Big Tech Ditches Bad Assets, Keeps 'Schmuck Insurance'
Hewlett Packard Enterprise and Intel aren't exactly the epitome of smart dealmakers, but the technology giants seem to have finally learned at least one valuable lesson: cut and run.
Both companies announced deals late Wednesday in a sort of double-whammy disposal of bad tech businesses. Hewlett Packard Enterprise is spinning off a package of software assets and merging it with U.K.-based Micro Focus. That will leave Hewlett Packard Enterprise shareholders with a 50.1 percent stake in the combined business, while the company will receive $2.5 billion in cash. Intel, meanwhile, is spinning out its McAfee cybersecurity business and then selling the majority of it to private-equity firm TPG.
The CEOs of Intel and Hewlett Packard Enterprise should get credit for their pragmatism in these deals. Yeah, we know, pragmatism is dull. It's not the "moonshot" coolness that lands technology CEOs on the cover of business magazines. But when an asset isn't working -- Intel's computer security business and Hewlett Packard Enterprise's software unit really aren't working -- the smartest thing a CEO can do is get out while the getting is good, at the best possible value for shareholders. No looking back, and no regrets.
Actually, we have to look back a little. Intel and Hewlett Packard Enterprise were in possession of bad assets in part because they did some truly poor acquisitions. Even at the time Intel purchased McAfee in 2011, it was already clear that online security threats had moved way beyond the company's quarter-century-old approach of building a virtual wall to keep hackers out of computers. The deal is (for now) officially a loser. Intel bought McAfee for $7.7 billion. It's getting just $3.1 billion in cash in the deal with TPG, plus a 49 percent stake in the newly formed entity.
As for the company formerly known as Hewlett-Packard before it split in two last year, whole books could be written about its M&A mistakes. Part of the software business in the deal with Micro Focus came from the beyond-ill-fated acquisition of Autonomy. That deal, along with takeovers of Mercury Interactive and Vertica Systems, cost Hewlett-Packard at least $15 billion. Hewlett Packard Enterprise's software revenue was about $1.6 billion in the six months ended April 30, and its operating earnings were a puny $328 million.
After years of trying to fix these troubled businesses, throwing in the towel seems like the right call. At the very least, Hewlett Packard Enterprise is divesting its mistakes in a way that may save a few tax dollars. The company's deal with Micro Focus is structured as a Reverse Morris Trust, a maneuver used by large companies to in effect sell unwanted assets to a smaller partner without triggering the taxes that would typically accompany a traditional sale.
The danger of bailing, of course, is that your trash turns into treasure (or at least slightly less trashy trash) in the hands of someone else and winds up being worth a lot more than what you sold it for. The only thing worse than doing one bad deal is doing two bad deals on the exact same business. But Hewlett Packard Enterprise and Intel have both given their shareholder quasi-insurance policies -- "schmuck insurance," if you will. Intel will retain a stake in the business sold while HPE investors will get a big ongoing stake in the combination with Micro Focus. If the British company can breathe new life into the downtrodden software assets and TPG can turn around McAfee, then shareholders in both Hewlett Packard Enterprise and Intel will be able to reap more than their upfront cash profits, and the companies will partially redeem themselves as stewards of shareholder capital.
The question of course is whether Hewlett Packard Enterprise and Intel really wanted their investors to have that option on the future upside or if they were forced to strike partial deals because no one was willing to take these businesses completely off their hands. We may never know for sure. But at the very least, Hewlett Packard Enterprise and Intel had the sense to distance themselves from these businesses while they could.
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Beth Williams at email@example.com