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Hewlett-Packard Packs Up Its PC Business

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The world's largest PC seller, Hewlett-Packard (NYSE: HPQ  ) , is shedding its computer business as part of a broader shakeup to focus more on the high-margin software business. It plans to do so by acquiring Autonomy -- the U.K.'s largest software maker. Investors, however, were not impressed by the announcement, and the stock dropped 6%. Broader concerns have also weighed on the company's stock, which is off 30% since the start of the year.

The deal
HP said it agreed to buy Autonomy for $11.7 billion, a 64% premium to Autonomy's Wednesday closing price on the London Stock Exchange. Autonomy makes software that searches and keeps track of corporate and government data. This will complement HP's existing offerings, giving it valuable intellectual property and enhancing its value in areas such as software and cloud solutions. At the moment, software accounts for only 3% of the company's revenue.

HP seems to be following the strategy that IBM (NYSE: IBM  ) undertook six years ago, when it dropped the computers, focusing solely on software. This transformation is becoming a trend in IT companies today, with Dell (Nasdaq: DELL  ) shifting toward software, too.

Hard to compete
Even though the computer business accounted for 30% of sales last quarter, it suffered from slow growth, low margins, and tough competition. The operating margin of this business last quarter was 5.9%, which is the least among all the company's segments. The company plans to surrender its vulnerable tablet computers and smartphones after facing strong competition from companies such as Apple (Nasdaq: AAPL  ) and Research In Motion (Nasdaq: RIMM  ) , which have encroached far into the market.

Overseas investment strategy
Under current tax rules, U.S. companies are subject to a specific tax charge on bringing foreign cash into the country. The New York Times noted that HP is a good example of one of those companies using its foreign cash pile to make strategic investments and overseas acquisitions, thereby skipping repatriation taxes.

As of March 31, the company had a war chest of $12.7 billion from the printing division, most of which comes from abroad. HP will use this "offshore cash" and debt to finance this deal. This seems to be an added benefit of the deal.

After HP's disappointing quarterly results, the acquisition of Autonomy -- whose annual revenue was $969 million -- will add to the company's earnings per share in the future.

The Foolish bottom line
HP is moving toward its core business in a tricky time for the company. These are the right sorts of moves to help HP get back on track. I think it may take some time, but a few years from now we could look back at the stock as being pretty cheap today. Fools, watch out.

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Navjot Kaur doesn't own any shares in the companies mentioned in this article. The Motley Fool owns shares of International Business Machines, Research In Motion, and Apple. Motley Fool newsletter services have recommended buying shares of Dell and Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (5) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 30, 2011, at 11:44 AM, deemery wrote:

    There's Foolish and there's foolish. At this point, HP just looks foolish... They're trying to move to compete with two established business, IBM and SAP, by tossing money it doesn't have at business that don't scale. This goes beyond shooting itself in the foot to shooting itself in the groin. HP will do well to break even on the PC business sale/spinoff.

  • Report this Comment On August 30, 2011, at 11:49 AM, constructive wrote:

    "After HP's disappointing quarterly results, the acquisition of Autonomy -- whose annual revenue was $969 million -- will add to the company's earnings per share in the future."

    Maybe 20 years in the future, certainly the acquisition will not be accretive in any immediate time frame.

  • Report this Comment On August 30, 2011, at 2:10 PM, joeytheh wrote:

    Your post today is old news. How HP sales off the PC company is more the trick to the equation; i.e. JV, full sale off, lots of options. I usually find your column insightful, but today, it was old news.

  • Report this Comment On August 30, 2011, at 2:17 PM, mikecart1 wrote:

    Someone must have forgot to tell HP that hardware can't really be pirated but software can. Just sayin'. Good luck HP to your future losses. A person would rather update their 2-3 year old laptop for something faster, with better screen, bigger hard drive, and better graphics vs. updating their 2-3 year old OS or Software Suite. Someone is smoking in HP.

  • Report this Comment On August 30, 2011, at 4:13 PM, gilsh wrote:

    I think it is actually a wise move. HP learns from IBM: (a) Ditch the departments where you don't have a real moat (and lets face it, in a shrinking PC market, all of HP's brands are long past their due-date)

    (b) Enhance the departments that earn - in that case corporate focused software. and do that in the areas where your other strengths (for example: printing) already give you a leg in the door.

    I believe the outcomes of this move shall be seen in 3-5 years, which is the usual cycle for software investments/improvements/decisions. Furthermore, the benefits from departing from the dying PC horse will be seen as soon as the final steps are made and HP no longer spends a dime on that subject.

    And last but not least - Tax considerations are something that should not be taken lightly.

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