HP Breakup: Microsoft Next To Split Consumer, Commercial Lines?

Breakup fever has hit Silicon Valley. EBay announced last week it will spin off its PayPal e-payments unit while Hewlett-Packard stunned markets Monday with word it will split into two companies -- one focused on commercial customers, the other on consumers. The next candidate for a major divestiture may now be Microsoft, which some investors have said is too diverse to operate efficiently.

Analysts and fund managers at ValueAct Capital, Schwartz Investment Counsel, Stifel Financial and HighMark Capital Management are among those who called for Microsoft to separate its consumer and commercial operations earlier this year when Satya Nadella succeeded Steve Ballmer as CEO. Their thinking centers around the fact that there are few obvious synergies between, say, the Xbox gaming line and the software that Fortune 500 companies use to run their back-office operations.

A spinoff “is the direction that investors think would be their best chance of getting their earnings back up and increasing revenue,” Donald Selkin, chief market strategist at National Securities Corp., told Bloomberg at the time.

Ballmer departed the Redmond, Washington, company in February. Reports indicated his exit was sought by investors unhappy with a stock price that has largely stagnated for the past decade. Shortly after Ballmer stepped down, the company named ValueAct president Mason Morfit, an activist investor, to its board.

But with Nadella less than a year into his tenure, some observers say even the most impatient investors will give the new CEO time for his strategy to take hold. Nadella said he wants to see Microsoft become a leader in cloud services tightly integrated with hardware -- be it a gaming console or tablet or a mobile device used by health care professionals.

“I’m not sure there’s a way for Microsoft to become more competitive by splitting things up right now,” said Shebly Seyrafi, an analyst at FBN Securites. Seyrafi said Microsoft is looking to raise gross margins in its hardware business 20 percent to 30 percent, up from the current 3 percent. “They will see if they can execute on that target. If not, then [a spinoff] might make sense.”

HP will divide into two companies. Hewlett-Packard Enterprise will sell servers, storage and networking equipment to businesses and will be led by current HP CEO Meg Whitman. HP Inc. will focus on personal computers and printers under the leadership of Dion Weisler.

Investors welcomed the announcement. HP’s stock was up more than 5 percent in afternoon trading Monday.

If Microsoft were to follow HP’s lead, it would most likely base one spinoff around its devices and consumer unit, which houses the Xbox and other gaming and entertainment products as well as Surface tablets, and the other around its commercial group, which sells the SQL Server database, Dynamics customer-relationship management software and business versions of Office and Windows.

Gartner analyst Stephen Kleynhans shares Seyrafi’s view Microsoft’s board and major investors will give Nadella time to let his strategy play out before pushing for a breakup. “Further down the road this might be an approach for them,” Kleynhans told International Business Times.