Hewlett-Packard Inc.'s Historic Breakup: A Watershed Moment for One of Tech's Most Iconic Companies

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As the song goes, breaking up is hard to do. But in the case of American tech icon Hewlett-Packard , its recently announced corporate separation has been years in the making.

After pledging to keep Hewlett-Packard together when she joined HP in 2011, CEO Meg Whitman reversed course earlier this week by announcing the historic separation. This storyline has so many angles, it will take months to digest let alone actually playout.

But between the billions of shareholder dollars, not to mention the hundred of thousands of jobs, hanging in the balance as part of the storyline, this deal is automatically in the running with the Apple iPhone 6 for the most important tech story of 2014. Let's dive in.


Hewlett-Packard's new halves
HP's monumental split will divide its various divisions into two new companies: HP and Hewlett-Packard Enterprise. From high-level perspective, HP's self-division is split along their respective long-term prospects. As the company with more questions as to its future growth trajectory, HP's personal computer and printer divisions will be spun out into a company that will go by the moniker HP. Here's a quick snapshot as to what would have been HP financial performance in FY 2013.

HP

2013

Revenue (in Mil $US)

$55,925

Revenue Growth (Y-o-Y)

-7.1%

Earnings from Operations (in Mil $US)

$4,839

Operating Margin

8.7%

Operating Earnings Growth (Y-o-Y)

-0.1%

Source: Hewlett-Packard 2013 10-K 

If there had to be a "bad business" created from this split, as is so often the case in such moves, HP would probably be it. After several brutal years, PC growth is relatively stagnant and is becoming increasingly commoditized. Likewise, few expect view the overall growth outlook for the global printer industry to remain robust as the digital age advances, although many argue 3D printing offers a glimmer of hope as a new growth market. In terms of leadership, Dion Weisler, the current head of HP's PC and printer businesses, will step into the CEO role at HP, and Meg Whitman will serve as its nonexecutive chairman. 

The second company, Hewlett-Packard Enterprise, will incorporate HP's current server, storage, networking, software, services, and financing operating segments. Here's how Hewlett-Packard Enterprise would have fared in 2013.

Hewlett-Packard Enterprise

2013

Revenue (in Mil $US)

$58,245

Revenue Growth (Y-o-Y)

-6.4%

Earnings from Operations (in Mil $US)

$6,245

Operating Margin

10.7%

Operating Earnings Growth (Y-o-Y)

10.6%

Source: Hewlett-Packard 2013 10-K 

Although not without its share of problems, Hewlett-Packard Enterprise has by far the more attractive set of core businesses and represents the key division Meg Whitman has sought to expand in her tenure at Hewlett-Packard. She isn't alone. IBM made the shift away from low-end hardware like PCs years ago, favoring the more favorable economics and margin profile the kinds of businesses Hewlett-Packard Enterprise will hold. However, although the financial structure of these businesses is clearly more favorable, Hewlett-Packard Enterprise will face plenty of competition from a host of large and established competitors. Meg Whitman will remain in the CEO spot at Hewlett-Packard Enterprise and current board member and former Alcatel-Lucent CEO Patricia Russo will serves as the board's nonexecutive chairman. 

The end of an era 
Splitting Hewlett-Packard into two new organizations is hugely symbolic in terms of HP's long-term place in the annals of U.S. technology history and its more recent troubles.

Looking to the its more immediate history, the Hewlett-Packard break-up should hopefully, and finally, put an end to its years of mismanagement and poor results, little of which falls at the hands of Whitman. After pursuing a litany of misguided or pricey acquisitions, HP appeared to many a company that had attempted to solve its innovation or growth issues by patching on other companies' operations. To give some color, HP spent a combined $53.8 billion alone to acquire the likes of Palm, 3Com, Compaq, Autonomy, and Electronic Data Systems. This doesn't even reflect the bulk of HP's sprawling appetite for acquisitions. The combined weight of these moves has left Hewlett-Packard's balance sheet bloated. Consider this: Roughly one-third of HP's total assets consisted of Goodwill alone during its most recent quarterly report. It's a company that has simply become too large, too complex, and too reliant on unsustainable growth strategies to go without the kind of drastic overhaul we saw this week.

And although the right move in my mind, HP's breakup story marks a defeat of sorts for one of Silicon Valley's most original and innovative companies. HP had lost the kind of innovative and entrepreneurial spirit that founders Bill Hewlett and Dave Packard sought to imbue in their organization long ago, the kind of corporate culture that would serve to inspire countless technology executives such as Steve Jobs or Bill Gates, among many others. That Hewlett-Packard died years ago.

At the end of the day, seeing an iconoclast of any genre suffer and fade into decay is never easy or comfortable. However, as we technology enthusiasts know all too well, time stands still for no company. So as this move officially signals the end of Hewlett-Packard's long rise and subsequent fall, the decision to breakup HP's IT empire is one that should serve the combined company well as it attempts to carve out its place in tech's new world order.

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The article Hewlett-Packard Inc.'s Historic Breakup: A Watershed Moment for One of Tech's Most Iconic Companies originally appeared on Fool.com.

Andrew Tonner has no position in any stocks mentioned. The Motley Fool owns shares of International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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