Stock sage Neil Sedaka had it wrong when he claimed “breaking up is hard to do.” Sometimes it is good for the shareholders in a relationship, but more often it is a positive experience for shareholders of a publicly traded company. Many major corporations are involved in several sectors that become more valuable as separate entities. It is for this reason that companies will split themselves up to let the newly formed companies focus on maximizing profit. Also, a company can split off in to units to sell the ones in industries or sectors they no longer wish to be involved in.
Hewlett-Packard Company (NYSE:HPQ) develops computer products, technology, software, and provides solutions and services to consumers and businesses worldwide. Once one of the most powerful technology companies in the world, Hewlett-Packard has become a battleground over the last 2 years. In these two years, they have fallen an incredible 65% from the $48 per share range to under $17. This company has had issues in just about every area that they use to dominate. Take a look at these numbers:
This chart is going in the complete opposite direction from where it should. Gross profit is decreasing, expenses are rising, and net income has fallen into the negatives. If this trend continues, Hewlett-Packard is destined for bankruptcy. Perhaps a breakup could save the company.
As mentioned before, Hewlett-Packard is involved in developing computer products, technology, and software and provides solutions and services to their customers. It is very easy to visualize a split in their company. They can separate the computer products, technology, and software company from the solutions and services company. The operations are differentiated enough and not interdependent on each other for growth. The software company would bring in the higher revenue and the solutions side would be a fraction of that. However, I believe they should then sell off the software side.
HP could sell their computer and software units to Microsoft Corporation (NASDAQ:MSFT). Microsoft has over $65 billion of cash on hand, which they could put to good use. Shareholders of companies like Microsoft and Apple are getting antsy while waiting to see what they will do with their cash. This makes sense for Microsoft because it would increase its share of the PC market and the combined businesses would actually have a fighting chance against Apple. The combined workforce could rival that of Apple’s “geniuses” and developers alike. There are many other suitors for HP, but it makes the most sense for Microsoft to buy.
I see the solutions and service business as something HP’s management is capable of running. Over the last few years there has been nothing impressive to come out of HP’s headquarters other than there impressively disappointing earnings reports. I have concluded that they are just no longer meant to be in the software business unless its to help work out bugs in other companies’ systems. There is a possibility that they would be able handle retaining some of the technology side, but only for the initial idea generation to then sell off to other companies for product development.