HP And Their PC Business

While HP has apparently reviewed several options for their PC business, their first choice appears to be to spin it off into a new company. This new company would presumably be owned by HP, at least initially. I can see some pros and cons for this approach, but my concern is that is really isn’t as big a change as HP makes it out to be. It still doesn’t solve the business’s slim margins, and how the costs are hurting the bottom line more than the profit is helping. Of course, the bigger problem is for any PC company that isn’t named Apple to get a higher margin on their product. HP isn’t alone in dealing with slim profit margins in the PC business.

On the pro side, the spin-off approach has the benefit (as touted in the ads) of still being able to carry the HP name, and the positives that it brings. That makes it easier, from a sales perspective, because they aren’t having to build a brand from scratch. The brand gets to ride on the HP coattails for a while. That could potentially be a big plus when trying to move product.

As a spin-off, the business can also continue to use HP facilities, have easier access to HP personnel as they start to make their way into the world, and keep the HP supply chain. Basically, the first machines could simply be the same boxes they make now with a different logo on the front. HP would get to charge the costs to the spin-off, and could build as much (or little) profit into those charges to either help the HP mothership, or to help the spinoff for a while.

A big question I have is where do the printers go? Right now, the printers, specifically the ink business, is a hefty source of profit, and one that can be used to subsidize the PC business to some extent. If HP keeps the printers and ink, and the spin-off only gets PCs, then the PC business could end up on its own, without any sort of high-margin income source to help things along.

The downside of the spinoff is that HP gets no cash in the short-term for the business, and they will need some of that to help pay for their WebOS write-downs and for the newest acquisition. While the spin-off is owned by HP, then the thin margins don’t help the balance sheet, because they are still there, just squirrelled away in a subsidiary. A sale of the business initially would mean cash in HP’s hands for other purposes. With a spin-off, HP will have to wait for either an IPO or eventual sale to someone else anyways. In the mean time, a decidedly non-entrepreneurial mega-corporation has to try to get “entrepreneurial”, if the sample ad that was leaked is to be taken at face value.

Taking the spinoff route may seem like a gentler approach, and it does make it easier for HP to change their mind and go back to their current arrangement. But to me, it seems a bit too much like pulling a bandage off slowly: it drags out a process that should be sped up to minimize the short-term pain and maximize the long-term gains. I’m not convinced that a spin-off will be able to make any higher profit, given that it will still have HP’s processes, supply chain and facilities, at least for the first year or so. Desks, logos and ID badges might change, but the underlying fundamentals will be more-or-less the same. I think an outright sale, for cash, to Asus, Acer, Samsung or someone else would make more sense, and help HP.

A spin-off looks too much like fence-sitting and indecision. An outright sale may seem scarier, but I think it’s the braver and more sensible approach.

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