According to Reuters, Hewlett-Packard Company (NYSE:HPQ) or H-P plans to split into two companies after about a year of consideration from Nov 1 this year. CEO Meg Whitmann made the announcement in an event, HP Discover 2015, in Las Vegas on Tuesday.
H-P had announced in Oct 2014 that it will split its enterprise-facing hardware and service business and its consumer-facing computer and printer segments, with both companies trading publicly. The business-oriented company will be called Hewlett-Packard Enterprise while the PC focused businesswill be called HP Inc.
Reportedly, in Meg Whitman’s communication at a customer conference in Las Vegas, she also emphasized that the company will focus on four planned areas, namely, cloud computing, security, software and mobility.
We believe that these strategic initiatives will provide both the companies with the focus, financial resources and flexibility to quickly get used to changing market and customer dynamics. We also believe that these steps will add long-term value for its shareholders.
In fact, H-P has undertaken a good many steps for this shift including a blend of research and development, partnerships, and acquisitions.
Recently, the company announced that it will acquire networking company Aruba Networks Inc. for $2.7 billion.
The purchase of Aruba should help H-P improve its role in the wireless local area network (WLAN) market, as more and more companies allow their employees to access work systems through their personal wireless devices. Once the deal closes, Aruba will function as a subsidiary of Hewlett-Packard.
The current separation of the units comes at an opportune moment for the company as it is trying to diversify its revenue base from its legacy PC and printing operations to the enterprise segment, which consists of computer servers, data storage devices, networking, software and services.
It is worth noting that the PC and printing segment contribute more than 50% of H-P’s revenues and the rest come from Enterprise Group, Enterprise Services, Software and HP Financial Services. Nonetheless, the PC and printing business contribute less in profits.
Bottom Line
We believe that the biggest benefit that H-P will derive from splitting its two business units will be the ability to focus on the core fundamental business.This will enhance shareholders’ value. The separation will also enable the company to turn around Enterprise Services and strengthen its go-to-market capabilities.
Also, the split is intended to notify shareholders that the company will attempt to tap into high-growth businesses such as the 3-D printing business that will hopefully return sustainable cash flow and earnings multiples for years to come.
We believe that H-P’s traction in the cloud, security and Big Data segments will be growth catalysts, going forward. The split would enable a customized approach to two different kinds of businesses, which might not have been possible as a single entity. Nonetheless, H-P’s enterprise segment will now compete directly with International Business Machines (NYSE:IBM) and Oracle (NYSE:ORCL), which means that a lot still depends on execution.
Hewlett-Packard carries a Zacks Rank #3 (Hold).
A better-ranked stock in the technology sector is Cirrus Logic Inc (NASDAQ:CRUS)., sporting a Zacks Rank #1 (Strong Buy).