Is HP's split good for its health?

Large companies can benefit by breaking up into smaller pieces, but Hewlett-Packard Co’s split exposes an uncomfortable reality for chief executive Meg Whitman.

Large companies can benefit by breaking up into smaller pieces, but Hewlett-Packard Co’s split exposes an uncomfortable reality for chief executive Meg Whitman: Her new, slimmed-down company will be on no steadier footing than the current H-P.

H-P said Monday it will cleave itself in half. The new HP Inc. will carry on H-P’s personal computer and printing operations while milking them for cash. The other part, Hewlett-Packard Enterprise, will sell H-P’s products and services for large companies, including computer servers, data-storage equipment, software and consulting.

In a conference call announcing the breakup, the company billed Hewlett-Packard Enterprise as a growth engine. However, that side of H-P, which Ms. Whitman is slated to run, is stalled. Revenue in the enterprise portions of H-P slipped 3.2per cent in the nine months ended July 31, compared with a year earlier. Earnings before taxes fell 6 per cent.

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Ms Whitman said the breakup would make the new company more nimble and enable it to invest in products and acquisitions to better address its market.

In an interview Monday, Ms Whitman said the breakup would sharpen executives’ ability to attack the enterprise company’s challenges. “I believe that this focus will actually help us,” she said.

The new company—like the current H-P businesses it absorbs—will be squeezed by price-chopping hardware vendors such as Lenovo Group on one side and high-end software specialists like Oracle Corporation and VMware Inc. on the other.

H-P’s bright spots are in areas like so-called converged systems, or hardware platforms that unite storage, networking and computing. And HP is a promising new entrant in networking gear that funnels Internet traffic, putting pressure on market leader Cisco Systems, said Neil MacDonald, vice president at Gartner.

The catch, he said, is Ms Whitman’s enterprise company will need more money to invest in or buy its way into other emerging areas of business technology. She no longer will have the steady flow of cash generated by the PC and printing group.

“HP on the enterprise side, they’ve been behind the eight ball. The jury is still out as to what this strategic move does for their growth,” said Daniel Ives, a technology analyst with FBR Capital Markets.

Wall Street reacted warmly to HP’s breakup, as it did to eBay Inc.’s announcement last week to split its auction business from the PayPalpayments business. HP shares rose 4.7 per cent overnight to $36.87.

However, where PayPal gained opportunities by separating from eBay, dividing HP confers few such advantages and may create problems. Without the PC-and-printing operation under the same roof, HP can’t as easily sell packages of computing gear, servers, consulting services and software to corporate-technology departments.

The slimmer companies that result also may lose clout and pricing power with suppliers of computer chips and other hardware parts.

The breakup of the 75-year-old Silicon Valley pioneer is the latest in a series of dramatic steps taken by some of the world’s biggest sellers of corporate technology. The current market leaders achieved dominance by displacing formerly entrenched rivals. Now, however, they are threatened by younger competitors as they struggle to adjust to tectonic shifts in how companies buy and use technology.

Larry Ellison stepped down last month from the CEO role at Oracle after 37 years, as his company navigates tumult in its product lines. Michael Dell last fall grew frustrated with investors and led a $US25 billion deal to return Dell Inc. to his control. Both Intel Corp. and Microsoft Corp. in the past 18 months turned to a new generation of leaders for a fresh eye on their challenges.

HP may not be standing pat after the breakup, either. HP and data-storage company EMC Corp recently discussed a potential merger, and a separation of HP’s PC-and-printer operation was a part of those talks, according to people familiar with the matter.

HP and EMC could continue to explore a tie-up, though the odds of such a deal ultimately occurring aren’t high, people familiar with the matter said.

Ms. Whitman on Monday declined to address discussions with EMC or other potential merger candidates.

Executives said Monday that HP was restricted from repurchasing shares of the company’s stock, because it had “material, nonpublic information”—a sign HP has been discussing acquisitions or sales. People familiar with the matter said the statement referred to possible deals, including with EMC.

If Ms. Whitman keeps the hand she was dealt, Hewlett-Packard Enterprise will inherit a tough competitive position.

HP has been slower than most other corporate-technology sellers in pushing into emerging areas such as cloud computing, mobile technology and services to help organisations modernise.

HP is the world’s largest seller of the most popular type of computer servers, according to research firm Gartner Inc., but that business is facing lower margins and greater competition.

The HP division anchored by servers, storage gear and other corporate hardware reported a 7.4 per cent decline in earnings before taxes during the nine months ended July 31.

That division will be Hewlett-Packard Enterprise’s biggest revenue contributor. At the same time, Lenovo and Dell have pledged to win market share in servers.

HP has introduced software tools to help companies manage their sprawling data centres and link them into clouds.

The company’s high-margin software business remains small and troubled. Software has accounted for less than 4 per cent of HP’s total revenue, and sales in that business fell during the most recent quarter from a year earlier.

HP also has acknowledged hiccups in its outsourcing and support operations, which mostly consist of the EDS business HP bought for $US13 billion in 2008. HP faces a squeeze there, as well, between high-end consulting operations like IBM’s and software exporters such as Wipro Ltd. HP said revenue from services fell 6.9 per cent over the past nine months.

—Dana Cimilluca and Joann S. Lublin contributed to this article.