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HP 2.0

The technology ecosystem just won’t give me a break – who would’ve thought that in the same week Google announced its bold acquisition of Motorola Mobility, that HP would also announce a radical restructuring of its business?

For those of you not up to speed, last Friday, HP’s new CEO Leo Apothekar announced that HP would:

  • Spend over $10 billion to acquire British software company Autonomy Corp
  • Shut down its recently-acquired-from-Palm-for-$1-billion WebOS hardware business (no more tablets or phones)
  • Contemplate spinning out its PC business

hpRadical change is not unheard of for long-standing technology stalwarts like HP. The “original Hewlett Packard”, focused on test and measurement devices like oscilloscopes and precision electronic components was spun out in 1999 as Agilent, one of the tech industry’s largest IPO’s. It acquired Compaq in 2001 to bolster its PC business for a whopping $25 billion. To build an IT services business, it acquired EDS in 2008 at a massive $14 billion valuation. To compete with Cisco in networking gear, it acquired 3Com for almost $3 billion. And, to compete in the enterprise storage space, it bought 3PAR after a furious bidding war with Dell for $2 billion. But, while this sort of change might not be unheard of, the billion dollar question remains: is this a good thing for HP and its shareholders? My conclusion: in the long-run, this is a good thing for HP. But how they announced it was very poor form.

Why good for the long-run?

  • HP needed focus. With the exception of the Agilent spinoff and the Compaq acquisition, all the “bold strategic changes” that I mentioned happened in the span of less than 3 years (EDS: 2008, 3com: 2009, Palm and 3PAR: 2010). Success in the technology industry requires you to disrupt existing spaces (and avoid being disrupted), play nicely with the ecosystem, and consistently overachieve. Its hard to do that when you are simultaneously tackling a lot of difficult challenges. At the end of the day, for HP to continue to thrive, it needs to focus and not always chase the technology “flavor of the week.”
  • HP had a big hill to climb to be a leading consumer hardware play. Despite being a very slick product, WebOS was losing the war of the smartphone/tablet operating systems to Google’s Android and Apple’s iOS. Similarly, in its PC business, with the exception of channel reach and scale, HP had no real advantage over Apple, Dell, or rapidly growing low-cost Asian competitors. It’s fair to say that HP might have been able to change that with time. After all, HP had barely had time to announce one generation of new products since Palm was acquired, let alone had time for the core PC division to work together with the engineers and user experience folks at Palm to cook up something new. But, suffice to say, getting to mass market success would have required significant investment and time. Contrast that with…
  • HP as a leading enterprise IT play is a more natural fit. With its strong server and software businesses and recent acquisitions of EDS, 3Com, and 3PAR, HP already has a broad set of assets that it could combine to sell as “solutions” to enterprises. Granted, there is significant room for improvement in how HP does all of this – these products and services have not been integrated very well, and HP lacks the enormous success that Dell has achieved in new cloud computing architectures and the services success that IBM has, to name two uphill battles HP will have to face, but it feels, at least to me, that this is a challenge that HP is already well-equipped to solve with its existing employees, engineering, and assets.
  • Moreover, for better or for worse, HP’s board chose a former executive of enterprise software company SAP to be CEO. What did they expect, that he would miraculously be able to turn HP’s consumer businesses around? I don’t know what happened behind closed doors so I don’t know how seriously Apothekar considered pushing down the consumer line, but I don’t think anyone should be surprised that he’s trying to build a complete enterprise IT stack akin to what IBM/Microsoft/Oracle are trying to do.

With all that said, I’m still quite appalled by how this was announced. First, after basically saying that HP didn’t have the resources to invest in its consumer hardware businesses, Apothekar turns around and pays a huge amount for Autonomy (at a valuation ten times its sales – by most objective measures, a fairly high price). I don’t think HP’s investors or the employees and business partners of HP’s soon-to-be-cast-aside will find the irony there particularly amusing.

Adding to this is the horrible manner in which Apothekar announced his plans. Usually, this sort of announcement only happens after the CEO has gone out of his way to boost the price he can command for the business units he intends to get rid of. In this case, not only are there no clear buyers lined up for the divisions HP plans to dump, the prices that those units could command will be hurt by the fact that their futures are in doubt. Rather than reassure employees, potential buyers, customers, and partners that existing business relationships and efforts will be continued, Apothekar has left them with little reason to be confident. This is appalling behavior from someone who’s main job is to be a steward for shareholder value as he could’ve easily communicated the same information without basically tanking his ability to sell those businesses off at a good valuation.

In any event, as I said in my Googorola post, we definitely live in interesting times :-).

Published in Blog

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