Is the HP Split a Win-Win for Hewlett-Packard Owners?

It’s an idea that has been on and off investors’ radars several times over the past few years, but now it looks like it’s finally going to happen for real: Hewlett-Packard (HPQ) is dividing itself into two companies.

hewlett-packard hpq stock hp splitAccording to a report first published by the Wall Street Journal this weekend, the personal computer and printer business will begin to operate separately from the enterprise hardware and services division at some point in the foreseeable future. Current HPQ CEO Meg Whitman will remain as CEO of the enterprise business, and will become the chairman of the PC/printer unit. Dion Weisler is expected to be named the CEO of PC and printer division.

Current HPQ stock owners need not do anything to receive the spinoff shares created by the HP split.

From here, two key questions arise.

  1. Will Hewlett-Packard actually be better off splitting itself into two pieces?
  2. What do these two pieces look like when they have to stand on their own?

Hewlett-Packard Is Right to Split

While spinoffs tend to be exciting events, the euphoria that generally surrounds them has been a relatively recent phenomenon, sensationalized by folks like Carl Icahn and companies like Sears Holdings (SHLD), which recently spun off Lands’ End (LE).

In reality, many spinoffs end up being the corporate equivalent to turning a 10-dollar bill into two five-dollar bills.

In other words, they can be meaningless.

So why would Hewlett-Packard bother? Because there’s always a chance both divisions will flourish more on their own than they could without an HP split.

The key is focus. Dissimilar business units can — and often do — lead to internal company conflict as each unit battles for the most of the company’s attention and resources. That battle can be so distracting that none of the organization can truly thrive.

In this particular case, HPQ stock owners should be optimistic about the maneuver from Hewlett-Packard. Why? Because this (almost exact) same spinoff was made years ago by an HPQ competitor, and those post-split companies did end up thriving.

That company was International Business Machines (IBM).

Most investors know that IBM makes hardware and provides enterprise-level service. And despite a few stumbles of late, that business is still a good one. What has been easy to forget, however, is that IBM was in the PC business until 2004 when it sold that unit to Lenovo (LNVGY).

Many investors also don’t recall that printer maker Lexmark (LXK) was once an IBM-owned division. Few would disagree that that these business did better by not being under the IBM umbrella, while IBM was better off without those distractions. In fact, Lenovo became the top-selling PC name in 2012, displacing — yes, you got it — Hewlett-Packard as the top-selling computer manufacturer.

Point being, it already has been proven that enterprise hardware and printers (and even personal computers) are distinctly different businesses that need dedicated leadership. It also has been proven that these technology lines of business can thrive when given dedicated attention and resources.

What Will HPQ Stock Holders Be Getting?

Since Hewlett-Packard is very forthcoming about where its revenue and earnings come from, HPQ stock owners can get a pretty good idea of what they’ll own with each stock after the HP split. And as it turns out, this spinoff is going to divide the company into two almost equally sized halves.

hpq segment revenue
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Last quarter, Hewlett-Packard sold $14.2 billion worth of computers and printers, and $14.3 billion worth of enterprise level service and equipment. And, as Forbes contributor George Anders noted here, each of those two divisions also generated roughly $1.4 billion apiece in operating profits last quarter.

As such, it’s not like there’s going to be a short end of the stick to worry about after the HP split is complete.

That said, there’s also little doubt as to the faster growing unit here. Notebooks and desktops are leading the turnaround effort from Hewlett-Packard. It wasn’t just last quarter’s 11.8% jump in revenue from the PC division, either. While certain pieces of the enterprise division have shown signs of new life in 2014, as the details from Q3’s update below indicate, desktop and notebook sales are firmly up for the whole year.

Be that as it may, even with the smidgen of hope Hewlett-Packard has created with server and networking sales, a stand-alone, dedicated company may well accelerate that line of business now too.

Bottom Line

Barring some Lampert-like shenanigans where the spun-off company is forced to take on debt just to pay the parent company a ridiculous departing dividend — and that’s just not apt to happen — the HP split is just what it seems to be: the division of a solid, promising company that’s going to result in two, even more solid and more promising stocks.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/10/hp-split-hewlett-packard-hpq-stock/.

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