Hewlett Packard’s Smarter Corporate Split
Hewlett Packard, after spanning eight decades of growth through mergers, joint ventures and global expansion, announced a corporate split in 2015 creating two fortune 100 companies namely Hewlett Packard Enterprise and HP Inc. Hewlett Packard Enterprise will be comprised of HP's enterprise technology infrastructure, software and services businesses, while HP Inc. will contain HP's personal systems and printing businesses and will retain the current logo. Three major reasons attributed to splitting HP into two companies. 1. Creating a streamlined business structure with two smaller and more agile companies. 2. Creating financial independence and more investment opportunities. 3. Enhancing the innovation capabilities.
Hewlett-Packard, like many other successful information technology and computer firms, started in a garage in California in the mid 1930’s. Despite its humble origins, this company achieved global recognition within a short period of time. HP went global in 1959. HP has been a leader of innovation in computers, printers, and digital imaging. HP has faced some of the formidable rivals in respective businesses like IBM, Oracle, Canon, and Dell. In 2002, HP acquired its rival Compaq, and in 2005 it acquired Snapfish and Scitex Vision. Albeit these acquisitions were connected to the core computer and network businesses in terms of market and technology relatedness for realizing synergy and scale, the new additions were neither improving returns to assets nor having much impact on the stock market return yield under one large corporate structure.
Although mergers and acquisitions appeared attractive to cut costs as the computer industry reached the maturity phase (in 2000), they were not helping the companies to sustain the pace of innovations. From 2010, HP’s business lines and the computers, electronics and instrumentation industries in general were showing signs of decline. For HP this was a critical time as the associated industries were exhibiting patterns of technological convergence and fast becoming digital, mobile and internet driven. HP had 7 different CEO’s in a relatively short span of time experiencing a leadership crisis. HP as a whole was suffering from rising bureaucratic cost and increases in investment risk. They lost their lead in innovation as well as market share to new entrants. Stock price of HP was experiencing volatility despite steady dividends from the company. The lack of focus, lack of customer responsiveness, slow innovations and indifferent stock markets were causes of concern.
HP’s New Game Plan
In 2015, with a new CEO Meg Whitman, Hewlett-Packard has initiated a renewal and restructuring of its corporate strategy and organization design to meet technological changes and pursue the long-term interests of the whole company and its shareholders. Reacting to the shareholders, the new CEO Meg Whitman said, “Being nimble is the only path to winning.” What she meant by this statement is that the HP plans to divide and become smaller in order to make the businesses more efficient, have a quicker market response time, and lower the operating costs. HP split into two publicly traded companies in November 2015. HP Inc. is the personal systems and printer business. HP Enterprise is the software, server and IT services business. HP Enterprise plans to team with Microsoft for cloud storage systems for private business.
The split is intended to accomplish several things benefits in the future. First it is hoping to have the flexibility to respond to the market quickly and regain competitive advantage. It wants to increase innovation and market growth for each division. It hopes to streamline the business and lower the cost and downsize top heavy management. HPE gained a $2.7 billion cost savings within one year after the split. With each business achieving focus and efficient resource allocation, split units are expected to increase the returns and achieve more innovations. Split units will have more autonomy to align with firms possessing necessary competences or leverage their capabilities to create innovations. Under shoaling configuration split units will complement each other to generate more value to the shareholders.
The stock price movements of HP Inc. (HPQ) and HPE before and after the split in 2015 suggest both companies’ stocks have appreciated in value.
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