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Hewlett-Packard's split up won't save Hewlett Packard

Aaron Pressman

Hewlett-Packard’s (HPQ) plan to split in two marks the latest move by aging tech giants to throw off their original core businesses and hope for growth in new markets. So far, there’s not much evidence that it works.

HP said it plans to separate its personal computer and printer unit in a tax-free spin-off to shareholders with Dion Weisler, who ran the unit previously, appointed as CEO. Current CEO Meg Whitman will become chairman of the new PC business and head the remaining enterprise software and services group as CEO.

The news follows eBay’s (EBAY) plan to spin-off its PayPal unit and IBM’s (IBM) recent sale of its server business to Lenovo (0992.HK). EMC’s (EMC) possible sale or spinoff of its remaining stake in VMware (VMW) is still in the rumor stage despite (also rumored) failed merger talks with HP. Some have even called for a Microsoft (MSFT) split.

Generally speaking, spinoffs have a pretty strong track record. Many studies have found spinoffs outperform the market and the Guggenheim Spin-Off ETF (CSD) has doubled the gain of the S&P 500 over the past five years.

But this latest wave of tech company’s shuffling the deck chairs doesn’t have the same pedigree. Motorola (MSI) and SAIC (SAIC) have lately split off units with uneven results. Better to go the sale route, as IBM (IBM) did in 2005 with its PC operations, or Nokia (NOK) with its phone unit.

There may be a fairly simple explanation. Tech companies often try to sell undesired units before going the spin-off route, as rumors have it that HP did in this case. And if there’s no savvy strategic of financial buyer, the public market is seen as the less-than-savvy buyer of last resort.

Also, tech companies do business in fast-changing markets, where the value of yesterday’s profit machine can quickly shrink away to nothing. Motorola’s spun-off phone unit was a loss-making machine while public and after Google (GOOG) bought it. It’s now in Lenovo’s hands. Since SAIC spun off its commercial IT services business and changed its name to Leidos Holdings (LDOS), the stock has dropped 20%.

And at HP, Whitman is still looking for real breakthroughs from her focus on new markets, like cloud computing and software services.

Last quarter, HP showed overall revenue growth for the first time in 11 quarters, but all of the gain was in the aging PC business, boosted by a short-term upgrade cycle from the death of Windows XP. Over the past three fiscal years ended in October, HP’s PC and printer revenue has dropped from $66 billion to $55 billion, while sales at the rest of the company dropped from $60 billion to $58 billion.

Thanks to the Windows XP boost, analysts expect HP will garner revenue of $57 billion for PCs and printers in this fiscal year, a modest 3% gain, while all other revenue declines to $54 billion, according to FactSet.

Wall Street is still waiting for the promise of some of Whitman’s promises to deliver. A 3D printer initiative and the Project Moonshot line of servers sound good, but haven’t helped the bottom line yet. Back in 2012, Whitman was promising a new line of tablets would save the day – that boost never showed up.

The new enterprise company faces fundamental challenges even without the shrinking PC business, the IT hardware analysts team at Credit Suisse warned in a note on Monday about the break up. "The issue around sustainable revenue growth continues to be a drag," they write. Servers sales are under pressure from cheaper competitors, cloud offerings lag other players and HP's complete software stack offering is "weak," they note. 

Still, in the short-term, investors are celebrating Whitman’s break-up. Shares of HP gained 5% to $36.80 in pre-market trading on Monday, the highest since…last month. But, to be fair, that recent high of $38.25 was itself the highest since 2011. Since the day before Whitman took over at HP in September 2011, HP’s shares have gained 58%, trailing the 62% rise in the S&P 500 Index.

After cleaning up the balance sheet and generally making some smart cost cuts, Whitman saved HP from a complete melt down. But ever since, she's struggled to find growth. Splitting up the company won't provide any better answers on that score.

(This article was corrected on October 7, 2014 to reflect that SAIC spun off its commercial IT business and changed its name to Leidos Holdings. The spun off company took the name SAIC.)

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