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HP: Breaking up is hard to do
New HP chief Mark Hurd talks about strategic plans and stresses opportunity, not split-up plans.
March 30, 2005: 1:15 PM EST
By Paul R. La Monica, CNN/Money senior writer
New HP CEO Mark Hurd will face plenty of questions about splitting up HP.
New HP CEO Mark Hurd will face plenty of questions about splitting up HP.
Since HP announced its merger with Compaq, the stock has failed to excite investors.
Since HP announced its merger with Compaq, the stock has failed to excite investors.

NEW YORK (CNN/Money) - Mark Hurd, who will take over the reins at floundering tech giant Hewlett-Packard on Friday, was grilled by analysts Wednesday about whether he plans drastic restructuring of the company.

Hurd, formerly the chief executive officer of NCR (Research), was named CEO on Tuesday. During an introductory conference call with the financial community Wednesday morning, Hurd stressed that his primary goal is to repair the problems at HP (Research), and not necessarily break up the company.

"You talk about problems but there are a bunch of opportunities at the same time," Hurd said in response to one question about strategy. "I want to get underneath every piece of the business and will be focused on doing my best to optimize each part."

HP has struggled during the past few years to compete with rivals like Dell (Research) and IBM (Research) in the personal computer and server businesses following its purchase of Compaq in 2002.

The poor performance of HP after the merger led to the ouster of former CEO Carly Fiorina in February. Critics of Fiorina also pointed to profit margin erosion that took place in HP's bread and butter printer business as evidence that the company lost focus.

To split or not to split

Hurd did not give offer specific plans. But during his brief remarks, Hurd made several comments that were similar to the ones that Fiorina often made to defend the Compaq deal -- namely that it made strategic sense to have a diverse portfolio of tech businesses ranging from PCs and servers to printing, software and services.

"I'm aware of competition and have seen questions about strategy, structure and consistency. But I also see the potential with these businesses," Hurd said.

And though many on Wall Street had been hoping for HP to make changes such as spinning off its lucrative printing unit or selling the PC division, analysts said after the call that Hurd is right to not rush into decisions.

"He shouldn't run and split it up immediately," said Wendy Abramowitz, an analyst with Argus Research. "Hurd should be given the option to look at the company as a whole and see if it's worthwhile keeping it together."

Abramowitz added that IBM faced similar pressures for a break-up in the early 1990s before Lou Gerstner took over and spearheaded a turnaround by boosting its presence in services and software, a strategy that HP has tried to emulate.

John Thompson, manager of the Thompson Plumb Growth fund, which owns about 1.2 million shares of HP, agreed that asset sales aren't necessarily the answer. He points out that HP probably wouldn't be able to get much for its PC division given its profitability problems.

"Nobody sells a house before fixing it up. If you want to sell you fix it up first," Thompson said. "But if Hurd can make the PC business consistently profitable then there is no need to get rid of it. It can be a decent business."

Size matters?

So far, Hurd is receiving rave reviews from Wall Street. Shares of Dow component HP edged slightly higher Wednesday after surging more than 10 percent Tuesday. The stock is trading just 10 percent below its 52-week high.

"Mark has put together an impressive track record over the past few years at NCR," said Brent Bracelin, an analyst with Pacific Crest Securities. "And the conference call went well. It was short, direct and concise. He's confident that he can come in and make a difference."

Still, Abramowitz hasn't changed her rating or earnings estimates, noting it remains to be seen whether Hurd will be able to return to HP to prominence.

For one thing, Hurd is known as an aggressive cost-cutter but HP's cost structure is actually in good shape. The major problems HP faced were inconsistent performance of individual business units as well as stagnant revenue growth due to competitive pressures.

There's also the issue of Hurd's lack of experience running a company of HP's scope. NCR is expected to generate $6.3 billion in total revenues in 2005, compared to projected sales of $86 billion for HP.

"Considering the size of the company he's dealt with in the past, Hurd's got a lot of work ahead of him," said Abramowitz.

Hurd, however, will have significant incentive to turn HP around. In addition to a base annual salary of $1.4 million, he will be eligible for annual bonuses ranging from twice to six times his salary and will also be granted options to purchase 700,000 shares of HP stock, according to documents filed with the Securities and Exchange Commission Tuesday.

For a look at more hardware stocks, click here.

For a look at HP and other Dow components, click here.

Analysts quoted in this story do not own shares of the companies mentioned and their firms have no investment banking ties to the companies.  Top of page

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