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HP signals dealmaking is on the cards

Published:Wednesday | October 8, 2014 | 10:00 AM
In this August 21, 2012, file photo, the Hewlett-Packard Company logo is seen outside the company's headquarters in Palo Alto, California. Hewlett-Packard is splitting itself into two companies. File

By Sarah Mishkin in San Francisco and Richard Waters in New York

Hewlett-Packard has indicated that it is considering further dealmaking, as it split its PC and printer arm from its software and corporate hardware business.

On Monday, the United States (US) technology conglomerate said it would split in two and give existing HP shareholders a tax-free distribution of shares in a new company.

However, Cathie Lesjak, chief financial officer, also disclosed that the group has material non-public information that is "not expected to be resolved before the end of Q4" - which analysts interpreted as information about a potential acquisition.

Ms Lesjak also noted that the new Hewlett-Packard Enterprise business, which will contain HP's cloud and big data offerings, was being set up with significant net cash, and an eye towards investment.

"They're really focused on taking the firepower of their balance sheet plus the cash flow that they generate to really go after growth opportunities both in organic and inorganic ways," Ms Lesjak said.

Analysts suggested that the split could revive past talk of mergers. Last month, it emerged that data storage group EMC, under pressure from an activist shareholder, had held talks with HP about a sale of its business earlier this year. Those discussions broke down, but Kate Hanaghan, research director at TechMarketView, suggested HP's new structure changed the situation.

"With the PC business attached, EMC shareholders will simply not have accepted becoming part of Hewlett-Packard," she said. "Now, you have something that looks quite different and there might be a revival of those talks to bring those companies together."

Maynard Um, analyst at Wells Fargo, suggested that the company's material non-public information may be related to continued talks with EMC.

Another possibility is that the struggling PC and printer unit could look for a sale to a larger electronics company, Ms Hanaghan added.

Under the terms of the company's split, Meg Whitman, chief executive, will become CEO of Hewlett-Packard Enterprise. Dion Weisler, an executive in HP's printing and personal systems business, will become chief executive of HP Inc, the PC and printer focused division.

By dividing the group up in this way, HP will end a controversial 13-year chapter in its history, which began when Carly Fiorina, then chief executive, agreed to buy Compaq Computer, one of the largest US PC makers. Dissent from members of the HP founding families almost led to a rejection of the deal by shareholders. Even when the merger was completed, it was plagued by years of integration problems at the PC division.

Ms Whitman has since succeeded in stabilising HP's finances and revived flagging shareholder confidence via stringent cost cutting. However, revenues have contracted, and she has struggled to bolster sagging competitiveness in all four of the main business divisions.

Based on last year's revenues, both parts of HP would have ranked among the 50 largest US companies, according to the annual ranking produced by Fortune.

HP's PC and printer businesses produced revenues of US$55.9bn in its last financial year, almost identical to the combined US$55.7bn of its enterprise computing, services and software divisions.

Last quarter, HP's PC division ended two years of falling shipments, but growth in the business was markedly slower than those of rivals Dell and Lenovo, the Chinese group that recently overtook HP as the world's largest seller of PCs by volume.

On Monday, the company also announced that a larger number of posts would be made redundant as part of its longer-term restructuring, increasing the total potential staff reduction from 50,000 to 55,000.

Additional reporting by Murad Ahmed in London.

(c) 2014 The Financial Times Limited