Try lobbing this question during quiet moments at Silicon Valley parties: Which big technology company is most likely to follow industry pioneers like Digital Equipment and Sun Microsystems into the tech dustbin? Hewlett-Packard comes up repeatedly in this parlor game.
That’s the situation facing the two companies carved as of Monday from the legendary company incubated in William Hewlett and David Packard’s garage. CEO Meg Whitman took a natural step to break up as the company's sales stalled, the pendulum in corporate America swung to favor focus rather than sprawl, and potential merger allies such as EMC found other dance partners. Yet technologists don’t think that chopping Hewlett-Packard in half will make any difference, and neither does Wall Street.
Usually a company split follows a familiar pattern. One company has pokey growth but generates piles of money to squeeze for cash returns to shareholders. The other is the growth company that gets nurtured and fed to hunt for promising nooks and crannies of business. That is the situation at eBay, Whitman’s former company, which split into a slow-growth e-commerce business and a perkier PayPal.
At the company formerly known as Hewlett-Packard, neither of the fledglings shows much growth. At the new HP Inc., which houses the company’s personal computer and printer operations, revenue dipped 6.4 percent in the nine months ended July 31. That’s fine; no one expects a PC-and-printer company to invent flying cars. But at Hewlett Packard Enterprise, which is supposed to be the carrying the flag for the future, sales fell 5.6 percent during the same period. (Whitman said in a CNBC interview on Monday that Hewlett Packard Enterprise would post revenue growth in 2016 after adjusting for the strong dollar, which has shaved several percentage points off big companies’ sales growth rates. )
In one snapshot of the problem, the software operation at Hewlett Packard Enterprise -- what should be a focus now that “software is eating the world” -- is both small and declining, which is hardly the setup for a happy tech success story. Revenue there fell more than 6 percent in the past nine months, and in fast-growing areas of cloud computing, the company has churned through executives and strategies.
Just a year ago, Hewlett-Packard threw a splashy party in San Francisco with fried chicken food trucks and a performance by rapper Flo Rida to pitch software developers on Helion, the company's homegrown cloud technology. Two weeks ago, the company gave up on a big chunk of Helion. The remaining rump of Helion is based on a relatively nascent technology standard that hasn’t caught hold yet in the corporate technology mainstream.
So there’s the trouble. The split takes one collection of ho-hum businesses that aren’t breaking ground in much of anything and transforms them into two collections of ho-hum businesses that aren’t breaking ground in much of anything. Ta-dah!
Fortunately, Wall Street expectations are incredibly low, as they have been for large chunks for the four years Whitman has been at the company’s helm. Both HP Inc. and Hewlett Packard Enterprise are among the cheapest stocks in the S&P 500 based on expected earnings for the current year, according to Bloomberg data. HP Inc. has the lowest P/E ratio in the S&P 500; Hewlett Packard Enterprise, which Whitman is leading, is No. 12.
Whitman smartly helped set this low bar for herself. She told investors early in her tenure that her company was a mess and that it would take several years to get the stink out. Whitman did much to clean up an ugly balance sheet, cut costs and win back some credibility back from investors who had grown tired of a company that failed more often than Charlie Brown trying to kick a football. What has proved more elusive for Whitman is finding hit new technologies.
Hewlett-Packard's situation encapsulates a dramatic period of change for entrenched technology companies, particularly those in the suddenly tumultuous business of selling hardware or software to companies. Some of the old (by Silicon Valley standards) lions -- including Oracle, Microsoft, IBM, Intel, Cisco and Qualcomm -- each changed CEOs within the last three years, in some cases taking a step away from legendary founders or their proteges. Michael Dell took his company private and is now seeking to gobble up EMC. Each of these tech giants is trying to land on the right formula for creating a second or third act after tech trends have passed them by.
In short, breaking up isn't hard to do. Coming up with winning technology is tough. Whitman has played incredibly well with the bad hand she was dealt. With no easy solutions, she did the only thing she could do – rearrange the deck chairs and hope for the best. But hope alone rarely secures a successful future.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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