Merrill Lynch Advocates Breaking Up Hewlett-Packard

On the eve of Hewlett-Packard's(HPQ - Cramer's Take - Stockpickr) analyst meeting Tuesday, Merrill Lynch analyst Steve Milunovich has suggested the computer giant break itself up by spinning off its printer and computer divisions.

Just as H-P prepares to talk up the progress it has made, the comments conjure up nasty reminders of the opposition to H-P's merger with fellow computer outfit Compaq, which closed on May 3, 2002. At the time, critics insisted it was a mistake for the company to increase the size of its computer business, saying it would drain resources from the more profitable printer arm.

In a Monday morning note, Milunovich said H-P's lagging stock price underscores the company has yet to gain the full confidence of investors. H-P shares have ebbed 8% since the day before the company announced its merger with Compaq on Sept. 4, 2001, compared to a 1% decline for the S&P 500 in the same time period.

Amid positive advances among other tech stocks, H-P shares were recently up 31 cents, or 1.5%, to $21.57.

Explaining the market-lagging performance, Milunovich invoked the now-standard line that H-P is squeezed between IBM's(IBM - Cramer's Take - Stockpickr) computer hardware and services at the high end and Dell(DELL - Cramer's Take - Stockpickr) at the low end.

More worrying, Dell's move into printers in the past year could eventually pressure H-P's heretofore sacrosanct imaging and printing line, a steady source of profits even when its computer division dipped into the red in recent tough times.

The solution, in Milunovich's view: Break up the $80 billion company, probably by spinning off its printer division. (Merrill Lynch has done investment banking for H-P in the past 12 months.)

Asked to comment on the substance of the Milunovich note, H-P spokesman Brian Humphries downplayed the call for a corporate break-up. He said, "We believe the portfolio we have built is compelling and provides the core for solid growth and profitability."