By Robert McMillan
Later this week, Hewlett-Packard Co. will disclose for the first
time the financial outlines of its successor companies: HP Inc.,
which will sell PCs and printers, and Hewlett-Packard Enterprise, a
supplier of corporate technology.
Separating the balance sheets is just the beginning of a complex
surgery. Scott Spradley, chief information officer at the current
H-P, soon will hit the start button on a global network of command
centers designed to keep operations running amid an arduous
four-month-long and $1.8 billion restructuring effort.
Computer systems are the lifeblood of H-P, and Mr. Spradley's
job is to ensure that his team of surgeons can safely divide a
company with $111.5 billion in annual revenue, spanning 600
locations in 170 countries.
That means cloning 2,600 internal computer programs--including
human resources systems, supply chain forms--separating their data
and restarting them.
If anything goes wrong, it could stall the split, and that would
undermine H-P's credibility in investors' eyes.
If the company's computer systems fail, H-P employees might not
get paid, its customers might not be able to order, and its
partners could be unable to communicate.
Mr. Spradley, who favors tortoise shell glasses and silver cuff
links in the staid world of H-P, doesn't easily sit still. He
clicks his pen restlessly as the milestones drone on, suddenly
jumping to a white board to explain a data migration plan. There
have been a lot of bugs, but things are smoothing out. "We're a
second half team," he adds. He is a key executive on a 500-person
Separation Management Office team.
Its seemingly endless checklist must ensure the new companies
can comply with Swiss workplace laws, file legal documents for new
companies in China, post new logos on websites. It also must
physically separate employees from the two companies while
simultaneously allowing them universal access to their Palo Alto,
Calif. offices.
"This is the creation of two new, equally-sized companies," H-P
Chief Executive Meg Whitman said in an interview. "You can't hire
people to tell you how to do this because, honestly, it has never
been done before."
It isn't the first time H-P contemplated a split. In 2011, Ms.
Whitman's predecessor, Leo Apotheker, floated the idea of spinning
off H-P's PC division, a move that rival International Business
Machines Corp. had made nearly a decade earlier. Mr. Apotheker
announced the plan during a day that included an earnings miss, a
plan to quit smartphone and tablet businesses, and the $10.3
billion acquisition of Autonomy, a British maker of analytics
software.
H-P's stock dropped 20% the following day.
Three months later, Ms. Whitman sat in Mr. Apotheker's former
office and said there was "no question" H-P was better off as one
company.
That view began to shift in early 2014. Ms. Whitman had pledged
to cut 55,000 positions, soothed anxious investors and boosted
employee morale, but she hadn't expanded the company's revenue.
In a series of meetings in Palo Alto, Calif., H-P executives
tossed out ways to improve their lines of business. Where would
printer ink be in five years? Laser printers? Consumer PCs?
Servers?
The group quickly realized they needed to adapt two different
strategies to expand the company's consumer and corporate
businesses.
With limited prospects for growth, the Personal Systems Group
could use the printer business' high profits to spin cash while
tiptoeing into new markets such as 3-D printing or virtual reality
hardware.
The Enterprise Group, in contrast, played in a fast-changing
market where cloud computing and crumbling margins threatened the
company's core hardware business. If H-P could become a one-stop
shop for corporate hardware, it could boost margins by selling
software for security and private cloud computing.
"We keep coming back and saying, the businesses are strong
enough, the leadership team is good, the operating model is in
place, they can stand alone as two Fortune 50 businesses," recalled
H-P Enterprise Group General Manager Bill Veghte. "And so, the
fascinating thing is, we started having discussions with the board
about it."
Over the next six months--and during 17 meetings in total--H-P's
board mulled various proposals.
"It became clear, as we looked at various alternatives and
scenarios, that separating into two still very large but more
focused and more agile companies would allow for us to accelerate
the ability to create value for customers, to compete, and
obviously create value for shareholders," said Patricia Russo, a
board member and a former CEO of Alcatel Lucent.
Another factor: In October 2013, Ms. Whitman lifted H-P's share
price nearly 10% by saying she expected revenue to stabilize in
2014 and the business world grow in 2015. By late 2014, though, it
wasn't happening. H-P's 2014 revenues were down from 2013, and the
slide has continued during the first two quarters of fiscal
2015.
"I think she was looking to do something--remember, H-P almost
merged with EMC Corp.--because she viewed the status quo, no
revenue growth, ongoing cost cuts, was unsustainable," said Toni
Sacconaghi, a computer industry analyst with Sanford C. Bernstein.
"Leo [Apotheker], to some degree, came to the same realization, but
he was more reckless."
Mr. Apotheker disputed that characterization. "The plan was to
execute the split in roughly 12 to 14 months," he said. "There was
a real plan behind it."
Still, demand for PCs is shrinking and H-P's printer group
revenue fell 7% year-over-year during its most recent quarter.
H-P's server business is under pressure from mobile devices, cloud
computing, and low-cost servers from Asia. Revenue in Mr. Veghte's
enterprise group was down 1%. In enterprise services, revenue
dropped 16%.
"While I think the split is likely to be value-creating for H-P
shareholders near-term, it is not a magic solution to H-P's revenue
growth challenge and difficult end markets," Mr. Sacconaghi
said.
Write to Robert McMillan at Robert.Mcmillan@wsj.com
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