The computer and printing giant, Hewlett Packard (HPQ, Financial), has decided to split the company into two divisions to make it into a more profitable enterprise – the decision was disclosed towards the early hours of October 6, and investors were concerned on the future of the HP stock trading on the NYSE. To soothe investors, the stock went up for more than 5% gain in early Monday trading soon after the news came in. This clearly reflects that the enthusiasm of Wall Street just got reinforced after the news poured out from the HP headquarters. News sources have confirmed that, by the end of 2015, the HP of today will no longer exist and the tech giant will split itself into two companies pursuing two different business lines to grow phenomenally in the near future. So, what is the overall story and how will it affect HP’s future in the long term? Will it be ultimately beneficial to the stockholders? Let’s dive in to find out the answers.
A part to the turnaround plan
Current CEO Meg Whitman commented, “The decision to separate into two market-leading companies underscores our commitment to the turnaround plan. It will provide each new company with the independence, focus, financial resources and flexibility they need to adapt quickly to market and customer dynamics while generating long-term value for shareholders, in short, by transitioning now from one HP to two new companies, created out of our successful turnaround efforts, we will be in an even better position to compete in the market, support our customers and partners and deliver maximum value to our shareholders.”
The split into two enterprises – Hewlett-Packard Enterprise and HP Inc. – has been declared to be part of the turnaround program to enhance the balance sheet strength. Since the company presently has a strong balance sheet which is something noticed in the past as well, it allows HP to have more financial flexibility. Analysts are of the view that the HP split could provide further upswing to the stock price, as has been witnessed by the Street embracing spin outs with recent news from eBay (EBAY, Financial) and other listed companies on a positive note.
The crux of the split
Appreciating HP’s move, the company’s top management have shared that this split would be a defining moment in the industry, as customers are looking ahead for innovation enabling workforces that are more mobile and connected while also allowing a seamless experience across work and play. The top brass has announced that "Hewlett Packard Enterprise" would focus on cloud computing, servers and software while the other company to be named "HP Inc." would concentrate on the computer-and-printer focussed business line. The former would be led by Whitman, and the second company would have Dion Weisler, who is currently serving as executive vice president of HP’s printing and personal systems business as the CEO.
As Hewlett-Packard Enterprise would continuously focus on developing cloud services, HP Inc will focus its efforts and investments on development in computing and 3-D printing.
HP Inc. will retain HP’s existing logo, and current shareholders will own shares of both Hewlett-Packard Enterprise and HP Inc. once the split is completed. An important point to be noted in this matter is that this transaction would be tax-free for federal income tax purposes.
Future outlook from the financial standpoint
The company has reiterated that for the entire fiscal year it expects to record non-GAAP earnings between $3.70 and $3.74 per share, and for the upcoming 2015 fiscal is projecting non-GAAP earnings to be between $3.83 and $4.03 per share. The company has reaffirmed that none of the earnings outlook for the fiscal years includes any one-time charges that the company expects to incur from the separation of businesses.
Soothing investors’ nerves
Investors might have been tense over whether they should still hold on to their investments after the announcement of this spilt flew in, but company officials have reassured that HP is not going to get delisted from any stock exchange. The split would mean owning shares of both the companies in a certain proportion which is yet to be disclosed to the investors. But surely, HP is still a good investment to hold on and the company promises to reward its investors on a continued basis even after the spilt which is slated to be completed by end of 2015.
Last word
Investors need not worry about the split and HP is slated to see better days – so the deal is promising for the company. Even the balance sheet strength will grow after the spilt is over, and we need to stay tuned to keep an eye on how the strategic split adds a new dimension to HP’s ultimate storyline.
