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HP unveils restructuring
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March 2, 1999: 5:02 p.m. ET
Technology giant to split into two separately traded entities
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NEW YORK (CNNfn) - Hewlett-Packard Co. announced plans to split into two separately traded entities Tuesday in a move aimed at allowing H-P to compete against rivals IBM, Sun and Compaq in the rapidly growing Internet services space.
Under the plan, already approved by the board of directors, one company will focus on the test and measurement businesses, while the other concentrates on computing and imaging businesses.
Analysts say the restructuring represents a pivotal step for the world's second largest computer maker, which was founded in 1938 by Bill Hewlett and David Packard out of a Palo Alto, Calif. garage with a $538 investment.
But they added H-P, with its wide range of business operations, may have further to go.
"They probably haven't gone far enough, but it's a good start," said Andy Butler, research director at GartnerGroup Technology Research Organization.
"It definitely makes the company leaner and more efficient," Butler said. "But at the computing company that's left, there's still a great deal of work to be done."
Shares of H-P surged 2-3/4 on the news to 68-5/8.
The break-up
Under H-P's restructuring plan, first reported by the Wall Street Journal Tuesday, both companies will be independently managed. Each will have its own board of directors and its own central research-and-development organization.
The new measurement company, representing $7.6 billion of H-P's total revenue, will include the company's test-and-measurement, components, chemical-analysis and medical units.
H-P's electronic testing equipment was a hot commodity during World War II, driving revenue up to $1 million by 1940, up from $34,000 three years before. However, in the latest quarter, revenue from H-P's test and measurement division was off about 14 percent.
Edward Barnholt, currently H-P executive vice president and general manager of the company's measurement organization, will become chief executive officer of the new measurement company, which will focus on high-growth opportunities such as communications and life sciences. The new company has yet to be named.
By breaking off into a separate company, Barnholt said the businesses will be more agile and better able to compete, not to mention more accountable for its financial results.
"We'll move more quickly because our resources and attention will be focused on just the measurement business, and we'll acquire a lot more freedom to pursue new opportunities," he said.
H-P is considering an initial public offering for about 15 percent of the measurement company's outstanding shares by year-end. This offering would be the largest technology IPO in Silicon Valley history. Following an IPO, H-P would expect to distribute the remaining shares to its stockholders in a tax-free transaction.
Computing firm to keep H-P name
The new computing and imaging company will continue to operate under the Hewlett-Packard name and will include all of H-P's enterprise computing systems, software and services, personal computer, and printing and imaging solutions businesses.
Lewis Platt will continue as H-P chairman, president and chief executive officer, and will manage the transformation until the separation is completed. He will step down after the separation.
Platt told analysts the search for his replacement has already has begun, both inside and outside the company.
Though no names were disclosed, some say H-P's current vice president and general manager of Enterprise Computing Solutions Organization, Ann Livermore, has long been groomed for the spot.
The company does not anticipate layoffs as a result of the restructuring.
H-P, with $47 billion in annual revenue, was considered one of the hottest technology companies in the early 1990s, but it has since been wounded by falling PC prices, which have lowered profits. H-P also has lost its edge in the server market, with competitors Sun Microsystems Inc. and IBM Corp. gaining market share.
Speculation of a possible breakup was set off when the company brought in consulting firm McKinsey & Co. to examine ways to boost the bottom line.
Chris Grisanti, director of research at Spears, Benzak, Salomon & Farrell, told CNNfn's "Business Day" the split would be good for H-P.
"If AT&T, for example, is any indication, the shareholders have a lot to gain (from this effort)," Grisanti said. "The executives…have the belief that the parts are worth more than the whole. And to get one piece of that sexy Internet business in this kind of a market, they could very well be right."
Implications
For H-P, the break-up of its computer and scientific units could strengthen its ability to compete - not to mention shareholder value, analysts say.
The company has missed analysts' forecasts in at least six of the last nine quarters, as its server business struggles to compete with larger rivals. It also warned shareholders that profits for the remainder of the year will be lower-than-expected, due to a slowdown in its North American and European business.
"People have been on H-P for a while about not being able to generate rapid enough revenue growth, and it's a huge, diversified company -- do we need all these unrelated pieces?" said Art Russell, a technology analyst with Edward Jones. "And I think by separating away the test and measurement business and the medical stuff, they can focus more clearly on their core strength, and that's the computers and imaging products."
Prior to H-P's announcement, analysts speculated the company would split into three companies. Some say that's still a possibility.
Scott Martin, a principal analyst with GartnerGroup's Dataquest, in San Jose, Calif., said it's possible the company has plans to split even further, but decided to pace itself until the initial division is in working order.
He noted, too, that the current restructuring may "give the companies a little more favorable valuation" since analysts will be better able to crunch the numbers.
"These are two businesses which don't really belong together, and I think it will certainly allow the top level management to focus more," he said, adding the restructuring won't automatically transition the company to compete more effectively. "You won't see H-P go from its current multiple to something like Dell 's (DELL). This is not that big of a deal."
Currently, H-P's price/earnings multiple stands at 25. Dell's is 79.
Will H-P stay in the Dow index?
Some, too, suggested the restructuring which will cut the company down, could have implications for H-P's long standing position as a component of the Dow Jones industrial average, a listing of the 30 largest Blue Chip stocks.
"External events such as this, or the Exxon merger, are always instigators of reviews of the average, and when we look at one component, we look at all of them," said John Prestbo, Dow Jones index editor. "However, the H-P thing, like the Exxon-Mobil deal, is not going to happen tomorrow, so I don't think we need to rush into anything tomorrow."
H-P is credited with pioneering computing with its launch of the handheld scientific calculator in 1972 . Shortly thereafter, the company introduced its first PC and LaserJet printer.
By 1986 H-P had positioned itself as a leader in the computing industry with its roll-out of a family of branded computers. It's been on a buying streak ever since.
In 1992, HP acquired Texas Instruments' line of Unix-based computers and four years later it bought the bulk of SecureWare, a software security firm.
In efforts to broaden its market share and better position itself for the Internet age, the company also H-P bought out VeriFone for nearly $1.2 billion, an electronic transaction firm in 1997. 
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Hewlett Packard
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