HP takes step in right direction with spinoff

Split comes amid faltering demand for PCs

Hewlett-Packard (HP) announced on October 6 that it would split into two separate listed companies by the end of the 2015 fiscal year, a wise move in light of its declining futures and a worsening market climate for computer makers. After the cleavage, one company, to be named Hewlett-Packard Inc, will focus on personal-computer (PC) and printer operations; while the other will be named Hewlett-Packard Enterprise and focus on corporate hardware and services.

According to its 2013 annual report, HP's printing and personal systems group recorded $55.9 billion in revenue and $4.84 billion in operating profits. Meanwhile, the company's technology solutions unit, which provides system support and consulting services to enterprise clients, brought in $55.6 billion in revenue and $5.85 billion in operating profit.

For the most part, investors and analysts took a positive view of HP's planned split, as well as an announcement that the company's 2014 earnings guidance would be unaffected by the division.

HP is said to have considered spinning off its PC business as early as 2011. Over recent years though, HP, like many of the world's other traditional PC makers, has had to contend with major shifts in the global computing market that have seen consumers gravitate away from desktops and laptops in favor of smartphones and tablets. Indeed, figures from technology industry researcher IDC showed global PC shipments falling by 1.7 percent year-on-year in the third quarter. This trend has left its mark on HP, which has reportedly seen revenues decline over 11 of the past 12 quarters.

Under pressure from investors, it seems the time has come for HP to take drastic measures. It wouldn't be the first PC maker to do so in recent memory - Dell, HP's long-standing competitor, went private last year under similar circumstances.

At this point, HP's split is an intelligent move. The company's edge in the PC market has dulled significantly over recent years thanks to market saturation and intensified competition - particularly from Lenovo, which reportedly surpassed HP as the world's largest computer shipper in 2013 and now commands some 20 percent of the global computer market, according to IDC figures.

As growth opportunities in the PC market vanish, HP is setting its sights on its fast-growing corporate business. By doing so, HP may be sacrificing scale and cost advantages, but a more flexible and financially independent HP will promote innovation and development. What's more, spinning off its PC unit will likely cut costs and reduce debt at the operating level, giving HP Enterprise the freedom to make investments in next-generation areas.

To boost profitability, spur growth and support share prices, many of the world's largest companies are trying to adapt to uncertain economic times by pushing splits and spinoffs. US e-commerce giant eBay announced at the end of September that it would spin off its PayPal unit into a separate, publicly traded entity. Bayer, the German pharmaceutical and chemical giant, also announced plans last month to spin off its material science division in order to focus more exclusively on its life science business.

Of course, these recent divisions follow a flurry of corporate merger and acquisition deals designed to build scale and business diversity. US telecommunications giant AT&T acquired television service provider DirecTV for $49 billion in May. Last year saw a similar deal with European giant Vodafone spending 10.7 billion euros ($13.5 billion) to acquire German cable company Kabel Deutschland.

It's difficult to say which direction the winds of change might blow in terms of corporate restructuring. Of late, market observers have seen several examples of successful spinoffs and acquisitions. What is becoming increasingly clear though is that stocks in many major markets are becoming increasingly volatile thanks to mounting concerns about asset price growth, continued economic malaise in Europe and uncertainty surrounding the US Federal Reserve's plans to raise interest rates. To keep investors happy, many of the world's largest corporate groups had better look carefully at their plans to stay profitable.