The HP Breakup Idea Gets Another Look
Let’s face it — between the unfolding slowdown in the PC and printing business, the write-offs for the services unit and the Autonomy acquisition — 2012 was a lousy year for Hewlett-Packard. HP’s stock was the fourth-worst performer on the Standard and Poor’s 500.
That has caused many shareholders and analysts to reconsider the notion that HP might fare better broken up into pieces than as a single company. In a research note to clients today, Toni Sacconaghi considers HP on a sum-of-parts basis and concludes that the company could be worth as much as $29 a share, which amounts to a premium of more than 88 percent from its closing share price of $15.39 on Tuesday.
How does he get to that valuation? First, the PC business: Based on the assumption that the PC business is worth a valuation of 0.2 times sales in HP’s latest 12-month period — valuations at which IBM, Gateway and eMachines all sold their PC businesses to acquirers, and units that all had lower profit margins than HP does today — he concludes that HP’s PC business is worth about $7.1 billion, or about $3.70 a share.
For printing, he compared HP’s business to that of Lexmark and Xerox and, assuming it should trade at a 15 percent discount to those two — HP has a bigger consumer printing business that faces bigger challenges, Sacconaghi argues — he valued that business at $16.3 billion, or about $8.30 a share. Add another $15.50 a share for enterprise hardware and support, plus $5 for enterprise services, then take back about $3.70 a share for some accounting adjustments, and you end up with about $29 a share.
Yet even if, on this basis, HP is arguably worth more in pieces than it is as a whole, Sacconaghi writes that a breakup is still unlikely in the immediate future. Also, CEO Meg Whitman has said repeatedly that she sees the company staying together. Even so, it’s hard not to wonder about her commitment to that, after some new language about the “potential disposition of assets” that aren’t meeting targets emerged in HP’s latest 10-K filing with the U.S. Securities and Exchange Commission.
Whatever Whitman’s thinking on the subject, Sacconaghi says she has time. “We believe that Meg Whitman and current management have 12-24 months to attempt to effect a turnaround at HP before management, the Board, or activist investors might look to break up the company to unlock shareholder value.”
If it does happen, he sees two scenarios. One is to sell the PC business to Lenovo or a private equity group, and then spin out the printer business to “harvest cash,” while retaining the enterprise and services businesses. The other option: Spin them both out.
And if it were to happen, it wouldn’t be easy, Sacconaghi says: “A breakup of any kind requires substantial effort and can have material potential costs along two dimensions: (1) spinning out businesses could lead to dis-synergies, as corporate functions need to be duplicated across two companies and scale is reduced. (2) disruption from a sale/spin-off could negatively affect performance (and therefore value) in the near term.”
Or, as Neil Sedaka so famously sang a half century ago, “Breaking Up Is Hard to Do.”