NQ Logic

Technology | Strategy | Consulting

HP's New Business Strategy

It was a busy day for Hewlett-Packard, the previous Thursday, August 18, 2011. Within the same day, HP announced that the company would
  1. Acquire the British enterprise information management software company, Autonomy Corporation plc, for U$10.3 billion in cash (or U$42.11 a share), a 64% premium from their last trading stock price.
  2. Evaluate strategic alternatives for their Personal Systems Group (PSG), including the separation of its PC business into a separate company through a spin-off or other transaction.
  3. Name former IBM John Visentin, as executive vice president of HP Enterprise Services, replacing the retiring Tom Iannotti.
  4. Shut down operations for webOS devices and explore strategic alternatives for webOS software.
  5. Discontinue operations for the TouchPad and webOS phones.
  6. Revise full year FY11 revenue guidance to U$127.2-127.6 billion, down from its previous estimate of U$129-130 billion.

During the FY11 Q3 financial result conference call that followed, HP’s CEO mentioned that the day's news are about transforming HP for the future:
… I'm taking ownership for these decisions and investments with a focus on driving actions that deliver value for shareholders as we shape the new HP.” — Léo Apotheker, HP CEO [Aug 18, 2011]
Since the Q3 announcement and despite higher quarterly earnings HP’s stock plunged by 20%. More significantly the company's stock price fell close to 45% since the appointment of Léo Apotheker as HP’s new CEO on September 30, 2010.

What Is HP Today?

HP is one of the world's leading ICT company in terms of net revenue, U$126 billion in FY10, up 10% from previous year. The non-GAAP operating profit for the same FY10 was U$14.4 billion. With over 324,000 employees worldwide as of October 31, 2010, and over 1 billion customers around the planet, HP is the first ICT company that first crossed and stayed above the symbolic U$100 billion in yearly revenue since 2007.

The Palo Alto-headquartered company is ranked as number 28 in the 2010 Global Fortune 500, second after the South Korean Samsung Electronics (ranked # 22) in the ICT category. The company ships more than 1 million printers per week, 48 million PC units annually and one out of every three servers worldwide. Similarly to Microsoft, HP is a leader in both the consumer and the business segment at the same time.

After Agilent Technologies' spin-off from HP in 1999 as an independent company (a U$8 billion revenue company with 47,000 employees), HP decided to grow by acquisition at a frenetic pace. HP announced its merger with Compaq in September 4, 2001 for U$25 billion in stocks. This move was considered at the time as the biggest merger ever in the ICT industry and the most risky acquisition. It has since then never been topped, and is now a study in business schools as a best practice post-merger integration execution.

Mercury Interactive in 2006 (for U$4.5 billion), EDS in 2008 (for U$13.9 billion), 3Com in 2009 (for U$2.7 billion), Palm in Apr 2010 (for U$1.2 billion), 3PAR in Sept 2010 (for U$2.35 billion), ArcSight in Sept 2010 (for U$1.5 billion) are the key multi-billion dollar acquisitions from the Palo Alto company.

Source: HP Financial Results [Aug 2011]

But on August 6, 2010, CEO Mark Hurd resigned, joining subsequently Oracle as Co-President. Cathie Lesjak assumed the role of interim CEO, and on September 30, 2010, Léo Apotheker (ex SAP Co-CEO) became HP's new CEO and Ray Lane (ex-Oracle President and COO) was elected to the position of non-executive Chairman at HP.

In losing Mark Hurd, the H.P. board failed to act in the best interest of H.P.’s employees, shareholders, customers and partners. The HP board just made the worst personnel decision since the idiots on the Apple board fired Steve Jobs many years ago.” — Larry Ellison, Oracle CEO [Aug 9, 2010]

Since then, HP and Oracle have turned from close partners to bitter antagonists fighting at every possible level, including legal.

HP by the Numbers

Based on the FY11 Q3 earnings report, HP's revenue is from four major business units: Services (29%), Enterprise Servers, Storage and Networking (17%), Personal Systems Group (31%) and Imaging and Printing Group (20%). The remaining 3% are from HP Financial Services, and HP Software.

Source: HP, FY2011 Q3 (Aug 2011)

Personal System Group (PSG) and Imaging and Printing Group (IPG) together represent 51% of the company’s revenue but are low gross margin business (PSG has 5.9%), or are shrinking fast (IPG growth -10% Q/Q). On the contrary, the other components of HP business (Storage, Servers and Services) are growing moderately (single digit growth) and have more motivating margins (around 15%).

