What the Hewlett Packard Split Means for Shareholders

In 2015, Hewlett Packard finally split in two almost 13 months after it first announced the split. The board opted to break down the technology giant into two $50 billion entities. The goal was to provide value to shareholders, better manage the business, and drive growth.

For every share of HP Inc. (HPQ) held as of October 21, 2015, shareholders received one share of Hewlett Packard Enterprise (HPE). According to Hewlett Packard’s SEC (U.S. Securities and Exchange Commission) filing, the cost of the split was expected to be above $2 billion. And the SEC felt that the cost could “undercut the synergy between the enterprise and PC operations in selling goods and services.”

Hewlett Packard had already reduced its workforce by 80,000 to 85,000 during the process of the split. And it then cut around 30,000 more jobs from its enterprise segment. The company has also changed the way it sells its products. It split its channel program, PartnerOne, into PartnerFirst for HP Inc. and PartnerReady for Hewlett Packard Enterprise.

The printer market is a declining market but a major contributor to the company’s revenue, contributing ~40%. Moreover, softness in the PC (personal computer) space is slowing revenue growth. The split helped the company focus on product development, boost its printing business, and innovate in the PC segment.

HP Inc.’s PartnerFirst program will focus on PCs, printing and imaging equipment, and supplies that can be tracked. It will also introduce the PartnerFirst ServiceOne program.

As part of the restructuring, Hewlett Packard undertook some bold steps to reduce costs and revamp its enterprise segment.

• It sold its network security company TippingPoint to Trend Micro Security for about $300 million.
• It closed its public cloud company Helion Public Cloud due to strong competition from Amazon Web Services (AMZN). Instead, it will focus on the private cloud and offer software services to corporations to integrate with public cloud services offered by companies such as Microsoft (MSFT).

Credit Suisse Group’s managing director Kulbinder Garcha expects Hewlett Packard Enterprise to make several small acquisitions in order to expand its product offerings. He named Arista Networks, Nimble Storage, Citrix Systems, and CommVault Systems as potential acquisition targets.

It’s now been four years since the split. And between November 5, 2015, and November 5, 2019, HP Inc. stock rose 30%. Meanwhile, HPE stock rose 102%. HP Inc. struggled through the declining printing market but kept its business afloat, thanks to strength in the PC business—and notebooks in particular. However, this strength hasn’t always been the case. Between fiscal 2016 and 2018, HP Inc. stock rose 60%. Its revenue rose -6.4%, 8.0%, and 12.0% on a year-over-year basis. Revenue largely rose because of an increase in volume shipments and ASPs (average selling prices) for notebooks.

But HP, like all tech stocks, has taken a hit from the US–China trade war since October 2018. The trade war saw HP’s fiscal 2019 revenue remain unchanged on a year-over-year basis. Its declining Printing business felt the biggest hit, with revenue down 3.5% year-over-year in fiscal 2019.

HP saw strong demand in the PC market. But a prolonged supply shortage at its CPU (central processing unit) supplier Intel limited PC revenue growth to 2.6% year-over-year in fiscal 2019 as against 13% and 11% in the last two fiscal years. Declining revenue sent HP’s stock down 29% in fiscal 2019.

While the company was struggling with a weak demand environment, HP’s CEO Dion Weisler stepped down for family reasons, effective November 1. The head of HP’s Printing and Imaging business, Enrique Lores, took over the CEO role after serving for 30 years at the company.

In light of the struggling printing business, HP Inc.’s new CEO announced a restructuring plan in October 2019. Echoing the 2015 Hewlett Packard split, this plan will restructure HP’s printing business model and introduce printing-as-a-service. Under this plan, HP will cut 15% of its 55,000 workforce. It aims to slash 7,000–9,000 jobs by the end of fiscal 2022. The company will bear an overall restructuring charge of $1 billion. And it will also achieve an annual cost saving of $1 billion between fiscal 2020 and fiscal 2022.

Enrique Lores shared some details about the new print model in an interview with CRN. Accepting that it’s the Print business that needs restructuring, he explained that HP will diversify print revenue streams into “three complementary directions.”

At present, HP sells printers and supplies but earns most of its profit from supplies. Since selling printers isn’t earning money, the company decided to provide printers as a contractual service. This model is similar to the cloud business model, where companies subscribe to high-performance computing workspace to avoid investing in hardware. Contractual service is one revenue stream.

Lores added that the second revenue stream is bundling printers and a significant amount of supplies—like ink and toner. This move will save customers the hassle of buying supplies separately. Meanwhile, it will also help HP increase its revenue per customer. Also, Lores stated that the third revenue stream is offering two configurations in printers:

• The first is a flexible model in which customers pay a higher price for printers. In exchange, they get the flexibility of using supplies from other companies.
• The second is an end-to-end model in which customers get printers at a subsidized rate. But the “printer will only work with HP supplies.”

Lores stated that HP will roll out the new print portfolio at the end of fiscal 2020. Activist investor Carl Icahn, in an open letter to HP shareholders, described the standalone restructuring plan as “rearranging the deck chairs on the Titanic.”

HP’s board authorized an additional $5 billion buyback. And it also promised a 10% increase in quarterly dividend as part of the restructuring. But the plan failed to create enthusiasm among investors and analysts. What got shareholders exited was a takeover proposal from a smaller rival, Xerox.

In early November, Reuters reported that Xerox (XRX) made a takeover offer of $33.5 billion or $22 per share for HP in a cash-stock deal. The rumors came true and renewed investor interest in HP.

A November 13 article from the Wall Street Journal stated that Carl Icahn, who owns a 10.6% stake in Xerox, purchased 4.24% stake in HP for around $1.2 billion. Icahn believes the takeover will bring strong synergies.

What makes this offer unique is that the small fish, Xerox, with an $8.5 billion market cap, is looking to acquire HP. HP is very much the big fish here. It’s three times the size of Xerox, with a $30 billion market cap.

After careful consideration, HP rejected the Xerox offer. HP stated that the offer significantly undervalues the company and that the combined company would have massive debt.

However, Carl Icahn strongly opposed HP’s decision. He stated that the CEO and board might just be delaying the deal to save their position in the company, according to CNBC.

Meanwhile, both investors and analysts are in favor of the takeover. Both Xerox and HP operated in the printing market, which is declining thanks to digitization. No standalone efforts will bear significant fruit in this declining market. According to the industry life cycle, companies consolidate in the decline stage as costs reduce and sales converge. To get more details on the industry cycle, check out this Corporate Finance Institute article.

Deal or no deal, the noise around the takeover sent HP and Xerox stock up 11% and 10.6%, respectively, in the last month. The two stocks will continue to garner investor attention until these companies reach a final decision.

Originally published in November 2015, this article was substantively updated on December 9, 2019.