HP's PC reality: A spin-off is its only choice

HP's PC reality: A spin-off is its only choice

Summary: HP execs say that a PC unit spin-off is the best move for shareholders. The reality is that it's unlikely it will find a buyer to pay a big premium for the unit.

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HP executives are talking up the PC unit and noting that it will be No. 1 even after a spin-off. Obviously, HP prefers a spin-off of its PC unit, but that's because it is unclear what price the unit will fetch.

Todd Bradley, head of HP's personal systems group, told Reuters a spin-off will give shareholders the most value. A sale to another player such as Acer or Samsung doesn't make sense, argued Bradley. Translation: HP can't find a buyer that will overpay for the unit.

It's hard to argue with Bradley's take largely because it's a mystery what the PC unit is worth.

As noted previously, analysts value the PC unit anywhere between $3 billion in a total meltdown to $9 billion or so. Given that wide range, the reality is that HP couldn't sell its PC unit if it had to. A spin off is really the only option.

HP can spin off the PC unit, which can then raise capital to compete, and let the valuations fall where they may. If HP sold the PC unit, it would have to take market rates, which may be depressed amid jitters of the post PC era.

In our earlier story on the HP spin-off, one reader summed the situation up well. The translation to HP's most recent comments boils down to:

We need to get rid of this thing and there are no interested buyers.

Sterne Agee analyst Shaw Wu recently argued that Samsung was a good candidate to buy HP's PC business. On the surface, Samsung is a logical buyer because it has a vertically integrated supply chain. Reports indicated that Samsung was interested, but the company later shot down the speculation.

Nevertheless, the Samsung-HP speculation highlights that the PC unit math is muddled. Wu wrote:

We believe one potential hurdle may be the asking price. As we have mentioned before, we believe the PC business may be worth $8 billion or $3.66 per HPQ share. We get to this valuation by assuming a 5% operating margin on $40 billion in annual revenue and a 22% corporate tax rate. We get net income of $1.6 billion and with a 5x multiple, an $8 billion valuation. Other potential parameters to watch are whether Samsung asks HPQ to include webOS, giving it ownership of operating system software, thus lessening its dependence on Android. And what about HPQ’s highly profitable printer business to augment its own efforts?

In other words, the valuation for HP's PC business is a mystery and the price tag depends on what else is lumped in. In that situation, a spin-off is the best---and only move.

Related HP posts:

Topics: Hardware, Hewlett-Packard, Operating Systems

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15 comments
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  • There are two considerations.. Profit and growth.

    How much profit per sale can be made? As a result of the PC Price wars... Not much. What about growth? Well depends on how you look at things. Right now it looks like Smartphones, Tablets, and perhaps Ultralights are the growth markets of today and tomorrow. So if I were to put my money into something (And a HUGE amount of it I might add) I might just think that opening up a savings account would be a better deal with far fewer risks than actually buying a PC business.

    Pagan jim
    James Quinn
  • No buyer really could offer a reasonable price for it

    First problem is that what HP would be selling is a unit which includes no manufacturing capability at all (not a lot of design or engineering talent either). HP's PC business is now primarily a vast, sprawling sales channel for punting Chinese contract manufacturer kit. Companies like Foxconn which anyone is free to do business with.

    You get the HP name which has great brand recognition, but not great brand associations. The HP brand doesn't particularly say cool, sexy, reliable, quality, powerful, or even cheap. Mostly (in my head at least) the HP brand says "meh".

    There is still real value in HPs PC unit. But the only kind of company that might benefit from an HP purchase would be an established PC player looking to corner more market. But buying a sprawling monster company which is bigger than your own is pretty challenging. Leadership would do nothing but try to integrate for a good 2-3 years which doesn't leave much time to adapt to a radically changing computing landscape.

    Almost all PC companies are probably much happier sharpening their knives to start taking chunks out of a wobbling HP unit. It's much less risky and the rewards are still good.

    There is a psychological component too. If it is valuable, why is the biggest PC company in the world trying to get out of the PC business?

    "Dear Sir or Madam, I am CEO of very large computer making company. It is company which makes many tens of billions of dollars every year. Unfortunately, due to certain laws and regulations in my home country of america, I am no longer able to run my company and, for legal reasons, I must sell. All that you need do to help is provide a bank account number and password which has in excess of $10 billions of dollars. As exchange for your service you will be entitled to all (many tens of billions of dollars a year!) that my computer making company makes. Kindly provide the account number as the laws and regulations require action quickly and soon. Kind wishes, Leo."

