Hewlett-Packard’s PC Spinoff Would ‘Reinvent’ Company With Return to Roots

By spinning off Hewlett-Packard Co. (HPQ)’s personal-computer business, Chief Executive Officer Leo Apotheker is shedding a unit the founders never liked anyway.

David Packard only reluctantly agreed to focus on PCs in the early 1990s. And Walter Hewlett, a board member and son of co-founder Bill Hewlett, mounted an unsuccessful campaign to block the 2002 acquisition of Compaq Computer Corp., a deal that vaulted Hewlett-Packard to the top of the PC industry.

From Hewlett-Packard’s beginnings in 1939, the company’s founders set out to invent one-of-a-kind products and tools for engineers. They never intended to become the biggest provider of a commodity product, said Michael Cusumano, a professor at the Massachusetts Institute of Technology’s Sloan School of Management. Now that PC profits are waning amid competition from Asian rivals, Apotheker is poised to return to that philosophy.

“Their DNA never included being a commodity consumer products manufacturer, which is what the PC has become,” Cusumano said. “It’s certainly not where the action and innovation is in the business these days. They can reinvent themselves. They may have the capability to do it.”

While the PC unit accounted for 30 percent of sales last quarter, it only generated a 5.9 percent operating margin. That’s less than at any other division in the company.

Hewlett-Packard, based in Palo Alto, California, dropped $5.91, or 20 percent, to $23.60 at 4 p.m. on the New York Stock Exchange, the biggest decline since October 1987.

IBM’s Deal

Hewlett-Packard’s move mirrors a broader shift among U.S. technology companies, with fewer of them designing and selling PCs -- a trend that began when International Business Machines Corp. (IBM) offloaded its PC unit to China’s Lenovo Group Ltd. in 2005. Dell Inc. (DELL), the second-largest PC maker, also is focusing more on services, though PCs still make up about half its sales.

The U.S. and European PC markets declined last quarter, while Asia Pacific, excluding Japan, grew more than 12 percent, according to research firm IDC. Local manufacturers benefited more from that growth than Hewlett-Packard. Its shipments grew 3 percent in the quarter, compared with 23 percent growth for Lenovo and 6 percent for Asustek Computer Inc., the Taiwanese maker of low-cost computers.

“All the PC vendors in the U.S. are now more focused on services,” said Pat Becker Jr., a fund manager at Portland, Oregon-based Becker Capital Management Inc. His firm holds Hewlett-Packard shares as part of the $2.2 billion it oversees. “You look at the margin structure of the PC business and the cyclicality, and it’s best led by somebody outside our borders.”

Steve Wozniak

Hewlett-Packard was a reluctant and relatively late entrant to the personal-computer market, which IBM turned into a mainstream product with the release of its first PC in 1981. Years before, Hewlett-Packard had turned down a proposal by one of its engineers to buy the design for a home computer he invented. The employee, Steve Wozniak, turned the idea into the Apple I in the 1970s. Still, Packard never expressed regret for the decision.

Packard agreed to let the company begin selling PCs in the early 1990s, so that they could be used to access Hewlett- Packard’s more sophisticated Unix machines. Packard never cared for computers in general, preferring other kinds of electronic equipment, according to “Perfect Enough,” a 2003 book by George Anders, who is now a Bloomberg columnist.

Packard, who died in 1996, wasn’t around to see CEO Carly Fiorina bet the company on PCs. Both Hewlett and Packard’s foundations voted against the $18.9 billion deal, which was completed in May 2002. Hewlett died the year before.

Fiorina’s Fight

Walter Hewlett, the co-founder’s son and a board member, budgeted $32 million to fight the deal, out of concern about the impact of the low-margin PC business. When Fiorina won the four- month proxy battle, Hewlett sued Hewlett-Packard in Delaware chancery court, prompting Fiorina and the board to kick him off.

The acquisition has helped the company grow over the last decade, said Dan Olds, an analyst at Gabriel Consulting in Beaverton, Oregon.

“HP became a dominant player in PCs, so I don’t know if I would call this the revenge of Walter,” Olds said.

Now Apotheker, who took the reins of Hewlett-Packard in November, may turn his back on the PC business.

The move would put pressure on the company to improve its other businesses, including corporate software, services, security, storage and networking, Cusumano said. It also will have to do what IBM did and acquire more software companies. Apotheker made a move in that direction yesterday, agreeing to buy the search-software maker Autonomy Corp. for $10.3 billion.

Autonomy, based in Cambridge, England, jumped 74 percent to 24.90 pounds ($41.29) as of 2:41 p.m. in London. Before today, the stock had declined 5.1 percent this year.

“Giving up a third of your revenue, even if you end up being more profitable, it’s still a big chunk,” Cusumano said. “As the biggest PC manufacturer, they were in a lot of people’s homes as well as offices. They will lose that.”

To contact the reporters on this story: Dina Bass in Seattle at dbass2@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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Hewlett-Packard was a reluctant and relatively late entrant to the personal-computer market, which IBM turned into a mainstream product with the release of its first PC in 1981.

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Photographer: Tony Avelar/Bloomberg

Hewlett-Packard was a reluctant and relatively late entrant to the personal-computer market, which IBM turned into a mainstream product with the release of its first PC in 1981. Close

Hewlett-Packard was a reluctant and relatively late entrant to the personal-computer market, which IBM turned into a... Read More

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Hewlett-Packard Co. Chief Executive Officer Leo Apotheker. Close

Hewlett-Packard Co. Chief Executive Officer Leo Apotheker.

Photographer: David Paul Morris/Bloomberg

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A shopper walks past a display of Hewlett-Packard Co. TouchPads in a Best Buy store in East Palo Alto, California,... Read More

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