Here’s Another Hewlett-Packard Spinoff Idea: Finance

Remember how, a year ago, Hewlett-Packard briefly considered spinning off its personal computer unit? Then, after jettisoning the CEO who put the plan in motion, decided not to do it?

Well, the spinoff idea is still alive and well, though this time the target is HP’s debt-ridden finance unit. The suggestion came today from UBS analyst Steven Milunovich, who in a research note to clients today not only suggested that HP should spin off the part of the company that helps customers finance their purchases, but convince rival Dell to do the same thing and combine both finance groups into a single independent company.

Here’s how Milunovich sees it: With HP’s net debt swelling from $12 billion to north of $20 billion over the course of the last year, of which $11 billion is due over the next two years, he reckons HP will be forced to do some fundamental corporate restructuring.

HP Financial Services (HPFS), he argues, may be a strategic asset in helping HP land deals, but with HP’s overall debt-to-capital ratio growing 43 percent, it might make a tempting target to carve off. It uses commercial paper and short-term notes to boost its liquidity. Having seen its credit rating cut recently, Milunovich worries that another cut — which he says isn’t likely to be imminent — might freeze HP out of participation from corporate debt markets.

Shedding HPFS, he says, might be the way to meaningfully reduce HP’s overall debt by about $10 billion and improve its overall cash flow.

Think of it a little like having a department store credit card. In its fiscal 2011, HPFS originated $6.8 billion worth of customer financing to corporate customers large and small buying servers, networking gear, software and paying for services. “Having HPFS in-house streamlines the sales process and offers flexibility. Rather than use a third-party financier, HP can take a holistic view during the sales process, managing both financing terms and the product sale to meet the customer’s needs,” Milunovich wrote.

It’s also profitable, having last year reported $348 million in profits on revenue of $3.6 billion. To that end, Milunovich concedes there are few reasons to actually spin it off. “But, taking the view of a potential suitor, we see room to reduce capital costs and to increase leverage,” he wrote.

That’s where the idea for the joint venture with Dell comes in. Combining them into a single, independent company might help both HP and Dell overcome inefficiencies in how companies finance their IT purchases.

“Although HP and Dell have different levels of balance sheet risk, both are tasked with re-inventing their business models amidst a challenging back-drop in PC and IT spending,” Milunovich wrote. “We think both would stand to benefit from such partnership while maintaining their individual competitive strengths and strategic focus.”

The idea comes two days before HP is set to convene a meeting with analysts in San Francisco, but don’t expect much to come of it. HP CEO Meg Whitman has already said numerous times that she sees strength in HP’s size and doesn’t foresee a scenario where any piece of it is carved off or sold.