Here Are The 2 Main Reasons Why Giant Companies Like HP Split In Half
Just ask Hewlett-Packard and eBay, both of which are going through divorces right now, following in the footsteps of Motorola, which split in 2011, and Kraft Foods, which did the same in 2012.
HP is making the split between its enterprise-facing hardware and services business, which will be called HP Enterprise, and its consumer-facing computer and printer segments, which will be HP Inc. Shareholders will have their stakes halved between the two new companies. Five thousand employees will be laid off in the process.
Ebay is also spinning off PayPal, the startup it acquired in 2002.
The motivations that compel companies to split can vary significantly, but they come down to two main benefits: focusing management and maximizing shareholder value.
Breaking up allows businesses to gain organizational focus.
A complex enterprise like HP can get messy and complicated, says Mohan Sawhney, a professor at Northwestern University's Kellogg School of Management. Enterprises clean up by splitting themselves in two.
He says that in portfolio companies like HP, there will be a set of younger businesses that need to be managed for growth and require investment, while others are mature and need to be managed for profits.
The skills, performance metrics, and management logic are different for every company. Growth businesses measure future performance rather than current performance, and will take their lumps in short-run profitability in the name of long-term growth, which he says wouldn't happen in a more mature company.
For tech companies, the organizational clumsiness comes out in chasing business-to-business and business-to-consumer markets at the same time. For example, Apple has never chased corporate clients and been rewarded for it, and SAP hasn't tried to sell to homeowners. For the same reasons, IBM wisely got out of the home PC business, and Cisco had a misadventure in acquiring the Flip Camera.
"HP was everything under the sun," Sawhney says. "Tablets, smartphones, and PCs all the way to enterprise. The way you manage the enterprise is different: clients are different, sales cycles are different. Consumer is a fashion business. You have to have a good sense for industrial design - that's Apple, that's Sony."
By splitting up, HP should be better able to focus on both its enterprise and consumer businesses, separately.
How will this play out? Sawhney says that if he was investing, he'd buy the forward-looking HP Enterprise over the legacy half, HP Inc.
Breaking up the businesses sends a clear message to investors.
Investors evaluate growth and mature businesses differently. They bet on the potential of the high-growth business, Sawhney says, which is one of the reasons Alibaba (with its 40% annual growth) is doing so well after its IPO.
But with a mature business, investors look for cash flow and earnings multiples.
Having both approaches in a single company makes for a muddled message to investors, Sawhney says, which is a primary reason for company splits. Mondelez spinning off from Kraft is a recent example. Mondelez is the high-growth international company, and Kraft is the stable American brand.
In HP's case, says Joseph M. Pastore, professor emeritus at Pace University's Lubin School of Business, "HP is responding to shareholder demands" for more aggressive growth, since its legacy PC business is holding it back.
Ultimately, these kinds of splits allow one company to detach from a slower-growth business so that it can rapidly achieve growth. That seems to be the aim of media companies like Time Warner Inc., News Corp., and Gannett, which are breaking off their print businesses to accelerate broadcast operations.
"Doing so not only allows the emerging portfolio to prosper in equity markets unconstrained by the slow-growth legacy business, it also serves to mitigate whatever organizational and cultural conflict may exist between the firm's past and future businesses," Pastore says.