HP's $25 b computer biz, on the line?

Reed Stevenson

SEATTLE: Hewlett-Packard Co. will be under pressure to sell its personal computer business after IBM's decision to sell its PC operations to China's top PC manufacturer, but analysts said the No. 2 computer maker would hold on to its $25 billion PC division for now.

"HP is now on the spot to show why their PC business is a strategic part of the company," said Martin Reynolds, analyst at Gartner Research.

HP, like International Business Machines Corp., has built its business in the last several years by offering large companies PC hardware as well as consulting services, serving as a one-stop-shop for information technology systems.

IBM, however, broke from that model this week when it announced the sale of its PC-making business to China's largest personal computer company, Lenovo Group Ltd., for $1.25 billion.

That gives IBM more freedom to focus on its IT consulting, chip design and services businesses, while PC manufacturers such as Dell Inc., HP, Lenovo and Japanese manufacturers compete over increasingly slim profit margins in the PC business, analysts say.

While PC sales are set to grow by at least 10 percent in 2005, HP and the rest of the industry will be facing slower PC growth after that, along with slimmer margins, Reynolds said.

"IBM is sending a clear message that it doesn't think building, designing, manufacturing and promoting PCs is strategic to its enterprise business," Reynolds said. "In many ways IBM was smart to get out of this (business) early."

For now, however, HP will stick to its strategy of being a single company offering a comprehensive range of products and services, the Palo Alto, California-based based company said in a statement issued on Wednesday.

"HP has been and continues to be committed to the PC market," HP spokeswoman Tiffany Smith said in a statement.

Indeed, HP Chief Executive, Carly Fiorina told analysts earlier this week that the company would stay the course since it had "the right portfolio, the right strategy, the right products, and we're playing in the right markets."

CRACKS APPEAR

Building scale has been Fiorina's guiding philosophy at HP since she took over the helm of the company five years ago, a notion that drove HP's merger with Compaq Computer in 2002.

That has enabled HP to increase its PC group revenue in fiscal 2004 to $24.6 billion from $14.7 billion two years earlier, but profitability remains slim at 1 percent versus a loss in fiscal 2002.

Still, Fiorina also revealed for the first time, at this week's analyst meeting, that HP's board had rejected breaking up the company three separate times in the past.

"HP has been doing a lot of things right by building it (the company) up," said Roger Kay, analyst at research firm IDC. "What you'll hear is that they're deeply committed (to their PC business) up until the day that they sell it off."

Analysts estimate that HP's PC business would be worth at least $2.5 billion to the right buyer.

All of this is set against the backdrop of further PC industry consolidation, analysts said.

Technology researcher Gartner Inc. said last week that the PC industry will consolidate with three of the top PC makers exiting the market by 2007. Gartner is expecting PC replacements to drive strong sales in 2005 and then taper off.

Despite the pressure on HP to sell its PC business, or alternatively free up its lucrative imaging and printing business, IDC analyst Kay said that HP could also stick to the strategy of achieving scale by buying another PC rival.

"Consolidation is going to continue to play out in this industry," Kay said.