 to beef up HP’s mobile capabilities; then the sale of Palm’s intellectual property. When HP splits in two on Sunday after a year of planning, what is left will bear little resemblance to the engineering-driven company founded more than 75 years ago in a garage not far from Stanford University.
Then there were other bigger, more questionable acquisitions notably HP’s $13.9 billion buy of EDS, the giant computer services company in 2008; followed three years later by its $11 billion bet on Autonomy, a software company. Each will be independent, with “flexibility to respond to a constantly evolving market,” Whitman told an investor conference last month. “With less to focus on,” she added, “each company will do core things better.” By dividing HP into roughly equal halves, analysts estimate, each spinoff should produce more than $50 billion in sales next year.
But skeptics say neither will have the clout of the old HP, which became a leading consumer brand while using its vast size to negotiate volume discounts with suppliers and big contracts with business customers. “They won’t have the impact that HP once had, now that they don’t have the depth of portfolio they once had,” predicted Rob Enderle, a longtime industry analyst. “It’s not clear what HP is anymore.” Each of the spin-offs will face significant challenges: Demand for PCs and printers is continuing to decline, as more people use mobile devices and store their documents and photos online in the cloud. To justify the split, Whitman will have to deliver cutting-edge technologies that will drive demand for the company’s core products, find smart and small acquisitions to bring new technologies to a wider swath of customers and take full advantage of the disruption caused by the Dell-EMC merger.
HP recently said it’s giving up on competing directly in cloud computing, a growing business in which companies large and small run software in remote data centers operated by Amazon and others. And in the commercial computing sector, more businesses are using online software instead of buying servers and other hardware from companies like HP. And and then there was an almost farcical round robin of screwups that included the hiring of Leo Apotheker as CEO in September, 2010 only to fire him a year later, largely due to the Autonomy deal which degenerated into charges and countercharges of fraud between HP and former Autonomy execs. When Whitman, his successor, took the helm, she claimed that would be a mistake given the cost advantages HP got from chip and storage suppliers by fielding both a PC and server business. Preparations for the transition have been under way for several months — ensuring everything from office space to internal technology systems were separated in time.
Last week, Whitman said she did something that hasn’t happened before: She spent an entire day on a three-year plan for its key server business without any talk about inkjet printers or what should be done to sell more PCs. Along with external pressures, HP has struggled with internal problems — a series of controversial CEOs, botched acquisitions and scandals involving top executives and directors.
The question is whether Wall Street believes the two companies will benefit from the separation. “Anytime you make a change, you make a claim,” said Toni Sacconaghi, an analyst with Sanford C. HP subsequently started soft pedaling that notion, and last week threw in the towel on the public cloud business, refocusing (again) on helping customers use Amazon or Microsoft MSFT -1.35% Azure to backstop their HP private clouds. HP Inc., the less technically ambitious of the two new companies, will largely occupy the building that used to house HP’s famed research and development division.
In a hybrid situation if there is a spike in the workload handled by company resources, the additional work get shipped off to a public cloud partner. As for the new spinoffs, Forrester’s Burris said he’s not ready to count them out. “It’s reasonable to think both can be thriving companies, but a lot will come down to the quality of their management.” The offices of William Hewlett and David Packard, kept intact after they left more than 20 years ago, are being sealed off with a separate entrance so that employees of both companies can come by for visits.
Still, HP said it’s investing in other ways to provide cloud services through a hybrid approach. “I think that game has played out,” Whitman said, referring to Microsoft and Amazon. “I think those are going to be the two winners in the public cloud.” The cloud shutdown was a “telling moment,” said Todd Lowenstein, director of research at Highmark Capital Management, which has HP shares among its holdings. “They have some catch-up to do.” Acquisitions will probably be part of any effort to expand the product line. Time will tell, but now that the HP split is nearly final, we’ll get to see if the two pieces can function better than HP as a whole did over the past decade.
When asked about what size they may be, Whitman pointed to companies Hewlett-Packard has bought for around $2 billion to $3 billion, including 3Par, 3Com and Aruba Networks. Carly Fiorina, now a Republican presidential candidate, wanted customers to learn from the way HP consolidated operations after it bought Compaq for about $25 billion in 2002. Whitman, who for years ran the auction site eBay. “This is crazy — Carly, Mark, Léo, me — the learning curve is too steep, the technology is too complex for an outsider to have to learn it all.” One year into the job, Ms. And one year ago, she concluded that HP needed radical change. “She had in strategic folks from Goldman Sachs and McKinsey,” said Chris Hsu, HPE’s chief operating officer.
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