After the big news this morning about HP splitting in two pieces, I wanted to put in my two cents. I have followed HP for a long time, but have not been close to it for years. So I have a lot of opinions about HP, its future, its management team, its winding strategic path and its pattern of M&A, but I will avoid those for today’s post. Instead, I just want to cover the idea of splitting a company in two.
Divestitures and spin-offs are something that the Street loves. Corporate Finance classes teach the idea of focused companies, it is as close to a religious principle as you can find in MBA 101. And as Joel Grenblatt points out in his great investment book, investing in spin-offs are usually a great investment strategy. The idea is to let investors pick their risks. If you want a low-growth, high dividend company you will soon be able to buy one piece of HP (HP Inc.), but if you prefer higher risk, faster growth companies, you will soon be able to buy the other piece (HP Enterprise). This widens the scope of investors who can participate, capturing both growth and value investors. And not for nothing, it is generally easier to model, follow and conduct checks on smaller companies, which means it is easier for the analysts to do their work.
But what makes sense to the Street often conflicts directly with the reality of running a company. Put simply, splitting a company is hard. Let’s just say this is a subject with which I am a little familiar. There are so many fine points that have to be considered – from large things like who owns the brand and who owns the patent portfolio, to the small things like who gets which office furniture. Done poorly, it can wreck both the parent and spin-off. But doing it well, requires a huge spend on lawyers and consultants and accountants, not to mention employee distraction time.
When HP first suggested doing something like this a few years back, customers revolted, as many enterprise buyers were concerned that they would not get support from both sides of the company. If you bought your servers and desktops from one business, but purchased those through a consulting contract with the other side of the company… well those things cause confusion. I think the whole computing market has shifted a lot since then, so these concerns are less pressing, but I imagine the HP salesforce is going to be one of the trickier areas to split up. Manufacturing is also going to be easy. The PC/printer side (HP Inc.) has massive scale (e.g. a top 3 Intel customer), so the other side of the business will soon lose access to that volume pricing. My favorite spin-off issue is IT. How do split the IT services of a company? Often, the way this is done is for one company to provide transitional services to the other for some period of time until the other side gets its own operations in order. The irony is that HP has for years built a business providing outsourced IT for other companies. Now one side of the business is going to get to ‘enjoy’ what its customers have endured for years.
Now it bears mentioning, that HP has done this before. Most notably with Avago their chip business, and Agilent their test and measurement business, which recently split itself again. So HP has experience at doing this. I read through some of the management presentations and analyst commentary this morning about the transaction, and I got the sense that management had clearly thought through many of these issues. I really doubt that they have a full plan, because you need to tell everyone about that, but it did sound like they have some of the key issues sorted out.
This is an old company with many large acquisitions layered on. They say it will take a year to complete the spin-off, and people who have done this sort of thing agree that is a rapid timetable. They have a lot of work to do.
Nonetheless, I suspect this is going to prove a difficult transaction. Maybe not for investors, but definitely for employees.