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One HP becomes two, but it's not an about turn insists Meg Whitman

Stuart Lauchlan Profile picture for user slauchlan October 5, 2014
Summary:
One HP was all about being better and stronger together, so why has CEO Meg Whitman changed her mind and decided that two is better than one?

There must be something in the air.

meg_whitman
Last week, eBay’s management team performed a reverse-turn and decided that despite resisting the idea for a long time, it had now decided that it would be best to break off its PayPal business.

This week, HP’s management team has done the same thing.

A curious connection between the two? Well, Meg Whitman used to be the CEO at eBay and she’s currently CEO of HP.

That said the more demanding question being asked today of Whitman and HP is simple: why now? Or perhaps more pertinently, so what’s changed?

Three years ago when Whitman took the helm of HP following the ousting of former SAP CEO Leo Apotheker, one of her first acts was to nix his plan to break up HP and spin off its PC business, declaring that sticking together offered the best chance of future success.

Flash forward to today and Whitman is apparently euphoric about breaking the company in two, one a consumer-focused PC and printer company, called HP Inc, and one a business-centered one, called Hewlett-Packard Enterprise:

I am thrilled about how this separation positions HP and its brand for the future.

So, to repeat the question, what’s changed? How come Apotheker’s idea now appeals where once it didn’t? What happened to One HP?

Whitman doesn’t even pause for breath:

Let me be clear, One HP was the right approach. During the fix and rebuild phases of our turnaround plan, we used the strength found in being together to become stronger throughout.

But of course the marketplace never stands still and in our industry more than ever you have to compete harder and faster every day. Being nimble is the only path to winning. Separating into two companies will enable each management team to focus more sharply on the opportunities that each market presents.

Today was made possible by our turnaround. Three years ago this company was in a fairly difficult situation. We needed to rebuild and we needed to do that as One HP. A couple of things have changed. One is the speed of the market is moving incredibly rapidly. We have a position now of strength where we can take advantage of that. We aim to be two big Fortune 250 companies, but a lot more nimble, a lot more focused.

So today there are strategic advantages in terms of being focused, better able to compete, faster to respond to customer needs. From a financial perspective, this optimizes the financial position of these companies. Make no mistake, One HP was the right thing to do to begin the turnaround of this company but to accelerate into years 4 and 5, this is definitely the right tactic.

Winners and losers

The winners? Well, the shareholders seem excited and the stock price is rising on the news. Former HP Chairman Ralph Whitworth, the head of the activist investor firm Relational Investors, certainly reckons it’s a good idea:

Today’s announcement sets out bold, logical and highly compelling steps that will align the company’s assets within more strategically and operationally focused corporate structures. Shareholders will now be able to invest in the respective asset groups without the fear of cross-subsidies and inefficiencies that invariably plague large business conglomerates.

At the same time, management can better design strategic plans, incentives and market initiatives to suit the varying growth rates, capital intensity, and market objectives of these more focused and nimble companies. The new companies will be better positioned to address today’s light-speed market dynamics and customer needs, and with distinct and compelling financial profiles and strong leadership teams, accelerate growth and shareholder value creation.

The losers? Well, 5000 people who until today reckoned they’d escaped the axe as part of the 50,000 planned redundancy program have another think coming as this break-up has resulted in further

incremental opportunities for reductions.

My take

At the end of the day, there’s nothing wrong with deciding that the idea you rejected actually wasn’t that bad after all. And there have been big u-turns made before elsewhere. Larry Ellison and the cloud? Bill Gates and the internet?

But still, the ‘things have changed since we thought what we previously thought’ mantra wasn’t that convincingly delivered by Whitman on her conference call with analysts - something else in common with the eBay move last week!

But the path’s set, the share price is on the way up and the future lies this way, so onwards, onwards.

Longer term I suspect what will happen is potentially more dramatic than it seems today. (Is Ellison chuckling quietly as much as Leo Apotheker today I wonder?)

As for the volte face by Whitman, well, as I said, these things happen and in the IT industry, we have always been at war with Eurasia.

Mind you, if she starts talking about what a great guy Autonomy’s Mike Lynch really is, then she really will be pushing her luck!

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