On Friday, Hewlett-Packard
I never bought the argument given by some that Hewlett-Packard's nonprinting units were coasting on the printer division's subsidies and that they would be forced to perform better if they were spun off. They would still have to be run a lot more efficiently to prosper, and they would have lost out on much of the $3.5 billion in savings achieved by merging the two companies by eliminating manpower, supply chain, and distribution redundancies. In the brutally competitive commodity business of selling hardware to consumers through resellers, International Business Machines'
Unlike IBM, which was a much smaller player at $10 billion with virtually no presence in the consumer segment, HP's PC division, at $24.6 billion in 2004 revenues, is the market leader in notebook PCs and second in desktops and handhelds. It needs distribution for toners and its growing portfolio of cameras, notebooks, and other consumer products. It strongly believes in the digital revolution and the PC to be its cornerstone. To abandon the consumer segment or the indirect sales model, especially with its strong technology and market leadership, would be suicide. IBM's former CEO, Lou Gerstner, believed that one of his biggest mistakes was shedding IBM's consumer business.
People had written off Apple Computer
To improve margins in personal computers, HP needs to continue its focus on superior technology for better pricing, and for that it needs the massive $3.5 billion R&D thrust from a unified HP to aim for a breakthrough product like the iPod.
HP's biggest problem in the business segment seems to be its inability to get its divisions to cross-sell in sync; it loses out to IBM on technology, product weakness, and customer relationships. Business Week estimated that an HP salesperson was spending only 35% to 40% of his or her time with customers as compared with 60% to 65% at more organized companies, which is shocking in a market dependent on relationships.
The combined $48 billion printer and PC division would lead to further cost reduction, increase cross-selling opportunities, allow for better product and brand analysis under a single control, and provide better direction to the sales teams.
HP has done the right thing in not jettisoning its struggling PC division. It should also use its $14 billion cash hoard to beef up offerings in storage and business solutions and increase R&D spending instead of defensively buying stock.
Fool contributor Bobby Shethia doesn't own any shares of HP or any of the companies mentioned in the article. He uses a sleek HP slim-line cabinet with a silver monitor at work on the company budget but cheerfully hacks away on a Dell at home.