| "We think HP's best course of action
is to become the IBM alternative in enterprise computing, since competing with
Dell at the low end appears futile."
-- Steven Milunovich Merrill Lynch analyst |
Merrill Lynch to HP: Time for a breakup
By Martin Lamonica, CNET News.com
Tuesday, June 08, 2004 09:49 AM
Tuesday, June 08, 2004 09:49 AM
In the note, Milunovich argues that HP can improve its strategic focus by
breaking off into distinct organizations. He suggests either spinning off HP's
imaging and printing business or breaking up the company into two divisions, one
that sells to consumers and one that sells to corporate customers.
"Our strong intuition is that shareholders will benefit by HP eventually
breaking up," Milunovich said. "As much as the company would argue that its
divisions are separately run and optimized, we don't fully believe it."
Merrill Lynch said HP's management should "do the right thing for
shareholders" and address the difficulty of maintaining its current competitive
position. HP is being squeezed between Dell, which undercuts competitors on
price, and IBM, which has a broad portfolio of goods and consulting services.
Milunovich said that overall, it appears that HP made a smart move in acquiring
Compaq Computer, which improved the company's market share in servers, PCs
and storage. To better compete, Milunovich said, HP should continue making
acquisitions of other companies. He noted that HP would be the most likely
acquirer of Sun Microsystems.
"We think HP's best course of action is to become the IBM alternative in
enterprise computing, since competing with Dell at the low end appears futile,"
he said.
But to exectute on the IBM-alternative strategy, HP needs more focus, he
said. Milunovich conceded that there are some efficiencies to be gained in
distributing and manufacturing both computers and printers but that overall, the
imaging and printing parts of the business would benefit from independence.
"HP is the Campbell Soup of printing. It owns the category, so its main
challenge is not share but growing the category," he said.
Meanwhile, the company's computer product line is diverse, including products
from Compaq's own acquisitions of Digital Equipment and Tandem. Those products
could be rebranded as part of a company split, while the imaging division could
maintain the HP name.
HP spun off a
medical testing unit, called Agilent Technolgies, in 1999.
Milunovich's advice for HP is not the first time he's recommended that a
technology provider take dramatic steps. In October, he sent an open letter to
Sun CEO Scott McNealy, urging him to focus Sun
on high-end computing and to exit some of Sun's smaller businesses, including
Java, the UltraSparc processor and Linux on the desktop.
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