HP has had its very own Black Thursday where it announces out of nowhere that it is exiting the hardware business for the much more profitable software business where it currently makes only 2% of its revenue, revenue for this year which is expected to be approximately $128 Billion.

This decision has been made in part due to a decline not only in the number of PCs sold, but also the thinner margins that we are seeing on these product because there is very little distinguishing features between them. The ONLY company to make gains in the PC hardware market has been Apple, where it has been able with its strong brand to consistently persuade consumers to not only purchase its products in increasing numbers, but also to pay the Apple Tax for their premium product. This has led one analyst, Brian Marshall of Gleacher and Co to go as far as saying “Apple single-handedly knocked HP out of the PC, smartphone and tablet business”.                      

Hewlett Packard currently has a market share (MS) of around 18-20% with Dell, it’s closest competitor having some 5% less. HP announced that it intends to follow the IBM model, where they famously sold off there hardware to Lenovo of China so that they too could concentrate on the much more profitable enterprise services. The idea is to spin off its hardware business to a buyer who would then sell it under a different name. There is however two problems with this.

  • IBM was able to adopt this model as it had a willing buyer for its hardware business that allowed it to make such a decision. A buyer that HP doesn’t currently have. It could take months or even years to find such a buyer willing to take place in a market that HP is desperate to get out of due to the reasons stated above.
  • The reason why people buy HP and it has that 20% MS is because of its brand. Now by spinning off its hardware to be sold under a different name. You are effectively re-entering into the market place with a less marketable and unknown brand. It would take a brand such as Google or Microsoft (installing their own specific OS’s, which is highly unlikely as it is cheaper and more profitable to license) to snap this up for it to maintain the MS. Also while HP concentrates on its new software business/venture, how much attention will the unwanted hardware get and will that 20% be allowed to dwindle, reducing its desirability to a buyer even more.
The second part of HP’s announcement was focused about its impending acquisition of UK software firm Autonomy. The $11.7bn offer accepted by the the companies board comes at a price which is 64% above the firms valuation and cost HP a 20% loss in its own share price at the same time. HP at this moment appears to be a company in free fall, unhappy with its $130 bn revenue and trying to re-establish itself as a software house. The valuation of Autonomy by HP’s offer is also 47 times the pre-tax profit earned by Autonomy in the accounting period for their previous 12 months to June this year, so how is HP going to fill the $130bn revenue gap. Downsizing and job cuts. So it’s inevitable that HP’s best people will be snapped up by their competitors during the next few months.

It makes sense to establish new revenue streams. But that take time. Integrating a new Company into HP will not be an easy process and will come at further cost. So i don’t understand why they are so desperate to dispose of the majority of its business, that has served it so well for so long and is still delivering significant revenue and profit to it’s shareholders, who at this time must be looking at there investment disappearing as there stock crashes.

One thing i can say is that i wouldn’t want to be HP CEO Leo Apotheker at the companies next AGM.

What do you think of HP’s latest move. Astute piece of business or commercial suicide. Let us know.

About Craig...

Craig is an avid tech enthusiast, fan of sport and lover of movies who is looking forward to sharing these passions with you through his articles on BloomeCorp.

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