A section of the industry advocates that HP be split up into two companies, with very different markets to target. This is primarily to address HP's lack of focus, and to end its identity crisis. One, the enterprise business, would be focussed on business customers - the Medium and Large businesses. The printing, imaging and PC business would focus on consumers, small-and-meduim businesses and retail sales. This is IBM's key differentiating feature: IBM does not focus on consumers, and even sold its PC business while it was still generating profits. In contrast, HP tries to be an enterprise company and a consumer-electronics company at the same time. Patricia Dunn, the interim Chairman, and Bob Wayman, the interim CEO, are, like Fiorina, opposed to a split-up of HP. During Fiorina's tenure, spinning off the printer business was discussed at least twice, but rejected each time. In case HP is indeed split, the printer business would be headed by Vyomesh Joshi (current executive VP of the combined PC/printer division). The other business (high-end servers, storage, software and services, collectively known as the Technology Solutions Group) is headed by Ann Livermore (executive VP of that division).
Problems with a breakup: The Enterprise business is sick
The PC/printer division might do well/better, with greater autonomy. But the other, high-end high-margin business, is already underperforming (as can be seen from profit-to-revenue ratios). First of all, HP has a very complicated product line[6], which it had begun simplifying after the Compaq merger[7]. Most of HP's revenues in this market come from selling high-end PA-RISC and Itanium servers with HP-UX installed (although HP also sells Intel x86-based servers running Linux, Windows and OpenVMS).
After end-of-life-ing Compaq's Tru64 UNIX OS, and abandoning plans to build AdvFS and TruCluster technologies from Tru64 into HP-UX [4] (instead using Veritas' Storage Foundation Cluster File System and Storage Foundation) last December, HP seems to be giving out signals that further innovation in HP-UX is slowing down. The delivery date for HP-UX 11iv3 has slipped consistently from 2004 to the first half of 2006.
The other problem is the hardware platform. HP-UX runs on the PA-RISC platform and the Itanium. HP has refused to port HP-UX to the x86 architecture [11]. It announced end-of-life for its HP 9000 series running on the PA-RISC. The Itanium (and the Itanium 2) never gained a decent market share in the first place[8], and have been all but superceded by AMD's Opteron and Intel's own Xeon EM64T 64-bit processors with 32-bit extensions, which can run both 64-bit and 32-bit applications at native speeds. In addition, HP's statements on the Itanium do not match its actions. It has announced that "we continue to see Itanium as the future 64-bit microprocessor"[7], implying also that the PA-RISC does not have a future. But late last year, HP dropped its Itanium workstation line, admitting the shift towards 64-bit extension technology [9], and ended its design work on the Itanium[10]. Also, HP sells over 90% of the Itanium servers sold in the market, implying negligible volumes from the rest of the industry.
Clearly, both the OS and the hardware platform are in trouble. HP, therefore, is increasingly being seen as a reseller of other companies' technologies, rather than investing in its own.
Maximizing returns from the printing and imaging business:
To repeat, the printing and imaging business accounts for only 30% of HP's revenue, but generates 75% of its profits. If the company is indeed split, this area of the business could grow phenomenally. There is also another strategy that HP could use[2]: Keeping the company together but turning it into an imaging-centric one. Focussing all product and services lines on the imaging business. Here are some of the possibilities:
Buy Eastman Kodak (valued at $9.8 billion) or Xerox ($14.2 billion) and merge the printing business with the new acquisition. This can open up new customers and can help expand the business further. HP can make such an acquisition. It has $14 billion in foreign profits[2] which can qualify for a one-time tax break if this money is invested in the US. HP's share price in case of breakup would be $27-28 a share[2], out of which the printing business itself is worth $20 appx.
Printing and imaging also has the most opportunities. HP has 40%+ share in the conventional desktop inkjet/laser printer market, but has not yet entered the high-end networked printers market. Today this is dominated by Xerox, Canon and Ricoh. That is why Xerox is a good acquisition for HP. Demand for photo printers and digital cameras is expected to shoot up over coming years. This makes Kodak attractive, as Kodak has strong prescence in the photo printing market as well as in-store kiosk printing/online printing services.
On the enterprise side, HP could use its expertise in high-performance computing and apply it to emerging markets, where again, margins are high. High performance, special-purpose microprocessors from HP could be used in computer simulations for gaming, weather forecasting, bio-informatics and genetics, and medical imaging. These are all areas where the market either is too nascent yet, or is highly fragmented. HP has an opportunity here to become an industry leader by being first off the blocks.
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