June 7, 2004 8:35 AM PDT

Merrill Lynch to HP: Time for a breakup

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Longtime Wall Street analyst Steven Milunovich is urging Hewlett-Packard's top management to split the company into two separate businesses.

Milunovich delivered the unsolicited advice in a Merrill Lynch research note published Monday, a day before HP holds a meeting with securities analysts in San Jose, Calif.

In the note, Milunovich argues that HP can improve its strategic focus by breaking off into distinct organizations. He suggests either spinning off HP's imaging and printing business or breaking up the company into two divisions, one that sells to consumers and one that sells to corporate customers.

"Our strong intuition is that shareholders will benefit by HP eventually breaking up," Milunovich said. "As much as the company would argue that its divisions are separately run and optimized, we don't fully believe it."

"We think HP's best course of action is to become the IBM alternative in enterprise computing, since competing with Dell at the low end appears futile."
-- Steven Milunovich
Merrill Lynch analyst

Merrill Lynch said HP's management should "do the right thing for shareholders" and address the difficulty of maintaining its current competitive position. HP is being squeezed between Dell, which undercuts competitors on price, and IBM, which has a broad portfolio of goods and consulting services.

Milunovich said that overall, it appears that HP made a smart move in acquiring Compaq Computer, which improved the company's market share in servers, PCs and storage. To better compete, Milunovich said, HP should continue making acquisitions of other companies. He noted that HP would be the most likely acquirer of Sun Microsystems.

"We think HP's best course of action is to become the IBM alternative in enterprise computing, since competing with Dell at the low end appears futile," he said.

But to execute on the IBM-alternative strategy, HP needs more focus, he said. Milunovich conceded that there are some efficiencies to be gained in distributing and manufacturing both computers and printers. Still, he said that overall, the imaging and printing parts of the business would benefit from independence.

"HP is the Campbell Soup of printing. It owns the category, so its main challenge is not share but growing the category," he said.

Meanwhile, the company's computer product line is diverse, including products from Compaq's own acquisitions of Digital Equipment and Tandem. Those products could be rebranded as part of a company split, while the imaging division could maintain the HP name.

HP spun off a medical testing unit, called Agilent Technologies, in 1999.

Milunovich's advice for HP is not the first time he's recommended that a technology provider take dramatic steps. In October, he sent an open letter to Sun CEO Scott McNealy, urging him to focus Sun on high-end computing and to exit some of Sun's smaller businesses, including Java, the UltraSparc processor and Linux on the desktop.

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Steven Milunovich does not know what he is talking about
I am a stock holder of HP and follow HP closely.

Imaging and Printing and Rest of HP can not survive without each other, they are symbians who live in harmony for self and each others benefit.

Imaging and Printing group mainly makes money on Ink, it is now that they can do it as most of the IP is protected by patents once these patents expire any company in the world including Dell can produce cheap Ink to hurt Imaging and Printing. Similarly the rest of the HP do need the muscle power which they get because of Imaging and Printing in many areas which they will not have if Imaging and Printing was not part of Rest of HP. The whole point of merging with HP was to create a behemoth which will lead the industry by virtue of its size and big portfolio.

By splitting HP into two both Imaging and Printing and Rest of the HP will be weak and would not be able to dominate the industry. I would even say that re-merge Agilent back with HP, instead of buying other companies. Agilent cost structure is very lean and mean now, and is very good buying target for HP.

If one can see what happened to Agilent after the split, anyone will agree to my point not splitting with HP. The split will look good in short term which will really benefit people like Steven but will not benefit the real stock holders in long term as it will result in two weak companies.

Prasad Malvankar
Posted by malvankar (2 comments )
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I don't care much for what Wall Street thinks
I don't care much for what Wall Street thinks. I hope companies are not to easily influenced by stock annalists. We hear to much about bad company decisions based mostly on pleasing share holders.
Posted by IT-Troy (6 comments )
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