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.
This would work because there are much less expenses in the solutions and services side of HP’s business. By minimizing their expenses and providing great solutions, HP would return to profitability and once again be a company that can begin their path to growing earnings in the right direction. It would be like pressing a restart button with an entirely new vision for the corporation.
This may seem as a harsh breakdown of the company, but I consider this to be a company not worth an investment. I would, however, be an investor of their solutions and service side because regardless of their inability to make money on products, they are incredibly efficient at making the products work.
This proposed breakup plan of HP is very similar to what SAIC, Inc. (NYSE:SAI) is planning on doing in the near future. They are separating their solutions side, which provides science and technological services to the national security, engineering, and health industries, from their services side, which provides systems engineering, financial analysis, and programming support. They, like HP, have been having trouble keeping shareholders happy. This split is expected to propel each individual company higher, but I see them selling off the services side to focus on government contracting since it is becoming a battleground of a sector. On top of this, SAIC had some troubles with fraud in which they owed the state of New York $500 million. The split should also result in a name change for each newly formed company. The name change would help people forget about the damage caused by SAIC and allow them to move past it. HP could use this outline to split up, sell off units they are not doing well in, and change their name to give themselves a brand new image. This can save Hewlett-Packard. Until then, I’m initiating an underperform call for HP on CAPS.
The article Neil Sedaka Never Met HP originally appeared on Fool.com and is written by Joseph Solitro.
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