One of Merrill Lynch's top analysts stunned the computing industry this morning by calling for HP to split into two companies.
None other than Steve Milunovich, a first vice president at Merrill Lynch, has come up with a drastic plan for reworking HP's structure. The analyst, in a research note, called on HP to either divide into separate printer and computer-focused companies or to split along consumer and enterprise lines. This advice comes the day before HP is set to meet with financial analysts to discuss its performance.
Original thought has never been Miloonovich's forte, making his case for a standalone HP printer company totally expected. It's about two years since HP closed its buy of Compaq, giving Miloonovich ample time to process the deal and come up with a conclusion.
Like myriad industry observers before him, Milunovich has noted that HP's printing and imaging division performs much better than the company as a whole. Breaking out the printer business would let HP focus on its strength, move quickly and possibly make better use of its strong brand, Milunovich said.
"Our strong intuition is that shareholders will benefit by HP eventually breaking up," Milunovich wrote. "Unlike IBM, HP has distinct businesses. . . HP is the Campbell Soup of printing - it owns the category so its main challenge is not share but growing the category. HP has done an admirable job of creating new printing markets and points out that it still doesn't address 95 percent of the potential opportunity, including books, magazines, newspapers, etc."
So a separate printer company would have a much larger potential upside than the current behemoth. Taking the other consumer company route, HP could link the printing group with consumer PCs, digital cameras, TVs and the upcoming iPod products - all more interesting than close to break-even enterprise computing products.
"HP has become a surprisingly strong consumer company, the leading consumer IT franchise," Milunovich wrote.
The analyst does note the difficulty of HP still being committed to consumer PCs in his scenario, but quickly glosses over this, saying one part of HP could manufacture the PCs and then sell consumer kit to the new consumer part of the company. That sounds easy enough. Why didn't Fiorina think of that.
What about the enterprise company?
Well, Miloonovich thinks the enterprise side of the house is looking better these days now that the Compaq parts have made their way through the organization. Before the Compaq buy, HP had massive holes in its Intel server business and storage. Problem solved.
From here on out, HP should forget about Dell and focus a separate enterprise computing company on fighting IBM, Milunovich said.
"CIOs want an alternative to IBM - there's always room for a strong #2 such as Pepsi or Avis - and Dell is not yet an enterprise player on par with the big two. IBM admits that HP also sees the business process outsourcing opportunity coming. To execute on it likely requires HP to boost its services capabilities, especially in industry expertise."
The Merrill analyst goes on to say the enterprise HP could buy Sun Microsystems, BearingPoint, Unisys and a host of other software and services companies. Then, it should chuck the HP brand.
Yeah, why not!
And when it's done acquiring companies, the new new HP could pay out some of its $15bn in cash to investors. If it can't be different from Dell in product, maybe it can do so in its fiscal policies.
"HP could differentiate its story to investors by aggressively returning cash to investors," Milunovich wrote.
A no brainer again.
"We think breaking up HP makes financial as well as business and urge the board to show courage and creativity," Milunovich closed.
Miloonovich - known here fondly as "The Loon" - has a real knack for timing his recommendations to companies at points when they will generate plenty of personal press. You might recall a certain open letter issued to Sun's CEO Scott McNealy in which The Loon suggested Sun abandon its SPARC server business - presumably so Sun could receive a later letter about how it had no way to differentiate against other Itanium server vendors.
Now, the day before HP's analyst meeting, The Loon vomits up a few bullet points on how HP could split into separate companies and expects to be taken seriously.
"Breaking up an $80bn company is a complicated problem that we only briefly cover here," he admitted at one point in the research note.
You could say that again, Steve. You might even suggest a research note is the not best place to lay out such a plan in the first place. How Merrill Lynch clients benefit from The Loon's extensive day dreams is beyond us. ®