As HP prepares to split into two companies, the company’s president of Personal Systems tells Sophie Curtis it plans to be at the forefront of creating new product categories
On the first day of next month, Hewlett-Packard (HP), the American technology giant that was famously founded in a garage in Palo Alto in 1939, is splitting in two. The company’s data centre infrastructure business – comprising servers, storage and networking – will become HP Enterprise, and its PC and printer business will become HP Inc.
It is arguably the biggest upheaval in the company’s history. While HP has bought and spun off many subsidiaries in its 76 years – from 2001’s $24bn acquisition of Compaq to the $12bn purchase of Autonomy in 2011 that turned into a major corporate scandal – it has never overhauled its core structure in quite such a dramatic fashion.
The two companies will be of practically equal size: HP estimates that HP Enterprise will have revenue strength of $58bn and operating profits of $6bn, while HP Inc will have revenues of $57bn and operating profit of $5bn.
The man responsible for the lion’s share of the latter is Ron Coughlin. Under the new structure he will be president of HP Inc’s Personal Systems business, putting him in charge of PCs, tablets, accessories and their related services – a unit that currently brings in $35bn of revenues. Coughlin will report to Dion Wesler, HP Inc’s new chief executive, with HP’s current chief, Meg WhHewlett-Packarditman, taking over the other side of the company when the two split.
“What makes us most excited about the new HP Inc is the ability to have the creativity and speed of an entrepreneur and the scale of a Fortune 100 company,” said Mr Coughlin. “This means that when we have a great idea, we’re going to move fast, and we’re going to create new categories, but at the same time, when we get that idea, we can put it in every country, every city, every province in the world.”
Some argue that the split is long overdue. Former chief executive Leo Apotheker proposed spinning off the company’s PC business in 2011, but the plan was dropped following pressure from shareholders, which ultimately led to Apotheker’s departure.
Ms Whitman led a reorganisation of the company in 2012 that saw the PC business combined with the Imaging and Printing Group, helping to pave the way for the current separation plan.
HP is now taking a big leaf out of the book of IBM, another major IT supplier, which realised years ago that it was never going to be a one-stop shop for corporates, and started to sell off “non-core” businesses such as printers, PCs and servers. Rather than gradually divesting businesses though, it is splitting, which offers several advantages. Existing shareholders will get shares in both companies, and the two have agreed not to compete with each other for three years after the split. They will partner to buy supplies, jointly sell products to customers, and share patents and other intellectual property.
Mr Coughlin said part of the reason that the previous attempt to spin off the PC business was unsuccessful was because of “brand dis-synergies”. In other words, HP had decided that the PC business would suffer if it was not able to use its famous brand to sell its products.
This time, both companies will get to keep HP in their name, which Mr Coughlin said “took a lot of the dis-synergy out, and really unlocked the value”.
HP Inc will focus on three key areas – “core”, which is about using HP’s clout and scale to offer high-end features at the lowest possible cost, “growth”, which is about focusing on fast-growing categories like all-in-one PCs and convertibles, and “future” – creating new product categories.
At its consumer event in Barcelona this week, the company unveiled a slew of new devices with this new strategy in mind, including the Spectre x2, a elegant lightweight tablet with a detachable metal keyboard, an all-in-one PC with a huge 34-inch curved display, and a range of colourful HP Stream cloud-based Windows laptops.
The company is also looking to the future with its recently launched Sprout computing platform, which combines an all-in-one desktop computer with two touch displays along with a scanner, depth sensor, high-resolution camera and projector, to create a 3D computing experience – or in HP’s parlance, “Blended Reality”.
“We have been on a drumbeat of innovation. It started in October 2014, when we launched our Blended Reality,” says Mr Coughlin. “It was a vision last October, it’s becoming a reality now. Today if you go on HP.com, we sell Sprout. We also sell Sprout bundled with a 3D printer – 40pc of Sprout sales come bundled with a 3D printer.”
However, splitting the company into two comes at a price. HP stands to lose $400m to $450m during the split. The company hopes its cost-cutting efforts will help offset that number. Last month, HP said it expects to cut about 33,300 jobs over the next three years, on top of the 55,000 layoffs previously announced. The latest cuts represent a 10pc reduction in the company’s total workforce.
Revenue from the PC and printer business – what will become HP Inc after the split – fell 11.5pc in its fiscal third quarter, which ended on July 31. HP has said it expects the market for PCs and printers to remain tough for “several quarters”: the growing popularity of smartphones and tablets, as well as sluggish business investment, has meant both corporate customers and consumers holding back on buying computers.
Despite this, Mr Coughlin is optimistic about the future of the PC market, and confident of HP’s place within it. The addressable market for personal systems – hardware ranging from PCs to printers to mobile devices – is worth $340bn, he said, with half of that market growing at nine per cent.
“We have a scale market with significant growth pockets, and we’ve proven we can gain share in the PC category,” he said. “I’m also optimistic because we have momentum. We are blessed with being able to go public with one of the world’s strongest brands. Our marketing engine has never revved stronger.”
On the whole, analysts tend to agree that HP Inc has an opportunity to take a lead in the development of innovative hardware, in partnership with Microsoft, which under its chief executive, Satya Nadella, is undergoing something of a revolution focused on its new Windows 10 software. However, many believe that it has to look beyond its traditional markets, having seen the smartphone revolution pass it by almost completely.
The growing “internet of things” industry – connecting everyday devices to mobile or Wi-Fi connections to improve efficiency – could be one of these, especially given HP’s reputation among enterprises.
Coughlin says that operating as a separate company will allow HP Inc to invest more money in new categories as well as creating its own, rather than simply pouring all of its research and development budget into improving its existing technology. This is not only an intent but has been built into the new company’s framework, he says, highlighting how Mr Wesler was announced as HP Inc’s new chief executive when the company unveiled its next-generation Sprout technology a year ago.
“It’s not by chance,” Coughlin says. “It highlights the fact that innovation is going to be a centrepiece of the company under his leadership.”
Forrester analyst Peter Burris said that HP Inc will need to “place some big bets” and “run like the wind” if it hopes to play a role in shaping the consumer device and services industry. However, Mr Coughlin said that HP Inc will only play in markets where it can add value, both in terms of experience and from a shareholder perspective.
“Our focus is commercial mobility. In January we launched eight new devices in four vertical focus areas – retail, field service, education and healthcare. A great example is our healthcare tablet that is antimicrobial, it has a camera to scan the patient’s tag, so the whole idea is mobilising work flows, and that’s our focus. We can add value there, we believe there’s a need, we don’t believe our competitors serve that market well and we believe that there’s profit pools there,” he said.
“We don’t chase share for share’s sake. We don’t believe that we can do well in the $79 tablet market. I don’t think that anybody is going to do well there. In commercial, the good news is that the whole category has profit, and is such that you can offer great experience and great return for shareholders.”