HP's PC Spin in Doubt: Deals to Watch

NEW YORK ( TheStreet) -- Hewlett Packard ( HP) may step back from its controversial personal computer spinoff plan as management works feverishly on definitive plan for the company, the Wall Street Journal reported Wednesday.

Earlier in October, HP took a controlling stake in British software giant Autonomy moving the company closer to completion of its $10.3 billion purchase announced in mid-August. It was all part of former CEO Leo Apotheker's ambitious attempt to turn the company from a PC maker to a services and software specialist more in the mold of IBM ( IBM)and SAP ( SAP), which he led for over two years. The strategy was to spin out its computers and handset divisions in favor of Autonomy's software capabilities that could be grown into existing security and services business lines.

The company is currently reorganizing after firing CEO's Mark Hurd and Leo Apotheker in the past 12 months. After the board approved Apotheker's plan, he was then ousted and replaced with former EBay ( EBAY)CEO Meg Whitman. The extent of H.P.'s new strategy to follow Apotheker's plan or revert back to its traditional operating structure is yet to be fully determined under Whitman's leadership. Last week, she said at a Fortune Magazine panel that the company would make a decision by the end of October.

In her introductory call, Whitman made it clear that while the Palo Alto, California -based company had a new leader was in place, HP would likely follow Apotheker's plan announced in mid-August. "I think the strategy is right. The initiatives that we undertook on August 18 are right," said Whitman. Responding to analysts questions about how long it will take for HP to solidify a strategy Whitman said, "The best thing we can do is get to a decision on PSG as fast as possible. This decision, it's not like fine wine. It's not going to get better with age."

She did however say that she would take a "hard look" at the overall strategy. Later in the call introducing Whitman as CEO, chairman of HP's board Ray Lane downplayed the notion that the company would transform itself. "Hopefully, we'll see a bigger software portfolio and we'll see more value-added services at HP, but we have $120 billion of hardware business that we care dearly about," Lane said.

Last week in a story about whether HP could make a transition to a services and software focus from PC's and hardware, Richard Kugele an analyst at Needham & co said, "To be the company Leo envisioned, you would need to do many acquisitions." Later that week, at a forum to discuss California's economic future, Whitman said that the company is definitively not looking to make more near-term acquisitions. In TheStreet's October 4th interview with Kugele, he said, "I suspect that if clearer heads prevail, the business may be kept (albeit now weakened). webOS should find a home because I feel it was a good OS, just needed some investment and MANY more apps."

In an October statement announcing its control of Autonomy, HP said the company will be run independently and its founder and CEO Mike Lynch will continue to head the Cambridge, England -based software-maker, reporting directly to Whitman. The decision gives HP and Whitman room to continue its P.C. operations and continue with the merger. Part of the reason Autonomy is running independently for now is only roughly 2% of current HP revenue comes from the software related businesses it's looking to build. With Autonomy revenue added, software will only be bolstered by roughly $1 billion or roughly 3% of overall revenue, a small piece of larger $100 billion-plus annual revenue that come from its overall PC, printing and server and network businesses.

HP shares are down nearly 40% year to date and are one of the worst performers in the Dow Jones Industrial Average -- They've risen since Whitman's introduction at the end of September.

Liz Claiborne ( LIZ) said Wednesday it is selling off several of its namesake and Monet brands to J.C. Penney ( JCP), its Dana Buchman line to Kohl's ( KSS) and its Kensie brand to Bluestar Alliance. The sales will net the New York -based company $328 million in cash.

Shares of Liz jumped over 40% on the announcement and as high as $7.24 in early trading.

For J.C. Penney and its $267 million Liz Claiborne and Monet purchase, it's an accelerated push to build classic fashion lines as newly hired CEO Ron Johnson prepares to replace current chief executive Mike Ullman, who is stepping down in November. Johnson left his post as a retail executive at Apple ( AAPL) in June to help the struggling retailer revamp sales and he was given a seat on the J.C Penney's board of directors in August ahead of taking the company reigns this fall.

In a press release announcing the business line sales, Liz Claiborne said it will now focus on its Kate Spade, Juicy Couture and Lucky Brands. The company also agreed with Donna Karan International to terminate its DKNY Jeans and DKNY Active licenses.

Earlier this year, Liz Claiborne sold fragrance brands to Elizabeth Arden and its Mexx business young women's business line to Gores Group, netting $58.4 and $85 million in cash respectively.

Of today's sales, Liz Claiborne Chief Executive William L. McComb, Chief said, "Consistent with our stated goal to de-lever the Company, these proceeds will be used to further reduce debt." The company said as a result of the sales it expects its debt to fall to as low as $270 million --current debt levels are $768 million according to quarterly filings as of July 2nd.

The company also lowered its 2011 earnings guidance, saying earnings before interest, taxes, depreciation and amortization will fall to as low as $80 million from prior expectations as high as $120 million. It also slashed its 2012 outlook by as much as 40% to $130 million from $220 million.

The lower earnings guidance and brand sales come at a time of great uncertainty for retailers. CEO McComb said in his announcement of brand sales that, "At the close of these transactions, at a time when most economists in the world are now agreeing that major European and the US markets are facing significant risks of another recession, we will be a more appropriately levered, more capital efficient, growth-oriented company."

The New York based company has seen its operating losses accelerate from $8.5 million to $64.5 million this year. It's also failed to be profitable in any year since 2006 and hasn't had a profitable quarter since this time in 2007.

Liz Claiborne shares are down nearly 8% this year to $6.60 and have been cut by over 75% since reaching highs of above $45 a share in 2007. Over that time, its annual revenue has fallen from levels as high $4.4 billion to $2.5 billion.

When all of the brand sales are completed and its namesake brand is absorbed into J.C. Penney, the company will find a new name to reflect its remaining Juicy Couture, Lucky Brand, and Kate Spade lines. Referring to remaining fashion lines, McComb said, "we are exploring options for a new corporate name that will better reflect our keen focus on building and growing our three global lifestyle brands.

In a separate press release announcing the purchase, incoming chief executive Ron Johnson said that the Liz Claiborne and Monet brands will bolster J.C. Penney, "we seek to be part of our customers' everyday lives, ensuring that we offer the brands that are most relevant to them is a crucial component in transforming JCPenney into America's favorite store. The brands we are acquiring hold tremendous appeal for our customers."

When Johnson becomes CEO of the Plano, Texas -based company in November, he'll hope to bolster J.C. Penney's stock price, which has lagged the S&P 500 and is down nearly 7% year to date. The company, like other retailers Saks ( SKS)and J. Crew has also been hit hard by the financial crisis and recession. Currently its share price of just over $30 is a fraction of highs above $80 a share reached in 2007.

-- Written by Antoine Gara in New York

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