Hewlett-Packard Calculates a New Strategy

The shake-up's not done, execs suggest.
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For months, Wall Street demanded action. Today it got some. Now the question is whether 61-year-old tech giant



has done enough to revive investor enthusiasm.

In a move aimed to boost its computer businesses, H-P said Tuesday it would split into two companies by spinning off its measurement division, which reported $7.6 billion in revenue last year and includes Hewlett-Packard's chemical-analysis and medical-equipment units. The company is also considering selling about 15% of the measurement arm, which accounted for 16% of H-P's $47 billion in sales in 1998, to the public by year-end in a deal that "would be the largest technology IPO in Silicon Valley history," H-P said.

Perhaps more significantly, H-P CEO Lew Platt will

step down from the streamlined Palo Alto, Calif.-based PC and peripherals maker once a new CEO is found and the realignment completed.

The shake-up has money managers beaming. "All I have to say is thank God," says Lenny Schuster, a hedge fund manager with

Gemina Capital

and a holder of the stock. "H-P had to do something because there is a lot of hidden value there. I just don't think the company has been able to figure out the best way to release that value."

"There are no synergies between the test-and-measurement group and the rest of the company," says Patrick Manning, a money manager with

Perry Capital

, who follows PC companies but has no position in H-P.

Tuesday, investors applauded the deal, sending shares of H-P up 2 3/4, or 4.2%, to close at 68 5/8. The stock earlier traded as high as 73 1/2.

'Sun has had a message that its employees can get excited

about -- H-P hasn't had that.'

-- Gartner Group's Paul McGuckin

Investors' enthusiasm stemmed in part from the stock's recent history as a poor performer, lagging behind Internet and PC leaders such as


(DELL) - Get Report

. As the tech leaders' stocks raced ahead in recent years, H-P shares remained mired at 1997 levels as the company unfurled a seemingly endless string of disappointments. In the last 10 quarters H-P missed more earnings estimates than it made. In the first quarter this year, the company showed scant 1% revenue growth from a year ago, and revenue from test and measurement equipment dropped 14% from a year ago, when the division reported record earnings.

Last November H-P hired consultants

McKinsey & Co.

to pursue strategic alternatives. This realignment may be the first in a series of moves with which Hewlett-Packard aims to catch up to competitors


(SUNW) - Get Report



(IBM) - Get Report

, which have more effectively articulated their Internet strategies.

"It's time for the company to take off its boxing gloves and not be so nice to its competition," says Paul McGuckin, a

Gartner Group

analyst and longtime H-P follower. "They have already lost way too much time and market share to Sun."

McGuckin points to the company's $10 million investment in Internet financial software company

Security First Technologies


. "It's an example of the direction H-P will start looking in," notes McGuckin, who sees the company's lack of a unifying message as its biggest problem over the last two years. "Sun has had a message that its employees can get excited

about -- H-P hasn't had that," he adds.

The company is also

expected to launch a new ad campaign highlighting its Enterprise Computing Solutions division.

Merrill Lynch's

Steven Milunovich said the campaign would be called "HP: The Internet Company."

"H-P hasn't been promotional enough, and there are tons of things hidden in that company that nobody knows about," says Schuster, the hedge fund manager.

CFO Bob Wayman hints of more announcements, including some related to "giving more autonomy to the business units in each of these companies and in its eServices strategy." One H-P executive who requested anonymity said Ann Livermore, head of Enterprise Computing Solutions, will lead the charge at the revived, slimmer H-P. The division accounted for 38% of total revenue in the first quarter.

The test-and-measurement division, the company's oldest, brings in up 30% to 40% of total profits, according to Amir Ahari, a senior analyst at

International Data

. This is good news for Ned Barnholt, former head of the measurement division and now CEO of the yet-to-be-named measurement company, but it may further pressure H-P's earnings outlook. "We will look for consistent, profitable growth, and focus on such high-growth markets as communications and life sciences," says Barnholt. The unit has grown 10% annually during the past five years.

Morgan Stanley

is the lead adviser on the strategic realignment and

Goldman Sachs

will also work with the company, according to a person close to the deal.