HP splits off PC, printer business

Hewlett-Packard Co. is breaking out its PC, printer and personal systems business into a separate company in a move that is reminiscent of IBM’s decision to split a decade ago.

The new business will be called HP Inc., while the rest of HP will be renamed Hewlett-Packard Enterprise.

The split is expected to completed in 12 months.

HP joins several companies that have split in recent years including Science Applications International Corp., ITT and L-3. But in this case, a close model is the 2004 split that IBM executed. Big Blue sold its PC and laptop business to a Chinese investment group that created Lenovo. Selling the business allowed IBM to focus on its services, software, cloud and infrastructure businesses, which offer higher growth and margins.

HP cited a similar rationale for the decision it announced this morning.

The split also is part of the progression of the company's turnaround led by Meg Whitman, who became CEO in September 2011 as the Palo Alto, Calif., company was stumbling.

She stabilized the company with a five-year turnaround plan, and the split “underscores our commitment to the turnaround plan,” Whitman said in a statement.

Over the last three years, the company has strengthened its core business “to the point where we can more aggressively go after the opportunities created by a rapidly changing market,” she said.

One of the big changes at HP has been a reduction of headcount. As of the close of the third quarter, 36,000 employees have left the company. Another 19,000 will leave over the next year, not counting reductions caused by the split.

The savings from the reduced headcount are being invested in research and development and sales, the company said.

The majority of the public sector business, including such large contracts as the $3.5 billion Navy NGEN contract, will go with Hewlett-Packard Enterprise.

Financially, the split is nearly 50-50. HP Enterprise will have $58.4 billion in annual revenue and $6 billion in operating profit with 10.2 percent operating margins. HP Inc. will have $57.2 billion in revenue and $5.4 billion in operating profit and operating margins of 9.4 percent.

HP Inc. will be split between personal systems, which accounts for 59 percent of revenue, and its printing business. The personal systems business includes PCs, notebooks and mobility products. The printing business accounts for 41 percent of revenue and includes ink printing, laser printing and managed print services.

The largest part of HP Enterprise will be its enterprise group with 48 percent of revenue; this includes servers, storage, the cloud and networking. Enterprise services accounts for 39 percent. This is the old EDS business.

Software is responsible for 7 percent of revenue, and financial services accounts for 6 percent.

In the rationale released as part of the announcement of the split, HP named five key reasons for the split:

• Creating of two Fortune 50 companies with strong financials and technology roadmaps.
• Enhanced focus on distinct opportunities for long-term growth and profitability.
• Simpler and more nimble organizations for partners and customers.
• Creates two distinct investment opportunities with clarity of capital allocation priorities.
• Two companies will be better positioned to generate long-term shareholder value and accelerate performance.

Whitman will remain CEO of HP Enterprise, but will also be the chairman of HP Inc. Pat Russo will be chairman of HP Enterprise. He currently is the lead independent director of HP.

Dion Weisler, current executive vice president of HP’s printing and personal systems business, will become president and CEO of HP Inc.

Part of the strategy of HP Enterprise will be how it is structured to take advantage of what the company calls the “new style of IT.”

With its financial services capability, HP Enterprise will be offer new deployment models for its customers.

Marilyn Crouther, senior vice president and general manager of HP Enterprise Services public sector, spoke about this in June in HP’s Top 100 profile.

HP is helping customers shift from traditional IT to this new style that is more consumption-based, she said.

“A lot of public sector clients have aging infrastructure that they’d like to move to the cloud, and we are helping them detail out a transformation agenda and develop an IT road map,” Crouther said. “That’s where we can add a lot of value.”