Hewlett-Packard (NYSE:HPQ) just took an important step toward splitting into two new companies. On July 1, the company filed a Form 10 statement with the SEC, in which HP laid out more detail on what the upcoming split will mean for investors.
HP's enterprise operations will become the Hewlett-Packard Enterprise Co., a separately traded entity with its own management team and balance sheet. Personal systems and printing operations will be known as HP, and get to keep HP's current logo. All of this was known from early announcements and filings, but it's good to see HP sticking to its guns.
To avoid taxable events, the separation is structured as a one-time dividend. Some fine day in November 2015, today's Hewlett-Packard shares will get the new HP moniker while also paying out 100% of the freshly printed HP Enterprise stubs. Some spinoffs come alongside complicated stock splits or reverse splits, but the number of HPQ shares will not change. That's not exactly news (or, for that matter, particularly important), but a clarification.
HP's current CEO, president, and board chair, Meg Whitman, will control both of the new companies, but from different angles. After the split, Whitman will be CEO and president at Hewlett-Packard Enterprise and chairwoman at HP.
Here, I was actually hoping for a change since Whitman's incredible workload appears to have been a core reason for the split in the first place. I'm not at all convinced she should be so deeply involved with both companies, and that HP would be better off if Whitman simply took her hands off of HP altogether.
Now we also know HP will hang on to the HPQ ticker symbol, while the Enterprise company grabs the HPE symbol. Both stocks will trade via the the New York Stock Exchange, as HP has done since time immemorial. So whether you're interested in buying one of the new HP stocks or selling the half you don't want after the split, you can start planning your trades now with the proper tickers and all.
Getting down to financial nuts and bolts, the enterprise business would have generated $55.1 billion of total revenue and $1.6 billion of generally accepted accounting principles earnings in 2014. That's almost exactly half of the full HP package's $111.5 billion in 2014 sales but only 32% of the company's overall profits.
The enterprise company brings along $67.4 billion of total assets and $1.5 billion of total debt, leaving $34 billion of assets and $19.6 billion of debt in the hands of the consumer-oriented HP In 2014, the operations destined for HP Enterprise generated $4 billion of free cash flow. HP's printing and consumer systems pulled down the remaining $4.5 billion of HP's $8.5 billion in total free cash flow.
So the enterprise business will be a nearly debt-free operation. Leaving most of the debt service to the more profitable of the two operations seems to make sense, although these stats might trade places over the coming years.
HP left a bit of suspense hanging over the new balance sheets. In an offhand remark, the Form 10 filing notes that "Hewlett-Packard Enterprise intends to enter into certain financing arrangements prior to or substantially concurrent with the separation."
That's all we know about those "certain financing arrangements" at this point. Since the Enterprise business will deal mainly in software development and information-technology services, with a light touch of hardware manufacturing on the side, it is destined to remain lightweight and nimble. Hence, I don't see any serious needs for the enterprise business to raise cash alongside the separation. Whitman might prove me wrong with something like an oddly timed big-ticket acquisition, but that would qualify as an honest-to-goodness surprise move.
This is by no means a complete rundown of HP's separation plans. The beefy Form 10 document weighs in at nearly 300 pages, packed with the usual blend of typical boilerplate and investable information.
For now, it's clear that Hewlett-Packard Enterprise will become a mirror image of Ginny Rometty's revamped IBM (NYSE:IBM) business. With a heavy focus on software and services, married to a lightweight balance sheet, HP Enterprise might as well have photocopied Rometty's turnaround plan. Yes, HP Enterprise will start its life in a risk-laden turnaround mode. Invest accordingly, if at all.
HP might not exactly hit the ground running, but it will at least hobble along at a reasonable pace. PC systems have seen better days, but HP still dominates the highly profitable printing industry. That's enough to create a cash machine, albeit much of the resulting cash flow might go into servicing that large debt load.
HP Enterprise looks like a play for the risk takers among us, as Whitman attempts to turn this IT heavyweight around. HP will offer lower risk and probably a larger dividend, and generally act like a safe low-growth investment. You can soon own either one, separate from the other.
Would I recommend buying any of these stocks, now or after the split? Not necessarily, given the gaping holes in the published information. HP promised to spill more beans at its annual investor conference in mid-September, and we'll see many more announcements and SEC filings before November.
In other words: Hold your horses.