Source: HP, FY2011 Q3 (Aug 2011)

With already small and ever decreasing margins, and tremendous competition from Asian manufacturers, HP's core business (PC and Printer) is less attractive. The growth by acquisition has reached its limits, and does not provide enough consolidation upside and cost cutting benefits to outgrow competitors.

Source: Gartner (July 2011)

The economic crisis combined with the introduction of intelligent devices from competitors in the consumer segment (smartphones and tablet PCs) have forced HP to take action.
Secular trends impacting our PSG business as consumers are changing the use of the PC. The tablet effect is real and sales of the TouchPad are not meeting our expectations.” — Léo Apotheker, HP CEO [Aug 18, 2011]

In this new "Post-PC" era, Smatphones are expected to take over the PC world in 2012. The trend seen in Japan years back is now coming to wash the shore of the world anytime soon.

Source: Morgan Stanley (Nov 2010)

HP needed to shift its strategy and the appointment of Léo Apotheker was the answer.

HP's New Strategy

At an HP analyst summit this March, Léo Apotheker outlined the new direction that the company should take to recover fat margins and past stock price. He shared a new strategy that relies heavily on analytics software and being a cloud platform for consumer and business segments. HP’s new vision is to provide seamless, secure, context-aware experiences for a connected world.

“As an executive who has spent most of my career primarily in software, it is a world I know well.” — Léo Apotheker, HP CEO [Aug 18, 2011]

With a forecast for worldwide IT spending at around US$3.7 trillion in 2011 as companies migrate to the cloud and spend more on software and IT services, it is clear that the money is in the cloud itself, services sitting on the cloud but not in the devices that reach the cloud.

Source: Forrester (Apr 22, 2011)

Léo Apotheker sold his vision to the HP board last August, and after three quarters of observations he is now executing his strategy. Placed in this context, all six announcements mentioned in the introduction of this entry make sense and should have been welcomed by the ICT insiders and financial analysts for the following reasons:
  1. HP is spinning off a low margin PC business to generate cash for future software acquisitions. Printers, though it is still an interesting category with descent margins thanks to the ink cartridges, could be the next business to be divested.
  2. John Visentin will bring the know-how and culture from the leading competitor (namely IBM) in the cloud computing and services business.
  3. Both webOS and TouchPad experiments are shut down since it no longer fits in the new 'Cloud & Software' HP strategy, and should be divested.
  4. Autonomy acquisition makes sense since HP would like to be the leading company in the 'Cloud & Software' market. For years the British company has been a reference in unstructured and structured data search and will represent the core of the next HP revenue opportunity.

What Might Come Next?

After a difficult 12 to 18 months anticipated spin-off exercise, the Personal Systems Group (PSG) could eventually be traded on the NYSE. With U$40.7 billion in revenue (FY2010), the new subsidiary would still be in the Global Fortune 500 list. This new company (Michael Dell sarcastically called it Compaq) could live independently from HP or be sold to any PC manufacturer or another player after a few months of operation (same as Motorola Mobility did recently).

The Imaging and Printing Group (U$25.7 billion revenue in FY2010) could be next in line if the PSG divestment do not bring enough cash, or if margins and growth start to decline as well.

Depending on HP's financial health (today it only has U$12.9 billion in cash before the Autonomy acquisition), more acquisitions in the software arena is highly likely.

WebOS could be sold for its patent portfolio (+1,500 patents) to one of the big three mobile players (Apple, Google or Microsoft), or to any underdog mobile manufacturer with some independent aspirations, such as HTC, ZTE or Huawei, if legal concerns and financial appetite align.

Source: HP TouchPad

The TouchPad incident (49 days of existence) and the following fire sale fiasco should be forgotten as a mere distraction. Although, at the discounted U$99 price, HP found what the mass market wants to pay for a tablet. The tablet PC will now be a battle between the leader Apple’s iPad (74% market share in 2011), newly self appointed contender Motorola-Xoom-Google, and the hopeful Amazon future tablet.

In short, HP has definitely turned Mark Hurd’s page and moved away from the post-PC debate to go back to its core business: helping its business customer. If Léo can do the impossible turn-around that Lou did at IBM, HP could be back to business…

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