SNS in the News - February 11, 2005
o matter who succeeds Carleton S. Fiorina as chief executive at Hewlett-Packard, the challenge will be the same: to shift the company's center of gravity to businesses with more ample profits.
One swift step in that direction - and a step Hewlett-Packard has considered, according to an industry executive close to the company - would be to buy Eastman Kodak or Xerox to complement and expand Hewlett-Packard's most profitable division, the printer, ink and imaging business.
Currently, the company's printing and imaging division contributes nearly 75 percent of its profits, but represents only 30 percent of its $81 billion in yearly revenues. The rest of the company, particularly its personal computer and corporate computer businesses, are clearly not carrying their weight.
For the long term, industry analysts say, Hewlett-Packard has three options - break up the company, improve the efficiency of its current businesses, or make a sizable acquisition to add to its profitable units like services or printing.
Hewlett-Packard has closely studied potential deals on that front, including Eastman Kodak and Xerox, an industry executive said. The stock market value of Kodak is $9.8 billion; Xerox's value is $14.2 billion.
Hewlett-Packard has the cash to make such a big move. It has more than $14 billion in foreign profits that qualify for a one-time tax break passed by Congress last fall, if it brings the money back to the United States for investment. In an interview yesterday, Robert P. Wayman, Hewlett-Packard's chief financial officer and interim chief executive, said he had not "looked at either of those companies recently."
Hewlett-Packard has insisted that the ouster of Ms. Fiorina on Wednesday is not a sign that the company has lost faith in the course she set. Ms. Fiorina championed the controversial purchase of Compaq Computer in 2002, a move that greatly increased Hewlett-Packard's dependence on the cutthroat PC business and the market for the larger computers that run corporate data centers.
"Our strategy is totally unchanged," Mr. Wayman said.
Patricia C. Dunn, a director who is temporarily stepping in as Hewlett-Packard's chairman, repeatedly said in a conference call on Wednesday that the board would search for a new chief executive with "hands-on" skills. What the company needed, Ms. Dunn suggested, was a seasoned leader to move the company more quickly and smoothly on its current path.
When a new chief executive comes aboard, the assumption will be that that person supports the current strategy, Mr. Wayman said. "That said, you don't hire a chief executive officer to be totally operational," he said. "And strategy needs to be reviewed from time to time."
Laura Conigliaro, an analyst at Goldman Sachs & Company, said that Hewlett-Packard's shareholders would do best if the company were split into separate companies. She estimates that the break-up value of Hewlett-Packard at $27 to $28 a share, with the printing business alone worth about $20 a share. Hewlett-Packard shares closed yesterday at $21.48 a share, off 5 cents, after rising 7 percent Wednesday on the news of Ms. Fiorina's departure.
The logical split, Ms. Conigliaro said, would be to have the printing and imaging division become a separate company, run by Vyomesh Joshi, the executive vice president who now manages that division. A second company, Ms. Conigliaro said, would likely be the corporate computing divisions including server computers, storage, services and software, led by Ann M. Livermore, an executive vice president who currently oversees those operations.
"But in a breakup," Ms. Conigliaro said, "the PC business would become an orphan," a prime candidate to be sold to another company just as I.B.M. last December agreed to sell its PC business to Lenovo of China.
Even if there are any strategic changes at Hewlett-Packard, they will most likely not come for several months, after a new chief executive is named. Outside and inside candidates will be considered, but the outside search has not yet begun. Mr. Joshi and Ms. Livermore are considered the leading insiders.
So for the foreseeable future, Hewlett-Packard will focus on improving the performance of its existing businesses. To do that, analysts say, will require ruthless cost-cutting and quick moves into new markets where profit margins are higher.
A leading candidate for expense reduction, analysts say, is Hewlett-Packard's corporate computer unit. The business has gross margins - revenues minus the cost of goods sold - of 35 percent to 40 percent, A. M. Sacconaghi, an analyst at Sanford C. Bernstein & Company, estimated. But in the fiscal year ended last October, that division had operating profits of $173 million on sales of $15.2 billion, as marketing, staff and other expenses ate into profits.
Hewlett-Packard still sells proprietary systems, each with its own kind of microprocessor engine and specialized software. Yet increasingly, corporate customers are switching to lower-cost machines powered by Intel processors and running Linux, a free operating system, or Windows from Microsoft. The profit margins on the new machines, using the low-cost technology of the PC world, are far lower than on proprietary systems.
The corporate computer business, Mr. Sacconaghi said, is "an extremely difficult market, and Hewlett has to get maniacal about costs."
The imaging and printing division, however, offers better opportunities for expanding into new and adjacent markets where profit margins are higher.
Hewlett-Packard's market share in the conventional ink-jet and laser printer markets is more than 40 percent. But Hewlett-Packard, analysts note, is just beginning to make inroads in the market for big multifunction printers, copiers and scanners, linked by networks in corporations.
The market for such machines, currently costing $10,000 or more, has so far been led by the traditional copier makers like Xerox, Ricoh, Minolta and Canon. Hewlett-Packard is trying to break in with lower-priced machines, in the $2,000 to $3,000 range.
"H.P. is really good at networking and printing, so it's an obvious area for growth," Mr. Sacconaghi said.
Digital photos represent a huge potential market for Hewlett-Packard. Digital cameras now outsell conventional film cameras, and Hewlett-Packard is in that market. More important, Hewlett-Packard is trying to get as many digital photos printed on its printers as possible.
But consumers are also printing digital photos at in-store kiosks and online printing services, like Kodak's Ofoto. One reason a Kodak purchase might be tempting to Hewlett-Packard, analysts say, is that Kodak has a strong presence in both online and kiosk printing - the alternatives to Hewlett-Packard's home printers for digital photo printing.
A hybrid strategy would be to keep the company together but focus it entirely on the imaging business, broadly defined, said Mark R. Anderson, publisher of the Strategic News Service, a technology newsletter. Cutting-edge microprocessors are now designed for rendering images in computer games, a form of imaging. Supercomputers that do simulations of gene-folding and weather patterns, he added, were tackling large-scale imaging problems. Fast-growing markets like medical imaging would be opportunities, he said, and so would home media computers for entertainment.
"I would focus on all the businesses through the prism of serving the imaging mission, and get rid of lower-margin parts of some of the businesses," Mr. Anderson said.
The abrupt exit of Ms. Fiorina might suggest turmoil at Hewlett-Packard, but so far the company's corporate customers do not seem distressed. "We're telling clients that the risk of having H.P. as a supplier is no more than it was two days ago," said Carl Claunch, an analyst at Gartner Inc.
Ms. Fiorina's departure has revived a long-running debate about Hewlett-Packard's future, one that is still unresolved.