HP and the Case for Corporate Spinoffs

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The separation of Hewlett-Packard into two $50 billion-plus companies over the coming year will be a test case in how corporate spinoffs can be orchestrated, according to Wharton management professor Emilie R. Feldman. When Meg Whitman, chair and CEO of the Palo Alto, Calif.-based company made the split announcement earlier this month, it marked a departure from years of growth through acquisitions.

The company that William Hewlett and Dave Packard founded in a one-car Palo Alto garage 75 years ago will be split into Hewlett-Packard Enterprise, focused on technology infrastructure, software and services for business customers, and HP Inc., the firm’s personal computers and printer business. HP expects to complete the split by the end of 2015. The company is on track to maintain this year’s revenues at last year’s level of $112 billion.

Growing Apart

“Divestitures and spinoffs are the ugly stepchild of corporate strategy Twitter ,” Feldman said on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.) “They are viewed as acknowledgements of failures, bowing to pressure from investors and competitors. In reality, spinoffs can be used very proactively, as we are seeing in the HP case, to create value for shareholders and separate businesses that don’t belong together anymore.”

Over the past year, Feldman has conducted research on what happens when managers and directors take on roles in companies that have been separated by spinoffs. She found the latest developments at HP “an exact reflection” of that setting.

According to Feldman, much research is focused on the post-merger integration of companies— studying issues such as how to bring two companies together, how to manage culture clashes, how to integrate management teams, etc. But post-divestiture disintegration is “vastly understudied comparatively,” she said.

“[Spinoffs] are viewed as acknowledgements of failures, bowing to pressure from investors and competitors. In reality, spinoffs can be used very proactively.”

Among the key questions: What is the best way to break apart a firm like HP into two companies? “You know of HP in one way; now we have to think of HP in two different ways — so there is an identity component,” Feldman noted. “There are ongoing relationships with suppliers. There are potentially common customers. There are potentially linkages across the management teams. This is not an obvious process to undertake, and it will be really interesting to see how such a large and high profile firm manages it. This is a test case for a lot of companies managing divestitures.”

Unlocking Value

At HP, the enterprise business had its own operations and customers that were distinct from the retail patrons of the PC and printer business, according to Feldman. The divisions had “different business dynamics [and] different growth trajectories,” she said, noting that spinoffs can help companies to create independent entities that are freestanding, where each has its own shareholder base, investors, dynamics, drivers, strategies and management.

Divestitures are often responses to competitive pressures, but they also free up hidden value in a company, Feldman noted. “We always hear this statement: ‘The whole is worth less than the sum of the parts.’ [Companies] want to separate out these businesses, and these deals allow them to unlock that value.”

Whitman seems convinced that separation is the way to go. “It will provide each new company with the independence, focus, financial resources and flexibility they need to adapt quickly to market and customer dynamics, while generating long-term value for shareholders,” she said in an HP press release.

HP Enterprise wants to concentrate on “the New Style of IT,” which it defines as opportunities presented by cloud computing, big data, security and mobility. The split might also bring new freedoms to the firm’s retail business. HP has thus far failed to make a dent in the smartphone and tablet market, and in recent years has lost market share in the PC business to rivals like Lenovo.

“You know of HP in one way; now we have to think of HP in two different ways — so there is an identity component.”

But Feldman spotted a hint of which new HP entity is viewed as the more attractive business opportunity. “The fact that [Whitman] is choosing to be CEO of the enterprise business says everything that you need to know about the two trajectories of these companies.”

Right Time to Split

When Whitman arrived as CEO in 2011, she resisted moves to spin off the PC business, but now she clearly feels it’s the time to do so, Feldman noted. “It’s a long time coming,” she said, noting HP’s expansion through acquisitions over the years. It merged with Compaq in 2002, bought IT equipment and services company EDS in 2008, computer networking products maker 3Com in 2009 and smartphone maker Palm in 2010.

Along the way, HP also spun off its business in electronic and measurement instruments in 1999. HP is not about to abandon the acquisitions route, analysts say. It has been in talks to buy to data storage maker EMC of Westborough, Mass., as the Wall Street Journal reported last month.

Feldman noted that the past six to 18 months have seen many companies breaking apart. Earlier this month, eBay said it will spin off PayPal, the payments and money transfer business that it had bought in 2002. Also this month, Symantec Corp. of Mountain View, Calif., said it plans to split into two entities, with one focused on its core security business and the other on information management; meanwhile, home improvement company Masco Corp. of Taylor, Mich., announced plans to spin off its insulation unit.

Whitman will be CEO of HP Enterprise and retain her role as chairperson of HP Inc., the printer and PC business. “As CEO of the enterprise business, that will be her No. 1 job. But as non-executive chairman of the PC business, she obviously has responsibilities there also,” Feldman said. “It will be interesting to see the extent to which there are any ongoing relationships or conflicts that happen across the two companies, especially as they disband … [and] how they manage that. It will be interesting to see how the benefits and costs play out across the two companies.”

“The fact that [Whitman] is choosing to be CEO of the enterprise business says everything that you need to know about the two trajectories of these companies.”

Feldman said the role of Patricia Russo in the HP changeover is significant, as she will move from her current position as lead independent director to chairperson of HP Enterprise. Feldman noted that Russo is a veteran of spinoffs. Russo had previously been CEO of AT&T spinoff Lucent Technologies and its successor company, Alcatel-Lucent, and chair of Lucent spinoff Avaya. “That wealth of experience can translate into real gains for these companies,” Feldman said.

Legacy of Separation

Meanwhile, the spinoff will have casualties. HP also said it will lay off an additional 5,000 employees. That is on top of job cuts of between 45,000 and 50,000 it had announced earlier this year; HP had 317,500 employees at the end of last year. Feldman described the cuts as part of a larger turnaround program that has been underway for the past three years, rather than a direct result of the split. “This is probably just the final capstone in separating the two businesses,”she said.

Feldman noted that Whitman will leave a “fascinating” legacy if she manages the HP split successfully. “The way we think about CEOs, especially in academic literature is: ‘What are you going to bring in to the company? How are you going to grow the firm?’” she said. “Growth is paramount in our world. Here it is exactly the opposite. Her legacy is going to be the separation. That legacy … underscores the importance of divestitures and split-ups as an avenue for not only growth but also CEO impact within firms.”

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