    Add it all up and a buyer could really only be found for a fire-sale price far less than its actual worth. However, if they pulled a TouchPad and dropped the price of their PC business to $99 there will be takers. Heck, I would buy two and sell one on eBay. :)
    SlithyTove
    • RE: HP's PC reality: A spin-off is its only choice

      @SlithyTove Eh, HPs were decently cheap enough. At least their laptops were, hence nearly everyone at my college having one. Unfortunately, the quality is there to match, as I don't know of anyone (myself included) that had one that was functioning after 4 years. I know mine crapped out after 2.
      Aerowind
    • RE: HP's PC reality: A spin-off is its only choice

      @SlithyTove When you say "But the only kind of company that might benefit from an HP purchase would be an established PC player looking to corner more market." you sound EXACTLY LIKE Carly Fiorina... That is how HP got into this mess.

      Everyone has read the postmortems on the Compaq deal and that is why there are no takers. That leaves a spin-off. I hope it works out better than the Compaq deal.
      fmcgowan
      • RE: HP's PC reality: A spin-off is its only choice

        @fmcgowan

        <i>When you say "But the only kind of company that might benefit from an HP purchase would be an established PC player looking to corner more market." you sound EXACTLY LIKE Carly Fiorina... </i>

        Only superficially.

        What I am basically saying is that unless you are already a PC maker I don't think acquiring HP's PC division makes much sense at any price. An existing PC maker could extract useful value from it's sales channels, but only at prices far below the basic value of the unit. That is a very different situation from paying big money for a near-rival during the heyday.
        SlithyTove
    • HP failed to differentiate themselves in the market

      back when they were king of test equipment and calculators, you paid a premium for an HP product, but you got something you could run through a snow blower and still have work. When HP went the PC route, they abandoned that concept and joined all other PC manufacturers in the race to the bottom.
      baggins_z
  • RE: HP's PC reality: A spin-off is its only choice

    The spinoff may be their only remaining choice, but it will be another horrible bloodletting for whoever is left holding HP shares. Todd Bradley is already making grandiose noises about how he will lead the spinoff.

    But HP currently has probably the most idiotic management of any major company in recent history. They have systematically destroyed $75 BILLION in shareholder equity, and they continue to make ridiculous claims and self-justifications. The only thing Bradley should be leading is the queue of executives headed for the unemployment line.
    terry flores
    • RE: HP's PC reality: A spin-off is its only choice

      @terry flores ...but the sad thing is, we both know that, having driven HP into the mountainside, he will end up in another lucrative CEO job, provided by his network of pals...
      bargeemike
    • RE: systematically destroyed $75 BILLION in shareholder equity

      @terry flores

      (sarcasm)
      My idea of a reward for these <i>members of damagement</i> is an <b>all expenses paid trip</b> from California to Hawaii in an old chartered 747.

      About half way in-between those points, that old plane experiences something extremely rare - <i>catastrophic failure of all 4 engines</i> while cruising at 40,000 feet.

      "Oh, the humanity!"

      (/sarcasm)
      fatman65536
  • There is no &quot;Post PC era&quot; and in the next 2 years, PC sales will spike

    after Windows 8 is released and tablets and PCs get upgraded to the new OS.

    That could be on the minds of HP executives for considering not selling the PC and tablet units. Why sell divisions which are likely to see a major increase in sales in the next 2 years?
    adornoe
    • RE: HP's PC reality: A spin-off is its only choice

      @adornoe@... No one will buy Windows 8 if it looks like a tablet OS for their PC. Unless you can switch it to look like Windows 7 I will have no need for it.
      Randalllind
      • RE: HP's PC reality: A spin-off is its only choice

        @Randalllind

        You are in luck. W8 will be able to switch between Aero and Metro.
        SlithyTove
  • they should not sale

    How many people are going to run out and get the new windows 8 and why can't they find a way to build a tablet that will run windows 8 i wouldn't sale to much money in the future.
    SmileyMark
  • RE: HP's PC reality: A spin-off is its only choice

    Let's say you have a large painting by Wedin that is supposed to be worth between 5k and 10k dollars... but there are no buyers. What's it worth? Just spin it off... sounds messy.
    notme403
    • RE: Just spin it off... sounds messy.

      @notme403@...

      No, it's more like an exercise in 'accounting tricks'. How the 'spin off' is accomplished can hide all kinds of realities the <i>damagement</i> really does not want to make common knowledge.

      Example: If HP's PC division is worth (for the sake of argument) $8Billion; and all they can get for it is only $4Billion, then there is a very large <b>loss</b> that has to appear on the books at the time of the sale. But, if they initially spin it off, they can transfer that $8Billion to the new company. Over time they can sell off their stake in the new company, and spread out the losses.

      In layman's terms, it amounts to having a massive hemorrhage, or a slow blood letting. One may kill you, the other you might survive.
      fatman65536