HP’s PC Decision Could Pay Dividends


HP’s decision to retain its PC arm will benefit all its businesses, but also comes with some significant risks, says Nicholas Kolakowski

Hewlett-Packard’s decision to keep its PC business rather than spin it off as an independent entity could end up benefitting it greatly — at least, according to the first analysts commenting on the company’s latest move.

“Despite being a commodity business, with a lower profit margin than most of its other businesses, PCs will benefit HP greatly,” Ezra Gottheil, an analyst with Technology Business Research, wrote in a 27 October research note. “TBR believes HP’s PC help drive the business across most of its product lines, from printers to servers to services. They create scale for the manufacture of other hardware, they fill out the portfolio for partners, and they provide entry points for the rest of HP’s sales force.”

On top of that, he added, HP’s initial decision to spin off the Personal System Group (PSG) alienated customers and painted the company as “less predictable and less reliable.” Keeping PSG could help HP rebuild its reputation as solid and reliable, “but that will take time.”

Maintaining brand value

According to HP, a data-driven evaluation revealed PSG as not only deeply baked into all of HP’s lines of business (including supply chain, IT and procurement), but also a significant contributor to overall brand value — too valuable, apparently, to divest and recreate as a standalone company. Moreover, PSG’s consumer products have a direct effect on the enterprise business HP so desperately wants to retain.

“One of the lessons of HP’s decision is that consumer businesses are becoming more relevant to succeeding in commercial products for end users,” Frank Gillett, an analyst with Forrester, wrote in an 27 October posting on his corporate blog. “During the announcement call … CEO Meg Whitman talked about the importance of ‘consumerization’ in winning business from enterprises.”

Other analysts, however, think HP should still consider divesting itself of PSG — at some point.

Brian Marshall, an analyst with the ISI Group, estimated that PSG will earn some $37.8 billion this year. He also suggested that, despite the drama surrounding Whitman’s decision, HP should still consider spinning off PSG at some point. “While we believe keeping PSG inside HPQ is appropriate given the state of the company currently,” he wrote in a 28 October research note, “in 3-5 years we hope the company sells the group to focus on enterprise infrastructure (similar to IBM’s move in late 2004).”

Now that HP’s retained the unit, it has a whole host of battles to fight. Chief among them is ensuring the business stays viable despite softening sales across the PC industry as a whole, not to mention traditionally low margins. During a 27 October conference call, Whitman acknowledged that “margin pressure,” but indicated she would refine HP’s manufacturing process to compensate.

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