HP plans to split the businesses by creating an enterprise technology infrastructure, software and services business, which will do business as Hewlett-Packard Enterprise, and one that will comprise HP's market-leading personal systems and printing businesses, which will do business as HP Inc.
The split would be made through a tax-free distribution of shares to stockholders next year, the company said.
The printing and personal computing business, known as HP Inc., will be led by Dion Weisler, an executive in the division. HP's current CEO, Meg Whitman, will lead Hewlett-Packard Enterprise and serve as chairman of HP Inc.
Here's what analysts had to say about the split.
Angelo Zino, S&P Capital IQ (Buy)
HPQ announces that it will split into 2 companies - Hewlett-Packard Enterprise (focus on servers, storage, networking, software and services) and HP Inc. (focus on PCs and printers). Meg Whitman will run Hewlett-Packard Enterprise while Dion Weisler will become CEO of HP Inc. The spin-off is expected to be complete by FY 15 (Oct.) end and be tax-free. We positively view the pending transaction, as we see it unlocking significant shareholder value and should open up strategic opportunities for both companies.
We view today's [announcement] as a very bold and smart move that provides increased flexibility, and we are increasing our 12-month price target to $39.00 from $34.50.
Also, during this morning's call, the company indicated that it is still in possession of material, non-public information that impacted the company's share buyback program in the October quarter. Recall, recent media reports have highlighted that HP and EMC were in discussions to merge, while other leading IT vendors were also mentioned as potential suitors. By separating the PC & Printing business from enterprise IT, we believe HP gains flexibility to sell off one or both businesses if an attractive offer emerges. If HP and EMC are in discussions to merge as suggested by recent media reports, we believe it would be difficult for EMC shareholders to accept a PC and Printer business.
Kulbinder Garcha, Credit Suisse (Upgrading to Outperform from Neutral; $45 PT)
While HP shares have performed well in the past several years, this has been driven more by FCF improvements, while sustainable revenue growth continues to be challenged. A break up certainly creates value through renewed focus for each of the businesses as independent operations; nevertheless, we harbor concerns for the Enterprise business given legacy exposure, negative impact from the cloud and weak position across the Enterprise stack. We also note HP Inc.'s shrinking top line with secular pressure from smartphones and tablets. While PC and Printing is run as mature asset, the Enterprise portion still need a degree of transformation - possibly through M&A, and believe our multiples reflect this.
Shebly Seyrafi, FBN Securities (Outperform; $55 PT)
Although we are less bullish on this split than on the eBay/PayPal split announced a week ago, we still think that this development is a small net positive for the stock. On the positive side, the split creates more focused companies that can arguably become more nimble vs. the competition, it improves alignment between rewards and results, it enhances capital allocation efficiency, and it creates more opportunities for M&A in our opinion. On the negative side, it may reduce HPQ's economies of scale in purchasing and distribution, and it may reduce HPQ's message that it offers a complete technology solution with "one throat to choke". Remember that three years ago HPQ noted that there was around $1B in synergies from holding the PC business as part of core HPQ, but HPQ now believes such there would now be less than $1B in synergies that would be lost. Still, with HPQ now on the fourth year of its five-year turnaround plan (and executing rather well), we think that this move is less disruptive now than when a similar plan was unveiled a few years ago under then-CEO Leo Apotheker.
Peter Walstrom, Morningstar
While we believe this is strategically the right move, there are still several moving parts and details to be finalized, which could materially alter the look of the two organizations a year from now, when the tax-free split is expected to close.
Timing is everything. The tagline from the investment community conference call was that today's move will create two more focused and nimble organizations that will be able to serve customers, partners, and shareholders more efficiently. CEO and chairman Meg Whitman was quick to point out that a move of this magnitude would not have been possible three years ago, and we wholeheartedly agree. Since Whitman joined HP, the company has taken several steps to fix its balance sheet (though more work is still needed, in our view), created a more cohesive leadership team, developed and introduced a more compelling product portfolio today, and reached existing and new customers with a more effective go-to-market strategy.
Highlights from the ratings report include:
- Compared to its closing price of one year ago, HPQ's share price has jumped by 61.26%, exceeding the performance of the broader market during that same time frame. Regarding the stock's future course, although almost any stock can fall in a broad market decline, HPQ should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
- Despite its growing revenue, the company underperformed as compared with the industry average of 9.2%. Since the same quarter one year prior, revenues slightly increased by 1.3%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
- Net operating cash flow has increased to $3,647.00 million or 36.38% when compared to the same quarter last year. In addition, HEWLETT-PACKARD CO has also modestly surpassed the industry average cash flow growth rate of 35.47%.
- The company's current return on equity greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of significant strength within the corporation. Compared to other companies in the Computers & Peripherals industry and the overall market on the basis of return on equity, HEWLETT-PACKARD CO has underperformed in comparison with the industry average, but has exceeded that of the S&P 500.
- You can view the full Hewlett-Packard Ratings Report.
-Written by Laurie Kulikowski in New York.
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