HP's personal computer business is under doubt with the sudden resignation of CEO Carly Fiorina yesterday.
One of the more contentious aspects of HP's acquisition of Compaq - largely thought to be the root cause of Fiorina falling out with the Board - was HP executives' reluctance to increase the company's stake in a low-growth, low-margin business like PCs.
PC market growth has been ten percent for the last several years, but is forecast to fall in 2005 and 2006 as consumers, HP's strongest customers, slow their purchases of new equipment, according to IDC and Gartner.
Fiorina believed that by acquiring Compaq's PC business and lifting HP into a virtual market share tie with Dell, the company could boost sales of higher-margin servers and services by selling complete packages of hardware to business customers. A company ranked first or second in market share in several different categories across the IT spectrum could provide a top-to-bottom portfolio of products for customers, she argued throughout 2001 and 2002.
However, almost three years after the deal was completed, HP's PC business is barely profitable. The company's PC business posted $6.5 billion in revenue during its third fiscal quarter but only $78 million in profits, which was its best showing in four years. By comparison, the company's printer business recorded the same amount of revenue but made $1.1 billion in profits.
Fiorina consolidated the printer and PC businesses under printer executive Vyomesh Joshi in January, a move that was seen as a hope that Joshi's profitable management techniques would rub off on the PC division.
Financial analysts, such as Steven Milunovich from Merrill Lynch, have called upon HP's board of directors to spin off the combined PC/printer businesses. Milunovich renewed those calls in a research note, noting that while a breakup of the PC/printer business is still out in the long term, the probability of such a move rose with Fiorina's departure.
London research firm Ovum agrees that HP should set its PC business free in order to divert resources toward more strategic businesses such as servers or services. Back in December, Gartner published a report just before IBM announced it was selling its PC business to Lenovo that predicted large IT firms would grow tired of the PC market.
However, other analysts believe the company's customers benefit from having access to PCs, printers, servers, storage and networking devices all from one company, analysts said.
"Why does the PC business have to make money?" said Stephen Baker, director of industry analysis at NPD Techworld in Reston, Virginia. "Maybe this is the tuna fish of the computer world, the loss leader, something to generate business."
HP would be better served holding on to its PC division and hoping that new management can increase the presence of the brand and the opportunities for server and PC sales teams to work on selling more products together, Baker argued.