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Hewlett-Packard Splits in Two Today. Now What?

CEO Meg Whitman says to be on the lookout for some acquisitions.

David Paul Morris / Getty

Hewlett-Packard, the computing giant that started in a Palo Alto garage 76 years ago and gave birth to the place we now call Silicon Valley, is starting over again.

Having grown into a lumbering colossus selling personal computers and printers at a moment when smartphones are the dominant personal computing device, it has decided to split itself in two in order to compete more effectively in a technology market that is retrenching. HP Inc. will contain the PC and printing business and will continue trading on the New York Stock Exchange under the ticker symbol HPQ.

CEO Meg Whitman will take over the new company, Hewlett-Packard Enterprise, which opens for trading today under the symbol HPE. It’s considered the healthier and more promising bit of the company. Today’s split brings to a close a process begun last year, but now it will be up to Whitman to prove that the breakup will allow both companies to run better.

HPE is the business that is less well understood by the wider public: Industrial-grade server computers that companies buy to host websites and crunch data for businesses, plus networking equipment, software and services to make them all run as they’re intended.

In an interview with Re/code last week, Whitman peppered her comments about the new company with the adjectives “smaller and nimbler,” but they’re relative: HPE will be a company with about $55 billion in annual revenue. Roughly half of that will come from traditional hardware sales: Servers, networking gear, data storage equipment. Another big slice is the IT services outsourcing business made of the old services company EDS and accounting for 39 percent of sales. Software and financial services account for 6 percent each.

“They are two smaller and nimbler companies in very different businesses from each other,” Whitman said. “But we’re also leaning into the next generation of new technologies and want to lead in those too.”

And yet, she may make the new company bigger: HP Enterprise will have about $5.5 billion in net cash on its balance sheet, and Whitman has hinted at more M&A deals to come. She points to last year’s $3 billion deal for Aruba Networks, a maker of office Wi-Fi gear, as the kind of M&A transaction she’s interested in. The likely targets will be smaller outfits that can have a quick impact on overall results.

For now, splitting solves one problem: The slow-motion collapse of PC sales and printers will no longer exert a drag on results of the healthier half.

But it leaves other problems intact: While HPE leads the market for conventional computing servers by a wide margin over its rival Dell, younger companies are less likely to become customers of HPE products. They’re bypassing traditional IT products like servers in favor of running their shops on cloud offerings like Amazon Web Services and Microsoft’s Azure, or using cloud applications like Salesforce.com. If they ever buy servers at all, they’ll be buying fewer.

And while HP had tried to compete in the cloud world against Amazon and others, it announced last week it would pull the plug on its Helion public cloud service and focus instead on offering a hybrid model — giving customers the tools to build their own cloud computing environments that would still work with AWS and Microsoft Azure.

“We decided that it no longer made sense to compete in the public cloud portion,” Whitman said. “Our strategy is to take an open, multi-cloud approach to the marketplace.”

However, the challenges that dogged the old HP will remain. The smaller company may find that its smaller scale gives it less leverage in negotiating with suppliers, raising costs. And supplying gear to companies building private and hybrid clouds is highly competitive: Dell, EMC, IBM and Cisco Systems are all attacking it from various directions.

The split, revealed a year ago, arguably closes the book on a lengthy darker chapter of HP’s corporate existence. Whitman arrived on the scene in 2011 after having been appointed to the HP board. Tapped as CEO at a moment of corporate crisis following a disastrously expensive acquisition, she shrank the company by laying off a combined 80,000 workers around the world, pared down corporate debt and improved cash flow.

Even so, as the books finally close on the old HP, the harshest critics of Whitman’s tenure point out, correctly, that on her watch the company stopped doing something it had practically always done since its founding in 1939: Grow. Combined revenue in 2010, the year before Whitman took over, was more than $126 billion. When the final books are closed on 2015, analysts expect revenue of less than $105 billion.

Today’s split takes place at the very moment that two of HP’s biggest rivals, Dell and EMC, have decided to combine into a massive new competitor. Last year, HP came close to buying EMC itself, though talks faltered over price.

Whitman feels HP is on the right path compared with her competitors. “Two of our biggest competitors will be involved in a very distracting multi-year merger transaction,” she said. “We have an opportunity to gain share from them, and I like our chances.”

For those who care to remember the old HP, so named as the result of a coin toss between two partners — Bill Hewlett and David Packard, who first met on a Stanford University football field in 1930 — here’s an ad the new company recently put out to commemorate the split:

https://www.youtube.com/watch?v=ZIzUsmNOV70

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