It's hard to find a buyer for an ailing company with more than $100 billion in annual sales. It's far easier to sell it really slowly.
That was the position CEO Meg Whitman faced in 2014 with Hewlett-Packard. She did yeoman's work for three years to rescue the company from its status as the Mr. Magoo of corporate America. But it was clear by then that the growth-challenged mishmash of a company that sold personal computers, printers, servers and consulting work didn't make sense. Hewlett explored a deal with EMC for a while, and when that didn't work out, it split into two.
Sure, there was some logic about how investors valued slower-growing businesses like printers and personal computers differently from how they valued theoretically growing businesses like corporate software and data-storage equipment. But it was clear from the outset that splitting up also made the remnants easier to crack apart, reconstitute and sell for scrap if necessary. And that is what's starting to happen.
Hewlett Packard Enterprise, the corporate technology sibling created in the breakup, said late Tuesday that it was hiving off its information technology consulting-and-outsourcing arm into a new company in combination with CSC, another IT consulting company that had hit hard times. This Frankenstein will be created to free shareholders from any tax penalty, with HPE shareholders owning about half of the new company's stock.
It's not clear whether the newborn consulting company will be any more successful than its parents were, but they had little choice. The consulting-and-outsourcing part of HPE -- essentially Ross Perot's EDS business purchased by one of Whitman's predecessors -- generates about 40 percent of HPE's revenue. But what HPE calls its enterprise services businesses hasn't posted sales growth since 2012, according to an analysis by Anand Srinivasan of Bloomberg Intelligence. CSC's revenue has also been falling since 2012, data compiled by Bloomberg show.
The share prices of both HPE and its merger buddy reflect the companies' stagnant sales. Each company is valued at roughly four times expected earnings before interest, taxes, depreciation and amortization for the next year, according to data compiled by Bloomberg. IBM and Accenture -- both more high-end corporate consulting operations -- are valued at nine and 13 times, respectively.
If the mission of a public company is maximizing money for the stockholders who own the company -- and it is -- then HPE should get a pat on the back. Whitman and her team are taking a sick business and combining it with an ill CSC and giving stockholders a tax-free ownership of a combined company that might find sounder footing.
It also makes me a little sad to think that at the company that kicked off the two-guys-in-a-garage startup trope, innovation now means figuring out clever ways to sell the company in parts without incurring taxes. Sure, that's a kind of innovation, too, but probably not the kind Bill Hewlett and Dave Packard had in mind.
But this is the real world, and executives have to play the hand they're dealt. Corporate IT consulting and outsourced software coding is a tough business. HPE and CSC were trapped in an unwelcome no man's land between premium tier consulting operations like Accenture and lower-priced software coding firms like India's Wipro and Tata Consultancy. The growing prevalence of cloud computing is also wiping out some companies' demand for specialized business software built in-house or by armies of consultants.
For years, Whitman had been trying to whip the EDS successor business into shape by winding down unprofitable contracts and trying to strike more lucrative consulting deals to help companies that wanted to modernize their technology. It was working, incredibly slowly. As promised, revenue declines haven't been as bad this year, and mass layoffs have helped pick up profit margins. But it was clear that crawling out from the deep abyss wasn't enough.
What's left if the combination with CSC goes through is a slimmed down HPE with nearly $30 billion in annual sales of computer hardware and a laggard corporate software business. The skimpy leftovers most likely mean the slow, sad but necessary breakup of Hewlett-Packard will continue.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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