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HP split: will one behemoth generate an awkward couple or two embracing dancers?

The news is all over the world with the announced split of HP into two reasonably equal parts. Some elements are an old story but some of the comments are puzzling.

The financial community has pushed this project for a long time. It does sound like the current CEO is better able to handle major stakeholders as we have heard few complaints. Interestingly just three years ago, there was such a furore that the former CEO had to leave in a melodramatic scenario.

Greg Walters thinks that it is largely linked to the Print Industry.

Others have been saying this is the split of Consumer versus Enterprise division, potentially misled by the naming, Hewlett Packard Enterprise and HP Inc.

 

Volume on decline, but attractive profitability.

Greg is right in his analysis, saying that print volumes are on the decline. We even believe this trend is going to accelerate next year and the following. However the profitability of the sector remains high and attractive. It might not be as lucrative as in the old times, but it is still quite nice. But this activity is not alone and sits next to PCs and servers in the division. The volumes are quite high but the profitability is not. PCs are a really tough market with not many benefits (no recurrent revenues, cyclical revenues, pressure from mobile devices changing the game, etc…). Servers are themselves under pressure with Data Centres purchases having a bigger and bigger share of the sales and at the same time making it difficult to cut a positive margin even with a strong brand and technology unless the new server architecture gives them an edge.

When some commentators compare with the IBM hardware divestments, IBM did it in a very phased way over 20 years (created Lexmark back in 1991 (a highly profitable company for many years), sold volume print to Ricoh, PCs to Lenovo and servers to Lenovo more recently).

One may ask what is HP trying to achieve here. We know that within HP Inc. itself business cycles and profitability are quite distinct.

  • Sell it by pieces? It sounds late in the game of these respective markets
  • Make it nimble and efficient? I challenge that a 50Bill US$ company is much nimbler and agile than a 100 Bill. US$ one
  • Allow it to ally, divest, maybe to invest in a simpler fashion. This is probably a very good reason. It is a recognition that no one nowadays can do everything without partnering actively and 50 Bill. US$ is still a powerful negotiating / partnering platform.

The other discussion was enterprise vs. consumer.

Of course Hewlett Packard Enterprise will sell mostly to Enterprises but it is pretty much the same for HP Inc.  HP, quite rightly so, has pushed in recent years its business towards companies rather than the consumer market. There are good reasons for that. Consumer markets are very volatile but one could say the same thing of the visible part of the Enterprise market (ask Blackberry what they think of it).

The interesting developments will be in the amount of inter-trade and joint sales approaches within the two newly formed entities.

Large clients of HP Enterprise may still want to buy their PCs and Printers from HP Inc. One of the major benefits that this customer set likes is the no hassle “single stop shopping”. When we talk of HP’s MPS efforts, I believe that the HP’s direct sales force is responsible for a very substantial share of the sales. So dividing it in two creates quite a complexity in terms of contracts, responsibilities, sales quotas, etc.

Significant Printer and MPS dealers will be also in the same situation though I tend to believe that they will trade mostly with HP Inc., which will maybe be in turn less distracted by infrastructure debates and investments.

Last but not least, one of the issues at HP is this lack of organisational stability. This affects dramatically the quality of execution of strategies. Staff, at all levels, tend to be wondering what their next move should be, not to serve the client, but to survive in the organisation. After three years of stabilization in the so called five-year turnaround plan, there was hope that they would be back on excellent execution. I am afraid the market will have to wait for another few quarters.

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This article was written on 07 Oct 2014, and is filled under Business Forecast, Managed Print Systems.

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