PC shake-up in the works

PC giant HP's announcement that it may spin off its Personal Systems Group (PSG) division will be the most radical shift in the PC market to date, creating the potential for the emergence of a dominant player.

The move will be even bigger than when IBM sold its personal computing arm to Lenovo in a $1.75 billion deal, six years ago, when personal computing was not nearly as massive as it is now.

The US-based company is exploring whether to spin off its PC business into a separate entity as it evaluates “strategic alternatives” for PSG, it says in a statement. HP expects the process to be wrapped up in the next 12 to 18 months.

HP's announcement is part of its plan to “to fundamentally transform the company”. Last week, the PC giant said it would buy UK-based Autonomy for $11.7 billion as it refocuses on higher-value offerings.

Although PSG has leading global positions in the consumer and commercial PC segment, this area is known for its wafer-thin margins, and global sales are slowing as consumer interest shifts to tablets.

HP has three business units: PSG, which covers business and consumer PCs, mobile computing devices and workstations; Imaging and Printing, which handles inkjet, laser jet and commercial printing, and printing supplies; and the Enterprise Business division, which offers business products such as storage and servers, enterprise services, software and networking.

HP is currently the world leader in PC sales. According to global research house Gartner, HP held onto its number one position in the second quarter of the year, accounting for 17.5% of global PC shipments.

Globally, PC sales are slowing. Gartner principle analyst Mikako Kitagawa says “after strong growth in shipments of consumer PCs for four years, driven by strong demand for mini-notebooks and low-priced consumer notebooks, the market is shifting to modest, but steady growth”.

Kitagawa says: “Given the hype around media tablets such as the iPad, retailers were very conservative in placing orders for PCs. Instead, they wanted to secure space for media tablets. Some PC vendors had to lower their inventory through promotions, while others slimmed their product lines at retailers.”

Gartner's figures indicate that Dell moved into second place for the first time since the fourth quarter of 2008, and now has 12.5% of the market. Lenovo is placed third, with 12% of the market, while Acer dropped from second to fourth and accounts for 10.9% of all PC sales.

HP sold 14.8 million units, a 3% gain quarter-on-quarter. Gartner says it performed better than average in most regions, but it was pulled down by its performance in the Asia Pacific region.

While HP achieved solid growth in the professional PC market in the second quarter, it continued to face challenges in the consumer segment, says Gartner.

In 2010, PSG turned over $41 billion of HP's total $126 billion turnover. HP expects full-year revenue will be between $127.2 billion and $127.6 billion, down from its previous estimate of between $129 billion and $130 billion.

However, HP says the “personal computing market is quickly evolving with new form factors and application ecosystems. Given these realities, HP believes it is in the best interests of the company and its shareholders to explore ways for PSG to position itself to address these rapid changes and maintain its technological and market leadership positions.”

The US-listed company is focusing its investments, resources and management attention to “drive higher value solutions to enterprise, small and midsize business and public sector customers”.

HP “believes that the exploration of alternatives for PSG will help the company accomplish its strategic goals and pursue profitable growth and enhanced shareholder value”. It adds PSG has a strong operating record and “industry-leading profitability”.

L'eo Apotheker, HP president and CEO, says: “The exploration of alternatives for PSG demonstrates our commitment to enhancing shareholder value and sharpening our strategic and financial focus.”

Hannes Fourie, IDC senior analyst for systems and infrastructure solutions, says “the whole PC business is changing”. If HP sells PSG, it will be the biggest game-changer in the PC market, bigger than when IBM spun off its PC unit, he says.

IBM sold its PC business, which marketed the ThinkPad line of notebook PCs, to Lenovo, in 2005, for about $1.75 billion. The sale marked a fundamental shift in IBM's business as it transitioned to a services-focused company.

If HP sells its PC unit, it will “impact a lot of people in the market”, says Fourie. He says a sale will create the opportunity for one of the other dominant players to become a mega company, although this may not be approved by competition authorities.

Fourie says HP's statement makes sense in light of its recent purchases. HP bought EDS for $13.9 billion in 2008, and last week said it would buy Autonomy for $11.7 billion.

Steven Ambrose, MD of WWW Strategy, says the laptop, PC and tablet space has become commoditised. Even though HP is number one, it cannot maintain margins and is investing in more profitable areas such as software and services.

Ambrose says HP's computing unit was a casualty of commoditisation, which placed pressure on margins. HP is fundamentally transforming the company and wants to focus its investments on areas that will yield the highest returns, he says.

Contenders for HP's PC business could come from one of the other large players, although this is unlikely, says Ambrose. He says it does not make sense to buy market share at huge cost and the purchaser would face huge integration costs.

It makes more sense for a player without a presence in HP's dominant areas to buy the company, says Ambrose. He says a smaller manufacturer such as Fujitsu or a software company may be keen on PSG.

PSG offers a manufacturer the opportunity to vertically integrate and move closer to the consumer, says Ambrose. “That would be worth a premium.”

HP says there is no guarantee that a deal involving PSG will be pursued or completed. It will provide updates when “appropriate”.

Related story:
HP takes IBM route