Hewlett-Packard no longer likes the PC business, but investors aren't liking HP at the moment on that news. One day after HP said it is considering shedding its PC unit, which currently comprises 30 percent of company sales, investors shed the company's stock, sending HP shares plunging to near six-year lows.
HP shares dropped 20 percent on Friday, to $23.60, after the company laid out its plan to get out of the personal computer business, abandon its new TouchPad tablet and WebOS operating system, and acquire Autonomy, a technology services company.
Hailed in the media as a move to remake HP into a company more along the lines of IBM or Oracle, it was viewed on Wall Street, momentarily at least, as one big risk with uncertain dividends in the short and medium terms.
One of the world's largest technology companies, HP has remained a dominant PC player, but the company has struggled with single-digit margins as explosive growth in the smartphone and tablet spaces is pressuring prices and taking marketshare. HP tried to make a strong move into the tablet space, currently dominated by Apple's iPad, but its TouchPad tablet and WebOS system, launched earlier this year, immediately became an embarrassing flop.
HP CEO Leo Apotheker, in the company's leadership role since November, says the company is merely considering possibilities for its PC business but Wall Street determined the damage has been done, sending HP shares hurtling down to a trailing price-to-earnings ratio of 5.80.
An analyst lowered his outlook on HP after news came Thursday that the company would acquire Autonomy for $10 billion, walk away from the TouchPad and the WebOS system it bought from Palm for $1.2 billion and consider shedding its low-margin PC business in a bold move to completely remake the company.
HP is the U.S. PC leader, and the company's unit is profitable, albeit increasingly challenging.
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.
Apotheker tried to calm fears of risk.
When IBM spun out their PC business, they spun out a money-losing business, he said, in an Associated Press interview. We are very proud to have a money-making, market-leading business with the best margins in the business. We are going at this from a position of strength.
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, particularly 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 cyclicality, and it's best led by somebody outside our borders.
By shedding its PC business, HP must focus on growing its other businesses. They include: corporate software, services, security, storage and networking.
At the same time Apotheker and HP announced consideration of spinning off its PC business, the company announced it will buy search-software maker Autonomy Corp. for $10.3 billion -- a move that holds merit, according to many, but also risks since the integration will be a total shift in some respects, coming at a time of corporate turbulence and marketplace change.
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 are attempting to get back to that original focus. The biggest question remaining now is whether investors will eventually get on board or not.