HP may be one of those Silicon Valley tech firms that started in a garage, but 2012 will be best remembered as a time when the company spent most of the year in the doghouse.
After months of poor performance that has made it the worst performer of all 30 Dow Industrials (a 45 per cent loss), a botched acquisition of a software firm Autonomy that was allegedly based on misleading accounting and now, this week, rumours of activist shareholder Carl Icahn taking a stake, analysts and observers everywhere are calling for HP to be broken up. This is, of course, the most reactive thing HP could do, and the stupidest. HP is not more than the sum of its parts; it is the sum of its parts. Let me explain.
Autonomy product will be key
Eleven years ago, when HP bought Compaq Computer in a highly controversial move, many people I spoke with thought HP would be far better off simply jettisoning its Personal Systems Group (PSG), which does the desktop stuff, and focus on its far more lucrative printing and imaging division. That's because, no matter how digitized the office, everyone keeps using paper, and people will always be running out of ink. Becoming more like Xerox might be enough to keep things in the black and satisfy risk-averse shareholders, but it wouldn't contribute a lot of new value to HP's customers.
"In terms of investments, we are very focused on product, product, product," said CEO Meg Whitman during the company's fourth-quarter earnings conference call. "Great companies return to greatness on the basis of product."
It's true. Think Apple and the iPod, to take just one example of a tech firm that was once dangling off a financial cliff before it put more efforts into its R&D. For HP, the greatest of its products this year was not to be the iPad-wannabe ElitePad but Autonomy's software, for which it paid US$10 billion.
Some call what Autonomy does e-discovery, and others describe it as meaning-based computing. Here's a simpler way to think about it: you know when you're working in a company and no one can find that PowerPoint deck that had some really important figures on them even though it was probably dumped on some shared folder somewhere? Autonomy will find it, and help put the information in context for a variety of people who might need it.
HP has never been known as a software company, but Autonomy marked its best chance at becoming one. Jillian Mirandi, an analyst with Technology Business Research Inc., points out that this has actually become HP's second-largest segment, driving US$269 million in the fourth quarter. In other words, once the legal issues around the deal have been sorted it, it represents a way forward for HP, particularly if it can layer Autonomy on top of its own products. "We believe that HP will leverage Autonomy's customer base (and) promote Autonomy to run optimally with HP servers," Marandi said.
Breaking up HP may look like a radical move to bring down costs and improve focus, but only to investors that aren't aware of how companies buy technology today. HP's customers want to deal with fewer vendors, not more. They want vendors that can not only sell stuff but help them use technology more strategically to meet their business objectives. This is why IBM, which once faced near-bankruptcy, began focusing on building up its IBM Global Services unit (and why HP, incidentally, bought EDS).
With only one year under her belt at CEO, Whitman is going to be spending most of 2013 keeping the Icahns of the world at bay. It's a fight she must win, because if HP can survive as a single entity, it has a far greater chance of marshaling the resources necessary to transform into a more diverse and valuable supplier, regain competitive advantage and improve its market share. This is a company which once used a single word, "invent," as its slogan. Perhaps it's time to update that slogan — to "reinvent."
Shane Schick is the editor-at-large for IT World Canada and the editor of expertIP. An award winning journlaist, he is a frequent guest on CBC, BNN and CTV.