HP must be broken upDecember 11, 2012: 12:35 PM ET
The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, and Abbott Laboratories, La Monica does not own positions in any individual stocks.
My first reaction upon hearing the rumor Monday about Carl Icahn supposedly considering a stake in Hewlett-Packard was this: What took him so long?
HP (HPQ) has been a slow-motion train wreck for a while now. Shares have been among the worst performers in the Dow for the past three years. But for all that's wrong with HP, it's not in danger of going away anytime soon. This is a company that generated more than $120 billion in revenue in its most recent fiscal year and has $11 billion in cash on its balance sheet.
So you'd think that Icahn or another activist investor would be eager to make an investment and push CEO Meg Whitman and the company's board to reconsider one of the few strategy decisions that former CEO Leo Apotheker got right during his Hindenberg-esque tenure at the company. Apotheker intended to spin off the PC business. That's the right call. HP needs to be broken up in order to get back on track.
HP dismisses such talk. In a written statement, the company said: "HP has some of the most valuable franchises in the technology industry. There are many advantages in one organization, including branding, go-to-market, supply chain, procurement scale, effective leverage of functional costs, and collaborative R&D efforts. HP is committed to keeping our businesses and assets together. Our customers and partners tell us that's what they want."
That may be true. But HP has to think about its investors in addition to its customers. HP has long sought -- and failed -- to be like IBM (IBM). It's why I keep calling them Little Blue and IBM Lite. But if HP truly wants to emulate IBM, it needs to get rid of low-margin hardware like Big Blue did.
IBM sold its PC business to China's Lenovo (LNVGY) in 2005, and that worked wonders for both companies. IBM has been free to focus more on software and services while a focused Lenovo steadily gained market share. It even vaulted ahead of HP to become the biggest PC maker in the world earlier this year.
HP seems reluctant to face reality and acknowledge that it has to slim down. Whitman put the kibosh on Apotheker's spin-off plan shortly after she took over as CEO. So it seems unlikely that the company would revisit that proposal unless there was significant shareholder pressure.
Enter Icahn. Or Bill Ackman. Or Dan Loeb. Or Nelson Peltz. Or scores of other hedge fund types who invest in companies with the notion of shaking things up.
If HP's PC business was free to operate independently via a spin-off, the company might be able to finally develop a successful mobile strategy. It would be able to focus on what consumers want and not worry about being a part of a larger one-stop shop, cross-selling strategy for corporate IT departments.
HP's printer division could be attractive in a takeover situation. The problem with the division is that sales and profits are falling, but it's still a cash cow with robust operating margins of 22%. A company like Xerox (XRX) could buy it. A merger of HP's printer unit with Lexmark (LXK) -- ironically, a spin-off of IBM in the 1990s -- might make sense too.
What would be left of HP after spinning off or selling the PC and printer business? A smaller and more nimble company that's completely focused on the four S's of technology: servers, storage, software and services. The virtue of this approach would be that HP could cater almost exclusively to the so-called enterprise market of big business.
Not having to fret about what Apple (AAPL), Google (GOOG) and Microsoft (MSFT) are doing in smartphones and tablets would be a blessing for HP. Consider that IBM's stock is less than 10% off its all-time high. Does anyone honestly think Big Blue would be doing that well if it was still fighting it out in the brutally competitive consumer gadget scrum?
A break-up could be a boon for all the disparate parts of HP. There's a good track record of companies performing better once they are no longer part of an unwieldy conglomerate.
Heck, look at my own parent company. Time Warner (TWX), which was targeted by Icahn a few years back, ultimately decided to spin-off Time Warner Cable (TWC) and AOL (AOL). All three stocks have outperformed the S&P 500 since AOL was spun-off in November 2009. (Time Warner Cable was fully spun-off in March 2009.)
HP even has its own experience spinning off units, having shed its measurement equipment unit Agilent Technologies (A) back in 1999. As the chart below shows, Agilent has been a much better performer during the past few years than HP.
Of course, the fact that no corporate raider has come knocking (or banging) on HP's door might be a bad sign. The recent $8.8 billion writedown of Autonomy and resulting accounting controversy surrounding that purchase could be scaring off hedge funds, too. If the barbarians aren't seeing value in HP at a mere 4 times fiscal 2013 earnings estimate and 0.25 times revenue forecasts, then when will they?
I still think an activist will eventually make a play for HP. But that's not a good reason for the average investor to buy the stock just yet.