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.
To stay up to speed on Hewlett-Packard, click here to add it to My Watchlist.
