By BEN WORTHEN, JUSTIN SCHECK and GINA CHON
Hewlett-Packard Co., the world's largest personal-computer maker, is exploring a spinoff of its PC business, an about-face that highlights how growth has pivoted from the computers that so long ruled the industry toward software and mobile devices, where H-P has largely failed to compete.
H-P said its board is evaluating strategic options for its PC business, which could include a "full or partial separation." It also will abandon efforts to sell tablets and smartphones that challenged Apple Inc.'s iPad and iPhone.
At the same time, H-P agreed to buy U.K. software firm Autonomy Corp. for about $10.25 billion, seeking to move further into the higher-profit business of analyzing data for corporations.
The technology giant has been in tumult since its former chief executive was ousted a year ago over ethics concerns. Since then, H-P shares have slumped as it has changed over much of its board and senior executives and lowered financial targets three times, most recently on Thursday.
Investors reacted coolly to the news, which emerged during market hours. H-P shares fell 9% to $26.73 in after-hours trading Thursday, after declining 6% to $29.51 at 4 p.m. on the New York Stock Exchange, amid a broad market selloff.
The surprise announcement is a strategic flip-flop for H-P Chief Executive Leo Apotheker, who took over in November. Mr. Apotheker said in a February interview that being in the consumer businesses like PCs gave H-P "an immense competitive advantage."
In an interview Thursday, Mr. Apotheker said "we need to sharpen our focus," and that to do so "you need to take significant action."
Even without its PC unit, H-P would be one of the world's largest tech companies. While the PC division was H-P's largest unit last quarter, with $9.59 billion in revenue, the company's tech-services division, which runs corporate computer systems, brought in $9.1 billion. The company would also remain one of the largest makers of server, networking and data-storage systems, as well as the world's biggest printer company.Mr. Apotheker said he had been analyzing market data and trends and talking with directors and advisers for some time about how to shift H-P. He concluded that "to be successful in the consumer device business we would have had to invest a lot of capital and I believe we can invest it in better places," specifically H-P's units that target businesses. He cited the deal for Autonomy as an example.
H-P's printer division had $6.09 billion in revenue and made an $892 million profit last quarter. The printer business has high profit margins due to the expensive ink that H-P sells for printer refills.
As part of its restructuring, H-P said was it was taking a $1 billion restructuring charge to shut down its tablet and smartphone operations. The company acquired an operating system for those devices last year with the $1.2 billion purchase of Palm Inc.
H-P earlier this year introduced its TouchPad tablet, but it hasn't sold well. In the interview, Mr. Apotheker said he wasn't happy with the performance of H-P's tablet and smartphones. "We want to make sure that none of our actions are an impediment," he said.
H-P's PC unit still makes a profit, including $567 million in the quarter ended July 31, but it is a low-margin business. Revenue has also been declining recently, including a 3% year-over-year decline in the July period.
"It certainly shakes things up," said Tim Ghriskey, the co-founder of $2 billion fund Solaris Group, which holds H-P shares. Mr. Ghriskey said he was waiting for H-P to make some kind of strategic shift since "the stock wasn't going anywhere."
H-P's spinoff plan comes nearly a decade after H-P struck a contentious $25 billion deal to merge with rival Compaq Computer Corp. to propel it to the top of the PC industry. It also comes seven years after rival International Business Machines Corp. sold its PC business to Chinese company Lenovo Group Ltd.
The H-P plan also marks the second time the company has looked to divest a core business to keep up with the changing tech industry. H-P in 1999 spun off its measurement-device unit—which included technologies that were the genesis of the company and core to its success—into a firm known as Agilent Technologies Inc.
Since then, H-P has repeatedly tried to remake itself with big acquisitions, including Compaq. In 2008, H-P bought Electronic Data Systems Corp. for $13.9 billion to compete with IBM's tech-services division. It bought 3Com Corp. last year to take on Cisco Systems Inc.'s network-equipment business, and acquired Palm last year.
Despite the deals, H-P remained reliant on its old-line PC and printer businesses for about half of its revenue.
Spinning out the computer business will improve H-P's overall profit margins, even though it would cut the company's revenue by roughly a third. The personal systems group had an operating margin of 5.4% in 2010, compared with 11.7% operating margin for the entire company, according to Brian Marshall, an analyst at Gleacher & Co.
Mr. Apotheker's predecessor, Mark Hurd, had said he was committed to staying in the PC industry, and Mr. Apotheker, the former CEO of software giant SAP AG, said earlier this year he would push forward with that strategy. After Mr. Hurd left, H-P executives said repeatedly that the company's strategy was on the right track.
Initially, said a person familiar with the matter, Mr. Apotheker wanted to keep all of H-P's businesses together and use the company's cash to buy its way into new areas like software. But, that person said, it soon became clear that H-P didn't have the war chest to compete with rivals like Oracle Corp. and IBM.
While H-P is the world's biggest computer maker, it is reliant on Microsoft Corp.'s Windows software and the Palm mobile software at a time when Apple's Mac OS X software has been the fastest growing PC operating system and Google Inc.'s Android is the fastest-growing smartphone system.
It became clear over the past few months that the only way achieve Mr. Apotheker's goal of adding software products for businesses was to find a way to get rid of the company's PC arm and use the cash to buy into new areas, said the person familiar with the matter.
Facing low margins and low growth in the PC businesses, Mr. Apotheker decided there would be no sacred cows and it would be best to get out of the computer business, people familiar with the matter said.
His goal is to reposition H-P into an enterprise business and move away from consumer products, the people said.
A $1 billion investment disclosed in May by New York hedge-fund manager John Paulson in H-P was also a "wake up call" for the company, one of the people said. Mr. Paulson told H-P executives that the company had to make moves to unlock shareholder value, the person added.
While H-P will pursue a spinoff, it will also be open to other potential offers if they are more attractive, people familiar with the matter said. The company said it expects the process to last 12 to 18 months.
After Bloomberg News reported H-P's moves Thursday, the company received about a dozen calls from private equity firms expressing interest, the people said.
Meanwhile, the boards of H-P and Autonomy approved H-P's purchase. Autonomy's revenue rose 18% to $870 million in 2010, and is expected to top $1 billion this year. The company makes software that helps firms keep track of their ever-growing streams of data, including emails, phone calls and other documents. H-P has been trying to move further into business software for years, but its attempts haven't had a big impact on the company's bottom line.
H-P Thursday reported revenue of $31.2 billion for its fiscal third quarter, up 1% from a year earlier, but down 2% when adjusted for effects of currency. Profit was $1.9 billion, up 9% from a year earlier.
H-P was advised by Barclays Capital, Perella Weinberg Partners and law firms Gibson, Dunn & Crutcher, Skadden, Arps, Slate, Meagher & Flom and Freshfields Bruckhaus Deringer.
Autonomy was advised by Qatalyst Partners, Citigroup, Goldman Sachs Group, Bank of America Merrill Lynch, UBS AG, J.P. Morgan Chase & Co. and law firm Slaughter & May.—Ian Sherr
contributed to this article.
Write to Ben Worthen at firstname.lastname@example.org, Justin Scheck at email@example.com and Gina Chon at firstname.lastname@example.org
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