HP returns to breakup plan it shelved three years ago

Computing giant Hewlett-Packard is close to breaking itself into two companies, following a months-long process during which it explored the sale of several business units, including its PC and enterprise services unit, to outside companies.

The announcement that it will split into two companies, one devoted to personal computers and printers, to other to corporate computing and IT services, could come as early as Monday sources briefed on the plan tell Re/code. HP will discuss the plan in detail at a meeting with financial analysts in San Jose, Calif. on Wednesday.

An HP spokeswoman had no comment. The plan was first reported by The Wall Street Journal.

Meg Whitman, CEO of Hewlett-Packard
Justin Sullivan | Getty Images
Meg Whitman, CEO of Hewlett-Packard

HP's CEO Meg Whitman will be head up of the enterprise IT company, and will be chairman of the PC and printing company. Dion Weisler, head HP's printing and PC group, will be CEO of that company and Patricia Russo, an HP director, will be chairman.

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The transaction will be structured as a distribution of shares to current HP shareholders.

Here's why this is happening: HP has in recent months sale of several business units without success, sources tell Re/code.

In a process led by Morgan Stanley, HP approached both Lenovo and Dell about the possible sale of its $32 billion (2013 sales) PC operation. In both cases it was rebuffed.

In another case, HP approached two India-based companies, Wipro and Infosys about the possible sale of its $28 billion IT services unit, known as Enterprise Services. Again it was rebuffed.

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In a third case, it approached IBM about the sales of its $1.2 billion Business Critical Server business, but was turned down.

Essentially every business unit within HP was evaluated for possible sale or divestiture, in a process known as "asset optimization." It's unclear how far HP got in talks with any of these outside companies, or whether or not they reached a formal phase.

The move comes as Whitman is beginning her third year as HP's CEO, and past the mid-way point of what she has described as a roughly five-year process to turn the company around.

HP also recently explored a strategic merger with data storage company EMC that would have created a $130 billion technology giant. In contemplating that proposed merger, HP was interested most in VMWare, the cloud software company which EMC controls.

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The merger talks failed mainly because EMC wanted a higher valuation than HP was willing to pay. One other reason the talks may have failed was that HP and EMC viewed the declining PC and printer divisions as a drag on the combined operations, sources say. A split into two companies might set up a scenario down the road where HP and EMC re-open those merger talks combining the enterprise company with EMC.

The move would be a return to a strategic plan that HP's prior CEO Léo Apotheker proposed in 2011, but which Whitman shelved after she took over as CEO in September of that year.

Apotheker, a former co-CEO of the business software company SAP, had sought to jettison HP's PC business and transform the company into one more devoted to software. The lynchpin of this plan was the $10 billion acquisition of the British software firm Autonomy. HP has since conceded that it overpaid for Autonomy by about $5 billion. HP's board fired Apotheker in the wake of that deal and tapped Whitman as CEO.

The split raises numerous questions. How much cash will HP put into the PC company? "Does this signal that HP is really going to go for it in PCs against Apple and Dell and Lenovo," says analyst Patrick Moorhead, head on the research firm Moor Insights and Strategy. "Apple really owns the home premium experience in PCs, and everyone else is fighting over what's left, and that's all a very low-margin business."

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Another important question, Moorhead says: How will two companies deal with the loss in scale. One reason Whitman shelved Apotheker's PC-spin off plan was, as she argued at the time, that it gave HP's the size and scale to help it negotiate with component suppliers like Intel which supplies it with microprocessor chips, and Seagate, which supplies it with hard drives. "The two smaller companies will have less negotiating power than the combined HP does now."

Once the global leader of the personal computer business, following its combination with Compaq Computer in 2002, HP has since fallen behind China's Lenovo into the number two spot in the PC market.

By Arik Hesseldahl, Re/code.net.

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