HP: PC unit spin-off would have cost billions

In reversal of initial announcement, HP execs determine costs of dumping PC arm were much more significant than potential benefits

Spinning off its PC unit would have been too costly for Hewlett-Packard, and that was one of the reasons why the company backed off from the plan it announced in August, an HP executive said on Friday.

The cost of spinning off the unit would have amounted to $1.5 billion in one-time costs and additional payments at later dates, said Tony Prophet, senior vice president of operations at HP's Personal Systems Group (PSG) unit, which deals in PCs, smartphones, and tablets.

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"As the analysis unfolded, it became clear the costs were much more significant than any potential benefit," Prophet said.

HP on Thursday said it had decided to keep its PC division after flirting with either selling or spinning it off -- a plan that had been put in motion by former CEO Leo Apotheker. HP was exploring alternatives for the low-margin PSG business in order to concentrate on more profitable business areas such as enterprise software, services, and hardware.

Keeping the PSG within HP is "right for customers and partners, right for shareholders, and right for employees," Meg Whitman, HP's president and CEO, said in a statement on Thursday.

The company had close to 100 people -- executives, customers, and legal advisors -- working to evaluate whether to retain or spin off the PC division, Prophet said. Other factors in the decision to retain the unit were customers' wishes and the component purchasing power provided by the PC unit, said Prophet.

Some HP enterprise customers previously expressed dissatisfaction with the company's decision to sell or spin off PSG, saying they wanted to buy products from a single entity instead of going to multiple organizations for software and hardware purchases. Analysts have said that the PC business helped HP acquire hardware at cheaper rates and provided strong distribution and logistics capabilities, which were key for the printer and enterprise hardware businesses.

A lot of due diligence went into deciding to retain the PC unit, and there's no turning back, Prophet said.

"You can be certain that there was deep and thorough analysis behind this," Prophet said.

The PSG unit was valued at around $8 billion by an analyst in August when strategic alternatives were being explored. The high price made it tough sell in a down market in which other PC makers were struggling.

While competitors tried to prey on the uncertainty surrounding HP's PC business, there is no sign it was affected by that over the last few months: Prophet said that PC shipments grew in the third quarter.

HP remained the world's top PC maker during the third quarter, according to IDC. The company's PC shipments totaled 16.6 million units, growing by 5.3 percent compared to the previous year's third quarter. After Lenovo, Dell was the third largest PC maker, with the company's PC shipments dropping by 1.6 percent year-over-year.

Looking ahead, Prophet said HP's future PC and tablet strategy revolves around Microsoft's upcoming Windows 8 OS. Microsoft has not announced a release date for the OS, but a top Intel executive earlier this month said the OS would be released next year.

"Obviously the major trends and the most important transition point will be Windows," HP's Prophet said. "We intend and are working to be a leader with Windows 8."

HP will release a Windows 8 tablet in the future and ultrabooks with the OS. Ultrabooks are being promoted by Intel as a new category of thin-and-light PCs with tablet-like features.

Meanwhile, the fate of HP's WebOS mobile platform hangs in balance. The company is still analyzing what to do with WebOS, Prophet said.

In August, HP said it would keep WebOS but kill smartphones and TouchPad tablets based on the OS. A buying frenzy ensued after HP sold remaining TouchPad tablets starting at $99. Smartphones such as Palm Pre and Pixi also sold out in the fire sale.

Prophet did not comment on the eventual fate of the TouchPad, but a company spokeswoman said support for the device will continue. It's too early to comment on smartphones, Prophet said.

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