HP Stock Plummets Pre-Market; Overhaul Has Significant Risk, Says Analyst

Hewlett-Packard is making a bold move to reshape its business that analysts are applauding as having long-term upside. In the short term, however, investors are concerned about the cost and risks involved -- sending HP shares down 17.38 percent Friday in pre-market trading.

HP closed at $29.51 on Thursday, but the stock was down $5.13to $24.38 early Friday, one day after the company announced it will reshape its business by spinning-off its PC unit which currently comprises 30 percent of its sales volume.

We are directionally positive on the shift to high-growth, high-margin business but this transformation is proving expensive, protracted and includes significant integration risk, said Robert W. Baird in a research note.

The brokerage firm on Friday downgraded HP's stock to neutral from outperform, cutting its target price to $30 from $51. The research firm said HP is no longer a safe haven stock.

In a bold move, HP CEO Leo Apotheker, still in his first months on the job, has decided to spin off the company's PC unit and acquire British tech services company Autonomy Corp. for $10 billion.

Technology companies have been following the trend of fewer designing and selling PC's that began when IBM shed its PC unit to China's Lenovo Group Ltd. in 2005. Dell, the second-largest PC maker, is focusing more on services, although PC's still comprise half of that company's sales.

U.S. PC manufacturers have steadily seen margins impacted by overseas manufacturing, particuarly from Asia where the competition is hard to beat.

All the PC vendors in the U.S. are now more focused on services, said Pat Becker Jr., a fund manager at Portland, Oregon-based Becker Capital Management Inc. in a Bloomberg interview. You look at the margin structure of the PC business and the cyclcality, and it's best led by somebody outside our borders.

By sheddings its PC business, HP must now focus on growing its other businesses. They include: corporate software, services, security, storage and networking.

At the same time Apotheker and HP announced the move to spin off its PC business, it announced it will buy search-software maker Autonomy Corp. for $10.3 billion.

Autonomy Corp. is an enterprise software company with joint headquarters in the UK and San Francisco. The company develops and distributes infrastructure software for enterprises worldwide. Its products include an intelligent data operating layer (IDOL) server that collects indexed data from connectors and stores it in its structure.

The company serves media organizations, e-commerce providers, telecommunications providers, finance and banking professionals, government and public sector agencies, and many more. Autonomy Corp. PLC was founded in Cambridge, UK, in 1996.

Giving up a third of your revenue, even if you end up being more profitable, it's still a big chunk, said Michael Cusamano, a professor at the Massachusetts Institute of Technology's Sloan School of Management, in a Bloomberg interview. As the biggest PC manufacturer, they were in a lot of people's homes as well as offices. They will lose that.

Apotheker is also taking the bold stop of quitting early on the company's TouchPad tablet and its webOS operating system, something HP had invested heavily in both financially and in brand reputation. But they just weren't working, so he decided to get out early.

HP has been in the news lately for the flop of its new TouchPad tablet, intended to take on Apple's iPad. But not long after the product's launch, HP discounted the TouchPad $100 in the effort to boost sales, The discount didn't work, however. HP was facing heavy returns retailers like Best Buy reportedly have thousands of unsold TouchPad tablets they want to return.

The company's PC business has similarly been haunted by sluggish sales this year. The company predicted in May that future growth in its PC business could be dampened.

The PC market continues to be bifurcated, said Apotheker, in May in a conference call with analysts. He said even though our consumer PC expectations had been cautious, the steepness in our (second-quarter) decline is greater than we had anticipated.

So less than a year into his tenure as CEO, Apotheker decided to shake it all up, shedding the low-margin businesses in the attempt to completely remake HP. No more TouchPad support. No more webOS investment. No more PC business. Tech services will now be the company's focus, and future.

That's probably what HP's founders wanted anyway. David Packard reluctantly agreed to focus on PCs in the early 1990s. Walter Hewlett, company board member and son of co-founder Bill Hewlett, tried unsuccessfully to block the company's 2002 acquisition of Compaq Computer Corp.

From HP's founding in 1939, the company set out to invent original products and tools for engineers. The vision had nothing to do with making commodity products. Now, HP and Apotheker attempt to get back to that original focus.