Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Hewlett-Packard (NYSE: HPQ) has had a rough time of it over the past five years or so as it has struggled to shift its business from manufacturing to a more service oriented model. Management issues and trouble integrating acquisitions have taken their toll. Now there are rumors that other companies are offering to buy parts of HP, potentially breaking up what the company recently built. Would it be a good move?
The Past Isn't Pretty
Dirty laundry is probably the best way to describe Hewlett-Packard's recent past. Transgressions of high level employees and board leaks are just two examples of the drama that has surrounded the company in ways that have nothing to do with business. It's been ugly, to say the least. The decision to bring in Meg Whitman, a high profile CEO with material credentials from her time at eBay (EBAY), appears to have helped resolve those problems.
The other big problem at HP is related to recent acquisitions. The first was EDS, which the company bought in 2008. This purchase was supposed to be the foundation of a services oriented business. That would move HP closer to the IBM (NYSE: IBM) mold. More recently, it acquired Autonomy, a company out of the United Kingdom, that was intended to build on the shift started with EDS.
Hewlett-Packard has taken material write offs on both purchases, suggesting that the purchase prices were too high and that the expected synergies simply haven't materialized. There's even an FBI inquiry into Autonomy's accounting, which HP sited in its write off.
Get Rid of the Hardware
The idea of breaking HP up isn't new. Prior to Whitman coming aboard, there was a highly publicized decision to get rid of the company's legacy hardware business. The idea behind that move was that hardware was a commodity business that would suffer from low margins for the foreseeable future. Get rid of that, and the higher margined services business could thrive.
Whitman quickly dropped that plan. A decision that seems prescient given the turmoil surrounding the services push. While hardware, like personal computers and printers, may be commodity based, HP is a leader with notable market share. It is the cash cow from these operations that has allowed the company to survive the notable blows from the EDS and Autonomy acquisitions.
OK, Then Get Rid of EDS and Autonomy
Now there's rumors, reported by The Wall Street Journal, that suitors have come calling to see if HP is willing to sell EDS and/or Autonomy. Clearly, the value of each of these additions is well below what the company paid, so a purchase would be opportunistic. However, breaking these businesses out would be hard to impossible.
EDS has been an integrated part of Hewlett-Packard for years. Trying to piece it back together to sell it is kind of a silly concept since it would require material reworking of HP's businesses. Autonomy, meanwhile, has key products that HP is using that would be notable losses if that business were to disappear. That said, Autonomy could probably be extracted easily enough to make a sale possible.
Does it Make Sense
Of course anything could be broken up or pieced together and sold, if HP wanted to. The real question is whether or not such a move makes any sense. And it probably doesn't. IBM realized years ago that hardware wasn't a great business and it moved on to software and services. The software and services business has higher margins and annuity-like contracts. And IBM has differentiated itself well. HP simply isn't IBM, and probably never will be.
Problems aren't unique to HP, so there's reason to believe that this tech giant can, eventually, right the ship. For example, CA, formerly known as Computer Associates, is another tech company that has shifted over the years to a services oriented business in the IBM mold. It, too, went through a highly publicized and fairly ugly scandal involving high ranking company employees. However, CA has managed to come back from its struggles a stronger company. It was a pretty ugly looking business at times, though.
Keep it Together
Hewlett-Packard's hardware business may not be sexy, but it does provide a reliable income stream to support the longer-term shift toward services. That's a solid foundation off of which to build. The goal of providing services is a good one and, assuming that Whitman can keep future mistakes to a minimum and get the new businesses running smoothly, HP will eventually find its stride again. That could take a few years.
HP has certainly made mistakes. So far, investors have paid the dearest price, as the shares have been notable laggards. Investors looking for a turnaround opportunity, though, shouldn't get caught up in the rumor mill. Hewlett-Packard as it is currently configured is a better long-term business than it would be ripped apart.
Cash Cows are Good
In fact, in some ways, the hardware business is similar in nature to the cash cows supporting companies like Microsoft (NASDAQ: MSFT), Intel (INTC), and many other older tech business that are trying to reinvent themselves or expand into new areas. Microsoft, for its part, has used is operating system and Office software to fund expansions into gaming (Xbox) and a number of less successful areas (the Zune music player). Currently it is using its cash cows to fund a push into the mobile operating system business with the help of Nokia (NOK).
The thing about cash cows putting out a lot of milk, as HP's hardware business does, is that they allow you to make mistakes. The money covers up the errors, regardless of market sentiment and share price movements. So, HP still has plenty of time to get the transition to a services model right. When it does, that will be the time to discuss a break up—though even at that point it's probably not that great an idea.
ReubenGBrewer has no position in any stocks mentioned. The Motley Fool owns shares of International Business Machines. and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!