The idiosyncratic processes of the cell can be expanded as an analogy to illustrate HP’s unprecedented split. A given cell must be in constant symbiosis with its external and internal environments while maintaining flexibility for prospective shocks. At some point, the cell at maturity must duplicate itself to ensure the perennial functioning and growth of the organism. And that’s what Meg Whitman, did on October 5 with the $112 billion tech dinosaur that is HP.
The proposed split will separate the well-performing PC and printers division from the B2B corporate hardware and service operations into two distinct publicly traded companies called respectively HP Inc. and Hewlett-Packard Enterprise. Whitman’s enthusiasm transcended her speech at the press conference: “It will provide each new company with the independence, focus, financial resources, and flexibility they need to adapt quickly to market and customer dynamics.” The announcement was welcomed by markets recording a 6 percent increase of HP’s stock price at the following opening.
However, some experts remain frigid regarding the Whitman’s strategic shift. Analysts at Bernstein Research attested that the prospective separation, “fueled by weakness, not strength,” will generate “material negative synergies” that could impede the distribution and commercialization of the respective corporations’ products. When considering the sales plunge of 19 percent in HP’s enterprise hardware division and termination of 55,000 positions from the last fiscal year, these problems need to be addressed. Emergent competitors such as Lenovo tighten the PC market irremediably while existing players bend under the yoke of aggressive cost leadership strategies.
Notwithstanding the subsequent wave of skepticism, the project is fully supported by Ralph Whitworth, former HP chairman, affirming that HP’s emancipation of the “inefficiencies that invariably plague large business conglomerates” will coincide with a new era of exploration of related markets such as 3D printing.
And this reshuffle of HP’s corporate architecture echoes a global growing trend of spinoffs. Solely last year, a total $1.6 trillion worth of subsidiaries have been sold to third parties. Bigger no longer better. EBay and PayPal, GE Appliances and Electrolux – the cases are numerous. Nevertheless, no consensus on the pertinence of this strategy has been established among scholars.
Proponents of spinoffs argue that such tactical restructuring permits the unlocking of hidden value to shareholders accessing to more transparency and greater selection power. HP’s 6 percent stock price appreciation on the following day of the announcement and EBay’s 8 percent are clear examples. More importantly, such segmentation would allow greater directional and operational flexibility, with greater strategic focus on the new enterprises. Results are empirical. According to research conducted by Anil Shivdasani of the University of North Carolina, stocks of firms evolving in niche and focused sectors of the demand spectrum would dominate conglomerates by an annual margin of 11.4 percent.
Altria Group Inc. exemplifies the perfect success story in which Whitman could repel the detractors of her maneuver. In 2007, Altria proceeded with Kraft’s spin-off and, later in 2012, dissociated itself from its booming snack operations registered under Mondelez International Inc. Today, the initial agents composing Altria Group are booming with a market capitalization expansion of 71 percent from 2007, beating the market by 32.5 percent.
On the flip side, with the announced fragmentation, HP’s vulnerability to Lenovo’s aggressive expansionary objectives will be exacerbated. Benefiting from costs reductions propelled by the purchase of IBM’s server business, Lenovo will exert predatory pricing schemes to take over a diminished HP. This marks a constant trade-off between synergies and operational flexibility with distribution and procurement economies of scale associated with integrated corporations.
With so many trade-offs affecting a split, there are bound to be repercussions for a company. To put it scientifically, it would be Newton’s third law of motion: “For every action, there is an equal and opposite reaction.” On October 7, HP’s stock price fell back to just 2 percent above its initial value before Whitman’s announcement. “Quite disappointing”, some would say. According to Jay Ritter, across the 166 spinoffs orchestrated by parent companies with annual sales exceeding the billion dollar threshold, returns have matched the markets’ performance. Thus, if past history is any indication, HP’s spin-off may prove less momentous than anticipated.
Will HP be able to grow and exploit its competitive advantages to the detriment of its arising competitors? Will the current strategy payoff? These are all uncertainties. But, one thing is limpid: the current trend of spin-offs and corporate cleavages has been reinforcing the accounts of investment bankers garnering $9.4 billion so far this year. In America, one thing is sure: Wall Street will always have the last word.
