Hewlett-Packard Was Just Kidding


Hewlett-Packard (NYS: HPQ) ex-CEO Leo Apotheker sure had us going for a while with his HP of the future. Well, current CEO Meg Whitman is now the sheriff 'round these parts, and she says the Personal Systems Group, or PSG, which includes the PC business, is here to stay. Farewell, Apotheker, and enjoy your executive air travel back across the pond.

Yesterday after market close, the company issued a press release confirming the decision that the unit will remain within the company. In the statement, Whitman said, "HP objectively evaluated the strategic, financial, and operational impact of spinning off PSG. It's clear after our analysis that keeping PSG within HP is right for customers and partners, right for shareholders, and right for employees. HP is committed to PSG, and together we are stronger."

The announcement also described that the cost to recreate the overall brand value outweighed the benefits of a breakup. The episode itself has undoubtedly already tarnished the brand value, since HP's board is now derided as one of the industry's goofiest gaggle of lollygaggers: an apt description of any board that hires a CEO sight-unseen and is more focused on entrenching itself than guiding the company.

Survey says ...
(NAS: DELL) was certainly enjoying the disorder, after it released the results of an "independent" survey of 130 current HP customers with at least 500 employees that showed that "many are now questioning if they have the right long-term technology partner for their business."

The survey also found that nearly half of them are now less likely to purchase HP offerings over concerns about the company's strategic direction. Even though it's only been a few short months since the affair began, Dell has probably been able to capitalize and poach HP customers. Even now that the PSG is sticking around, the damage to HP's brand identity and perception is unquantifiable.

We're No. 1!
I suppose we'll never know exactly why Apotheker was so compelled to ditch the No. 1 PC business in the world by revenue. It's true that he has software coursing through his veins and had high hopes of taking on juggernauts like IBM (NYS: IBM) and Oracle (NAS: ORCL) , and while the Services segment carries much higher margins, it's not as if the PSG was unprofitable by any stretch.

The PSG contributed 30% of last quarter's revenue, which came out to about $9.6 billion in sales. Operating income from the segment was $567 million, which represents just under 6% in operating margin. In contrast, Services were responsible for $9.1 billion in revenue and $1.2 billion in operating profit, or a 13.4% operating margin.

Even Apple (NAS: AAPL) hasn't killed its aged iPod line, despite declining unit sales and revenue, so why would HP get rid of its largest revenue source? A profit is still a profit, after all.

At what cost?
HP CFO Cathie Lesjak said that spinning off the PSG unit would have resulted in a one-time expense of approximately $1.5 billion. On top of that, the company would have lost other benefits like purchasing power and joint branding opportunities that may have added another cool billion to the final price tag.

That $2.5 billion runs much higher than the initial $300 million to $400 million estimated cost. The jury's still out on what benefits HP would have seen from ditching the PC business. I certainly don't buy into the notion that HP would have been worth more as the sum of its parts.

What about webOS?
Interestingly, there was no mention of whether or not HP plans on reviving webOS. The company actually just lost its vice president of Worldwide Developer Relations, Richard Kerris, who has moved to another flailing smartphone company, Nokia (NYS: NOK) .

Some leaked internal memos had showed that webOS was being split up internally, presumably in preparation for webOS hardware's death and a PSG spinoff, but your guess is as good as mine regarding what will become of webOS in the absence of any official word. The last we had heard was that HP was still exploring "strategic alternatives." Getting rid of the platform sure beats trying to reenter the ring with Apple and Google (NAS: GOOG) .

Just kidding
Two short months after the debacle began, it concludes with an expected anticlimactic whimper. After Apotheker's high-profile ouster, it was clear that the bungling board didn't like what he was doing, so it's not surprising that HP is putting an end to his plans.

The only question left: what will become of webOS?

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At the time thisarticle was published Fool contributorEvan Niuowns shares of Apple, but he holds no other position in any company mentioned.Click hereto see his holdings and a short bio. The Motley Fool owns shares of IBM, Apple, Google, and Oracle.Motley Fool newsletter serviceshave recommended buying shares of Dell, Google, and Apple, as well as creating a bull call spread position in Apple. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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