Company Summary and Recommendation Hewlett-Packard announced on 03/14/12 that it will combine its PC and printing divisions two of HPQ core business. Todd Bradley, current executive vice president of the PC group, will lead the combined entities, with printing Chief Vyomesh Joshi retiring from the firm. The company says this move is aimed at streamlining operations on both the supply chain and sales sides of the business. This restructuring effort is likely to result in a sizable reduction in head count as redundant functions will be eliminated.
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Combining these entities will account for about 50% of HP’s revenue and 45% of operating income. The divisions have overlapping attributes within corporate markets and HPs consumer market exposure. Also the divisions represent the least differentiated attributes of HPQ’s portfolio, in comparison to competitors. Competitor pricing has PC operating margins between 4. 6% and 7. 3%, for the past 10 years printer supplies has delivered operating margin between 15. 5% and 18. 3%.
HP’s services engagements are typically large, long-term in nature, and expensive for the customer to migrate to another vendor. HP has aggressively expanded its services offering similar to the successful business model of IBM, noted by the 08 acquisition of EDS. Converging a single function cash cow into multi-function department can lead to greater profit margins or lead to a complete failure. Each of HPQ business units faced challenging conditions last quarter, but for the most part, the firm’s performance was in line with management’s guidance.
It also has taken on risk from recent acquisitions of Palm, 3Com, 3 PAR, and Arc Sight. The next quarter hold minor upside potential, but growth in earning for the ladder of 2012 is expected. The main issue with HPQ is investor confidence because it is undervalued at $40 with comparable analysis and $60 using DCF model. Distrust is derived from upper management turmoil of 3 CEO in the past year. Once management is set in place and investor confidence is restored company value will flourish.
