Hewlett Packard Co. (NYSE:HPQ) is looking to spin off its PC business and potentially bid for Autonomy Corp., the second largest software maker in the UK, for a price tag that could surpass $10 billion. As the largest PC seller globally, this move is symbolic and marks a shift from being a consumer oriented business to one more focused on enterprise and services. While this move may pay off in the long run, the timing and surprising nature of the announcement caught many off guard who interpret this as a move in desperation rather than coming from a position of strength. Here we take a look at HP’s PC and software businesses and their contribution to the firm’s stock value.
We estimate that the PC business makes up nearly 15% of our pre-announcement $47.50 Trefis price estimate for HP, which is around 50% ahead of the current market price.
PC Business is a Declining Business
HP’s personal computer offerings, which includes desktop and notebook & netbook, are targeted at both consumer and business segments including the popular product series like Pavilion and the Touchsmart all-in-one in dekstops, Pavilion and Compaq in notebooks and Mini in netbooks.
The company is the global leader in the PC industry making up around 18% of worldwide PC shipments in second quarter of 2011, which is well ahead of competitors like Dell (NASDAQ:DELL), Lenovo, Acer Group and ASUS. [1] However given the low margin nature of this business, this has become a less important unit for the company and is the fourth largest driver of value for the company.
See also our recent notes: Do PCs Even Matter for HP or Dell? and HP’s 3 Most Valuable Businesses
Software Business is Growing
HP Software offerings optimize but not necessarily drive a business–they revolve around IT infrastructure management and technology optimization.
HP offers IT management software solutions, including support and professional services allowing clients to manage their IT infrastructure and applications. Other offerings include information management and open call solutions that allow clients to develop and deploy voice and data network services.
According to our estimates, the software business currently makes up less than 5% of our price estimate for HP. However this could change drastically with the Autonomy deal. On the other hand HP Services (33%), Inks & Cartridges (25%) and Servers and Storage (16%) account for nearly 75% of its stock value.
In a separate announcement HP confirmed it will be discontinuing its webOS based tablet and smartphone devices, [2] which according to our estimates are less than 1% of HP’s worth.
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