Hewlett-Packard Company (HPQ) To Split Into Two; Stock Surges


Hewlett-Packard Company (NYSE:HPQ) shares jumped 8.10% in pre-market trading Monday after the technology giant confirmed that it would split its businesses into two. The confirmation comes a day after sources familiar with the matter told The Wall Street Journal that Hewlett-Packard was planning to break into two. One entity, to be called HP Inc., will consist of the PC and printer businesses. The other one, to be named Hewlett-Packard Enterprise, will include its corporate hardware and services operations.

Hewlett-Packard to cut more jobs

The Meg Whitman-led tech giant will split through a tax-free share distribution to shareholders by the end of FY2015. Once the division is complete, each of the two publicly-traded entities will have more than $50 billion in annual revenue. The announcement comes just a couple of days before the company’s Analyst Day (October 8). Notably, HP combined its PC business with the more profitable printer unit in March 2012, laying the groundwork for the current plan.

The Palo Alto-based company said it had also identified “incremental opportunities for reductions.” So, it has increased the total expected job cuts by 5,000 to 55,000. Hewlett-Packard previously projected its layoffs to be between 45,000 and 50,000. The company has already eliminated more than 36,000 jobs under its current restructuring plan.

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Investors have long contemplated the breakup of HP. The company came pretty close to separating its PC unit after the controversial acquisition of British software company Autonomy Corp in 2011. But it later decided to hold on to its PC business. It’s not the first time the 75-year old tech behemoth is splitting itself. In 1999, the company spun off its testing and measurement equipment division called Agilent Technologies Inc. (NYSE:A). Agilent shares soared 41% on their first trading day.

How will the breakup affect its enterprise value?

Meg Whitman will serve as chairman of HP Inc, the PC and printer entity, and Dion Weisler, EVP of printing and personal systems group, will be its CEO. Meanwhile, Whitman will be the CEO of Hewlett-Packard Enterprise, and current independent director Patricia Russo will be its chairman. Stifel analysts Aaron C. Rakers and Joseph Quatrochi said in a research note that a potential spinoff could move Hewlett-Packard shares into low-$40 per share range.

Hewlett-Packard Enterprise

Stifel says a 4-5x EV/EBIT on the new entity containing PC and printer divisions would value it between $20 billion and $25 billion. That’s an EV/sales ratio of approximately 0.4x. The research firm assumes 6-7x EV/EBIT multiple for the enterprise-focused entity (Hewlett-Packard Enterprise). Using sum-of-the-parts analysis, analysts estimate Hewlett-Packard’s enterprise value at $69 billion, plus $4.9 billion net operating cash.

Brian White of Cantor Fitzgerald says in a research note this morning:  Separating the PC & Printer business from the rest of the company that focuses on enterprise hardware, software, and services. In our view, we believe this is a bold and smart move by HP.