It had been in the rumor mill and got red hot over the weekend, and it is now official. The “It” was in reference to Hewlett-Packard (News - Alert) (HP), deciding to split itself into two separate publically traded companies. These will be respectively:
Hewlett-Packard Enterprise: Portfolio will include servers, storage, networking, converged systems, services and software as well as its OpenStack Helion cloud platform. HP CEO Meg Whitman will be President and CEO of Hewlett-Packard Enterprise, and enterprise industry veteran and HP Lead Independent board member Pat Russo to be Chairman of the Hewlett-Packard Enterprise Board.
HP Inc.: Will house the personal systems and printing offerings of the current company. Executive Vice President of HP’s Printing and Personal Systems business, will lead HP Inc. as President and Chief Executive Officer. Whitman will serve as non-executive Chairman of HP Inc.’s Board of Directors. It will retain the current logo.
The transaction is expected to be completed by the end of fiscal 2015, at which time HP shareholders will own shares of both Hewlett-Packard Enterprise and HP Inc. The transaction is intended to be tax-free to HP’s shareholders for federal income tax purposes.
This announcement comes as HP nears year four of its five-year turnaround plan. As CEO Whitman commented: “Our work during the past three years has significantly strengthened our core businesses to the point where we can more aggressively go after the opportunities created by a rapidly changing market,” said Meg Whitman, Chairman, President and Chief Executive Officer of HP. “The decision to separate into two market-leading companies underscores our commitment to the turnaround plan. It will provide each new company with the independence, focus, financial resources, and flexibility they need to adapt quickly to market and customer dynamics, while generating long-term value for shareholders. In short, by transitioning now from one HP to two new companies, created out of our successful turnaround efforts, we will be in an even better position to compete in the market, support our customers and partners, and deliver maximum value to our shareholders.”
It was also noted that both companies will be well capitalized. The expectation is that they will have investment grade credit ratings and capital structures optimized to reflect their distinct growth opportunities and cash flow profiles.
In comments about the new Hewlett-Packard Enterprise entity, Whitman noted that “Over the past three years, we have reignited our innovation engine with breakthrough offerings for the enterprise like Apollo, Gen 9 and Moonshot servers, our 3PAR storage platform, our HP OneView management platform, our HP Helion Cloud and a host of software and services offerings in security, analytics and application transformation,” continued Whitman. “Hewlett-Packard Enterprise will accelerate innovation across key next-generation areas of the portfolio.”
In regards to HP Inc. she added, “Since assuming responsibility for the Printing and Personal Systems Group, Dion and his leadership team have done an excellent job of building our relationships with customers and channel partners, segmenting the market and driving product innovation,” added Whitman. “The creation of HP Inc. will only accelerate the progress the team has made.”
“This is a defining moment in our industry as customers are looking for innovation to enable workforces that are more mobile, connected and productive while at the same time allowing a seamless experience across work and play,” said Weisler. “As the market leader in printing and personal systems, an independent HP Inc. will be extremely well positioned to deliver that innovation across our traditional markets as well as extend our leadership into new markets like 3-D printing and new computing experiences – inventing technology that empowers people to create, interact and inspire like never before.”
In making the announcement, HP also took the opportunity to make some observations about its financials. It reaffirmed its non-GAAP diluted net EPS outlook range of $3.70 to $3.74, and updated its fiscal 2014 GAAP diluted net EPS outlook to be in the range of $2.60 to $2.64. In addition, for fiscal 2015, HP estimates non-GAAP diluted net EPS outlook to be in the range of $3.83 to $4.03 and GAAP diluted net EPS outlook to be in the range of $3.23 to $3.43. HP’s outlook does not include one-time GAAP charges the company is expected to incur in connection with the separation, including advisory and tax costs which will be quantified at a later date. And, while the company will be speaking with investment analysts about the split, it has called off its earnings call that was scheduled for October 8.
What all of this means going forward is certainly problematic at best as Whitman was forced to defend the move on her call with financial analysts. They questioned as to how the assertion of turnaround success after four years could be made given the decision to split the company, which some interpreted as a sign of it not working. They also asked if the smaller enterprise unit was strong enough to do M&A activities, such as the also much rumored “merger of equals” with EMC (News - Alert) who happens to be a majority owner of VMWare.
Whiteman gave a full-throated defense of the split as being justified because of market dynamics and the need for the separated parts to be more nimble, and left open the M&A question by stating that she was confident the company had the resources to compete and to do what it had to do on all fronts to that end.
What this seems to imply is the EMC talks remain viable, although, even if they are how such a deal would be structured is certainly open to conjecture. It also raises questions about how the performance of both new units. After all, the ink business has for years been the profit engine for the company, which lost its top PC spot to Lenovo (News - Alert) this year, and the significant job cuts in other units speak to the fact that getting the enterprise business turned around is still very much a work in process.
All of that said; the early returns on the news are positive with HP stock up 4.5 percent as of 11:30 AM. How it performs the next few days should be interesting to watch.