HP Mimicking IBM, Exiting PC Business

Technology giant Hewlett-Packard (NYSE:HPQ) seems to be following in the footsteps of its peer IBM by planning to exit the PC business to focus on software.

HP announced a series of developments Thursday, including the potential spinoff of its personal computer business that would kill the Touchpad tablet computer based on Palm's webOS software.

The deal comes only days after Google agreed to buy Motorola Mobility for $12.5 billion.

HP said its board has authorized the exploration of strategic alternatives for its Personal Systems Group and plans to close down its webOS device business.

The devices have not met internal milestones and financial targets. HP will continue to explore options to optimize the value of webOS software going forward, the company said.

The announcement from HP shocked the industry as it launched the Touchpad only weeks ago. But the device got only a lukewarm response and was unable to compete with Apple's iPad 2 and other Android tablets in terms of both features as well as ecosystem.

HP even slashed the price of Touchpad by $100 to boost its sales, but that did not help. Retailers like Best Buy started complaining of more than 200,000 units lying unsold in its warehouses. HP credited Best Buy and other resellers about $100 million for their unsold inventory.

The company said the separation of its PC business into a new company through a spinoff or other transaction would be completed within 12 to 18 months.

With this announcement, HP CEO Leo Apotheker, is taking steps similar to what IBM did six years ago. In 2005, IBM sold its PC unit to Lenovo for $1.25 billion, a move that made IBM a pure software and services company. Its stock also benefited from the strategy. Thursday's announcement also goes against the grain of HP's $25 billion acquisition of Compaq in 2002.

By exiting the PC business, HP is quitting a sector that has been hit by smartphones and tablet computers. HP's PC business is its lowest operating margin business with a 5.7 percent operating margin with annualized revenue of nearly $38 billion. In fiscal 2010, the business generated annual revenues of approximately $41 billion.

Analysts have been saying that it was time for HP to part ways with the PC business and estimated that its Personal Systems Group could fetch as much as $15 billion.

Even if we assumed that HP divested the PC business for $12.5 billion and repurchased its stock price at current levels, we estimate the annual EPS accretion of $0.06, Ticonderoga Securities analyst Brian White wrote in a note to clients.

For the third quarter, the PSG division represented 30 percent of HP's revenue, but sales fell three percent from last year.

The exploration of alternatives for PSG demonstrates our commitment to enhancing shareholder value and sharpening our strategic and financial focus, said Apotheker.

The $10 billion acquisition of UK software firm Autonomy makes sense as it would help expand its cloud infrastructure software and compete with IBM. Autonomy, which would be the third-biggest acquisition for HP after Compaq and Electronic Data Systems, generated 2010 sales of about $870 million and currently has a market cap of $5.7 billion.

HP shares, which fell over 20 percent year-to-date, fell $1.88, or six percent Thursday, to close at $29.51. In the after hours, the stock fell further by $2.90, or 10 percent, to $26.61.