Is Splitting HP In Two A Bad Idea?

on February 13, 2015

Anyone looking into the history of Silicon Valley will quickly find out it all started with Bill Hewlett and David Packard setting up shop in a Palo Alto garage and creating the first real Valley start up.  I have been covering HP since I joined Creative Strategies in 1981. David Packard was still Chairman of the Board when I first met him. I was a young analyst in awe of him. He had already become a legend in tech and a powerful figure here and in Washington where he served as U.S. Deputy Secretary of Defense from 1969–1971. He was a very humble man given his success and he was exceptionally kind and gracious to me as we talked about HP’s decision to get into the PC business. HP’s move to join the PC revolution was an important one and set in motion a powerful phase in HP’s growth. I vividly remember the actual launch of HP’s first PC when then CEO, John Young, introduced Cyril Yansouni who led this project. He walked a few of us analysts and media through the design and goals of their first PC offering.

I was reminded about my first meeting with David Packard a few years back as I sat in his private conference room, a few feet from his and Bill Hewlett’s office lovingly preserved in HP’s HQ in Palo Alto. HP set the tone for Silicon Valley’s tech culture and for decades it has been one of the most important companies in the world of technology. But over the last 10 years, HP has gone through multiple CEOs and various turmoils and today it is struggling to grow as a company and continue to be profitable and relevant at all levels of computing. Their recent move to split the company into two distinct entities, one focusing on the enterprise and servers and the other focusing on printing and PCs, is the next major evolution of a company struggling to find the right equation for growth and stability.

For me, this split is deja vu all over again. Not long after Carly Florina joined HP as CEO, she decided to take the PC division and put it under Vyomesh Joshi, the Executive VP of printing. Mr. Joshi, known as VJ to most, was a superb leader in their printer business but admitted from the start the PC market would be a new challenge for him to lead. Over the years I had worked on marketing projects for various PC companies, so not long after VJ took over the PC business I got a call from him. He asked if I could help with the strategic vision for their PC group and look at various technical and marketing ideas that were being floated to him at the time. So, for the next few years, I helped this group on various projects and saw their PC business grow marginally but still stay in the forefront of the PC business. During this time, HP acquired Compaq so VJ’s job also included the integration of Compaq into HP, which became a major challenge and distraction and both the PC and printer business were impacted by this move.

While not a spin off, it operated much in the same way and the PC business suffered for it.

However, the Carly Firona years at HP were turbulent and this ultimately impacted all of HP’s businesses. She was forced out of HP and the company hired Mark Hurd as the new CEO. One of the first things Mark did was bring the PC division back as its own group and put Todd Bradley in charge of all PC related projects. VJ went back to just overseeing the printing business, his first love anyway. It was under Bradley’s management he hired two of the smartest marketing minds in tech. Satjiv Chahil became CMO and he created their highly successful campaign — the “PC is Personal Again.” His second in command was David Roman, now the CMO at Lenovo. Together, they expanded HP’s role as the #1 PC player in the world. But during this time, the PC division was treated as a separate company and I never felt it got the proper support from the top to make it more successful and competitive given the strong moves Lenovo was making in PC market share.

Unfortunately for HP, the turmoil at the top continued. Hurd was forced out and Leo Apotheker, who lasted only a year, replaced him and current CEO Meg Whitman succeeded Apotheker. When she became CEO, she stated she would keep the PC segment inside and support it as an important part of the overall company — it would be strategic to their growth. But HP has continued to struggle at many levels and now HP is about to be split in a most dramatic way.

If you were in the PC division at HP, you would be forgiven if you felt you had whiplash. In the face of increased competition in the PC market from Lenovo, Dell and Apple, the PC company now has to fend for itself as a standalone group. The key issue why I think this a bad idea is the importance of offering a seamless and integrated solution to all of their customers. In fact, their competitors have all realized the importance of this and it has become the cornerstone of their business models. Dell went private specifically so they could integrate and innovate on all platforms and offer a seamless solution. Michael Dell told me close to 70% of their corporate sales come through their PC group and he considers PCs a major strategic part of their business. Lenovo approaches the market in the same way. All of their divisions are under a corporate umbrella with everyone marching to the same drummer. This is why they have now become the #1 PC vendor in the world. And Apple is the poster child for having everything inside a single company so they can offer a level of seamless continuity across devices and platforms and support them in ways that continues to differentiate them from their competitors. Add to that the deal with IBM and they have the potential of undercutting all the PC players in the next 3-5 years as they enter the enterprise market in a big way.

Paul Frank in Seeking Alpha summed this up well. In a piece dated Feb 4 he stated:

“Splitting the cloud, networking, storage, server, software and security arms from the core hardware user interfaces might be a big step in the wrong direction. Business buyers want low cost, convenience and a single decision/provider, if at all possible. Changing the winning proposition Hewlett-Packard now offers versus competitors is fraught with new risks. Decoupling the official link between units that work together as a successful team now will have negative repercussions for overall sales.”

So why am I skeptical about this split working? I recently had a discussion with one of HP’s biggest competitors and they told me they had just won a huge PC bid from HP because the client was concerned about the split and not getting the kind of single company solution and service they needed in the deal. I know of another 40K unit PC bid from an educational customer that went to an HP competitor for the same reason. I was part of a due diligence team on another big IT project and once I learned of HP breaking the company in two I threw my recommendation to a competitor since I questioned their ability to deliver the kind of solution this company wanted.

It is not a coincidence Dell and Lenovo have patterned their strategy around a single company solution. Apple has been very successful with it, too. HP’s decision to go in the opposite direction is one that is a difficult one to understand and I am not convinced it will succeed.