In the beginning, there was Hewlett and there was Packard, and they formed a company called Hewlett-Packard (HP) and the rest, as they say, is history. Yes Hewlett-Packard picked up some companies along the way: DEC, Compaq, Autonomy, and EDS, to name a few. HP had its fingers in many pies, acquiring numerous technology companies while attempting to become a one-stop provider of everything: storage (3PAR, LeftHand Networks), compute (Compaq, Neoware), networking (Metrix Network Systems, Colubris Networks, 3Com, Aruba). It also acquired various software companies (Persist Technologies, Novadigm, RLX Technologies, Opsware, Autonomy) and professional service providers (Atos Origin Middle East Group, CGNZ, ManageOne, EDS), among others along the way. Things seemed to be going the right way for it, but then along came this slightly disruptive technology called virtualization. HP the hardware company weathered it. Now we are in the cloud era, and everybody is doing everything they can to become software defined, virtual SANs, virtual networks—the list goes on.
But What Is HP Doing?
Recently I attended HPE Discover in London, and to be truthful, I am flummoxed. After three days of briefings, both strategic and technical, I must confess that I am as confused as a chameleon in a paint factory after an explosion. Yes, it is true that HPE has a coherent technical strategy: one of servers, storage, and networking coupled with an intelligent edge (its IoT play). At first glance, it appears that HPE is doing the exact opposite of what every other legacy technology company is attempting. It is selling off vast swathes of software-based technology—Autonomy to Micro Focus, its OpenStack and Cloud Foundry assets to SUSE Linux, its technical services division to CSC—and downsizing to a hardware core. This seems suicidal for HPE: why would I purchase a $20K Proliant server over four $5K white box servers? This is even more compelling when you consider that resilience is now handled at the software layer. Technical issues aside, it is important to look at what Meg Whitman is doing or attempting to do with the company.
Now, what follows is pure supposition, but it is based in factual knowledge. We know that Meg Whitman became CEO of then-HPQ in September of 2011, and as recently as 2013 she and Tim Cook of Apple were named “Most Underachieving CEOs” by Bloomberg. However, it is important to remember that the core tenet of any commercial enterprise is to make money for its investors. Few can argue that HPQ was underperforming. Whitman came to power at a turbulent time for traditional computing hardware providers, and her immediate predecessor, Apotheker, had just burned over $10 billion on Autonomy. Yes, Whitman was a board member, and yes, she authorized the deal together with the rest of the board, but it is safe to say that she was never a vocal supporter of the deal. She reversed the proposal to divest the PC business. But perhaps the biggest threat to HPQ during this time was “the cloud.” AWS had just begun its march toward domination of the public cloud.
What was her answer to this? To get your head around it, you need to understand her journey. It is argued that her most successful tenure as a CEO was with eBay, where she grew the business from thirty employees and $4 million in revenue to over 15,000 employees and $8 billion in revenue. One of her main strategies was to split the company into several business groups to drive revenue growth.
This is effectively what she has done with HPQ. Her first move was to split HP into two corporate entities: HP Inc. (HPI), which held the PC, notebook, tablet, and printer divisions, and HP Enterprise (HPE), which held everything else. This effectively increased the shareholder value by 50%.
At first glance, what has happened since appears odd, but it is in fact very astute when you only consider shareholder value. The divestiture of Autonomy to Micro Focus for $8.8 billion seems a good value, especially as it has already written down over $8 billion on this deal. However, this was not a true divestiture; it is more of a spin/merge. Micro Focus is actually paying $2.5 billion in cash for the assets, and the remainder is the 51% transfer of shares. Therefore, after the “divestiture” is completed, HPE shareholders will hold 51% of a newly merged company that includes the Autonomy assets and the prior IP of Micro Focus. It is the same with the technical services spin/merge with CSC. What at first seemed to be an $8 billion sale of the professional services division, which included the $13.7 billion acquisition EDS to CSC, as it turns out was also a merger, with HPE shareholders retaining 51% of the new combined company. So, now we have four companies over which the original HPQ shareholders hold sway.
- HP Inc: 100%, Meg Whitman is chair of the board
- HPE: 100%, Meg Whitman CEO
- Micro Focus: 51% (controlling interest, with HPE executives serving on the consolidated board)
- CSC: 51% (controlling interest, with HPE executives, including Meg Whitman, serving on the consolidated board)
Very good for shareholder value.
Now Comes the Supposition
What is interesting is that HPE shareholders now have controlling interests in four companies, and more importantly, HPE executives serving as board members are on all four boards. What is to stop these assets from being “spun” back into the core HPE if they are successful, together with the assets of those combined industries?
Or perhaps HPE will create a holding group and a federated model similar to the EMC federation.
Or more interestingly, will the smaller HPE now convert to private ownership, similar to Dell? This would remove it from the vagaries of Wall Street and the quarterly reporting cycles that dominate thinking, and allow the release of more funds to research and development.
There are interesting times ahead for Hewlett-Packard. We will watch with interest.
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