United we stand still, divided we fall: a modern dilemma faced by many lumbering giants of the tech sector, as businesses begin radically stripping back and separating in order to keep a competitive edge over more nimble competition. In the tech industry there are few giants bigger than Hewlett Packard, who this week announced a sudden split. The company will be cleaved into two businesses, one focusing on enterprise solutions (Hewlett Packard Enterprise) and the other selling consumer PCs and printers (HP Inc). Recent news has also seen perpetually-troubled Yahoo announce plans to shed part of its Indian workforce, eBay and Paypal go their separate ways, and the earnings of Korean behemoth Samsung take a dramatic swan-dive.
This is not the first time HP has suggested a split, and speculation about why the idea has resurfaced has been extensive. The aborted plan to split in 2011 was in the midst of a shaky economic recovery, a period where investors value the safetyof large corporations. The recent stability of the market may have presented an opportunity for HP to start taking risks. In a presentation to investors, HP execs claim the split will create “nimbler and more simple organisations”, which is at least true of HPs headcount, as the company announced the redundancy of 55,000 employees (that’s more than the entire workforce of Google).
Stephen Gandel of Fortune dismisses the plans as badly-thought-out financial engineering. He claims HP is sacrificing the economy-of-scale advantages of a large corporation for short-term increases in stock-prices. We saw similar effects last week, when shares in eBay grew sharply by 7.5% after announcing plans to spin off PayPal. Gandel argues that in the long-run, two mini-HPs may actually be worth less than HP’s current $69 billion market value.
It is likely HP Enterprise will face fierce competition from EMC, IBM and Oracle, despite profit margins far below those companies. Currently, it’s not clear how HP’s breakup will benefit its users or the company, although the decision of HP CEO Meg Whitman to chair the Enterprise business may give a good indication of who her favourite child is. Is the future of HP ‘Halved Potential’ or ‘Huge Profit’? Regrettably, it’s unlikely to be ‘Human Progress‘.