HP Splits Up. Is Two Better Than One?

The IT industry is just getting more exciting.

Hot off the heels of IBM’s sale of its x86 server business to Lenovo, providing the momentum for Lenovo to repeat its success in 2005 when it acquired IBM’s PC division to become the number one vendor, HP makes a major announcement to spin off its PC and printer division into a separate company.

1.WHAT IS THE SPLIT
 

Former chief executive Leo Apotheker had proposed the move in 2011, 6 years after IBM sold its PC business.  It happened at the same time that HP’s disastrous acquisition of the British software company Autonomy.  Eventually, HP held on to its PC business amid shareholder pressure, resulting in Apotheker’s departure and Whitman’s appointment.  Meg Whitman who joined 3 years ago to turn HP’s fortunes around had dismissed her predecessor’s plan to carve up the firm but has now changed her mind in the fourth year of her five-year turnaround plan.

HP expects to complete the  split of HP into two public companies by end of 2015 fiscal year.  Shareholders will automatically own shares in both companies.

• Hewlett-Packard Enterprise to cover corporate hardware and services, which Whitman will head up, and
• HP Inc to comprise the PC and printer units, to be headed by Dion Weisler (the current executive vice-president of HP's printing and personal computing division). Whitman will be the chairman of the HP Inc board, thereby retaining influence in both businesses.

2.WHY SPLIT

"The decision to separate into two market-leading companies underscores our commitment to the turnaround plan," said Whitman. "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-tern value for shareholders."

3. IMPACT OF SPLIT 

HP’s role in the IT market has been becoming increasingly unclear – with parts of its business moving toward growth areas, while others are being optimized to compete on the last era’s competitive battlefield.  This left the company in a tough spot, where new innovation efforts were often overshadowed by large legacy challenges.  HP has been addressing this through aggressive restructuring, ultimately shedding as many as 55,000 jobs by the end of FY2015. 

Whether HP’s efforts to reduce complexity and be more nimble with two large companies remains to be seen.  There are still many of the HP businesses that are not synergistic with different levers for success or where potential partners are unable to fit strategically with the company.

4. WHAT'S NEXT

Just when HP struck out at IBM by blatantly advertising that IBM customers and business partners should be worried about the x86 business sale to Lenovo, HP has now plunged into deeper uncertainty with their own company split.

It would be important for HP to quickly establish how different they will be after the split and what is the desired perception of HP to the world.

Managing a business divestiture. IBM closes sale of x86 server business to Lenovo.

Managing a business divestiture. 

IBM closes sale of x86 server business to Lenovo on 1st Oct.

 

On 1^st October 2014, the initial closing of the sale of IBM’s x86 server business to Lenovo started in most of the markets, including Asia Pacific. The 7,500 employees that work within the x96 unit across the globe will make the move to Lenovo’s Enterprise Business Group headed up by ex-IBM executive Adalio Sanchez.  This divestiture is a significant, strategic milestone for IBM and STG. 

1. WHAT CHANGED

The IT world has seen this x86 server become a fast-growing and lucrative technology that lifted sales at companies like HP and Dell, which still relied on them for billions of dollars in sales. As when IBM sold its personal computer business to Lenovo in 2005 which sparked success at both companies, this sale signals a change in the computing market.

Despite the competition, buying IBM’s x86 server business is a boon for Lenovo. Enterprise products are generally a higher-margin business than consumer gadgets. Lenovo’s own manufacturing capabilities and sales channels could help squeeze out more profits from the server sales.  


2. THE BUYER'S VIEW

 
Yang Yuanqing, Chairman and CEO of Lenovo said, “Lenovo will add a world-class business that extends our capabilities in enterprise hardware and services, immediately making us a strong number three in the global server market. By combining Lenovo’s global reach, efficiency and operational excellence with IBM’s legendary quality, innovation and service, I am confident that we can drive profitable growth.”


3. THE SELLER'S VIEW

On the other hand, IBM is turning its focus to higher end systems where it can generate competitive advantage.  “IBM will intensify the focus on our Power, mainframe and storage systems, where we can apply IBM’s valuable research and development capabilities to differentiate our offerings.  As we innovate in areas such as big data and cloud, allowing clients to capture value from opportunities in these segments.”says Tom Rosamilia, Senior Vice President of IBM Systems & Technology Group.

4. THE TRANSITION

 
Over the nine months, IBM has been preparing for this transition with a few key investments, including $3 billion in new chip technology to help IBM remain the systems innovation leader, $1 billion investment in Linux and open source technologies for Power Systems, $1 billion investment in Flash storage technology, and billion dollar investments in Watson ad cloud. These investments will help fuel renewed vitality and growth in our core STG businesses.

At such critical times, one server competitor who was fearful of the combination of IBM’s size and Lenovo’s profitability, showed their true colours with blatant competitive ads to undermine the confidence of customers and business partners on the server business.  We have chosen to ignore these ungentlemanly acts as baseless.


5. STEADYING THE TROOPS

I am privileged to be involved in the transition of the x86 team to Lenovo.  We have been going through a lot of planning for the integration of the business and a quick transition turnover of the business systems that supports how we operate.   IBM will continue to provide maintenance services to existing System x customers to ensure the transition between IBM and Lenovo is seamless.  IBM marketing has also been designed to support Lenovo marketing to ensure that our strong demand generation capabilities are transferred.

To the departed x86 colleagues, remember the “I love System x” campaign where you have demonstrated team work and confidence in our technology, regardless of the fear of the unknown new company.  Here’s a encouraging quote “Sometimes what you’re most afraid of doing is the very thing that will set you free.”  I wish you success in your new company.

To the IBM Systems & Technology Group team that remains, I wish you what I have experienced in supporting the transition. I have learnt so much more about the business, processes, people, differentiation and competitive advantage.  “A smooth sea never made for a skilled sailor.”