In the real world, break ups are a bad thing. They tend to involve extra time in bed, binge watching Friends, and way too much ice cream. In the business world however, break ups have seemingly become the new fad as companies split apart to try and increase their value.

This morning, Hewlett-Packard (HPQ) announced it is splitting up into two companies. One company will be made up of its PC and printer business, while the other will focus on corporate hardware, software and services. The stock is up about 5% today on the news. This announcement comes on the heels of eBay’s (EBAY) announcement last week that it is spinning off its payments system, Paypal, into its own company.


HPThe split is part of a 5 year turnaround plan for HP, which has been struggling recently. Total revenue was $112.3 billion last year, a decrease of 7% of the prior year.

Some parts of the business have been hurting more than others however. In its last earnings report, HP announced its PC and printer business saw a 3.1% growth year to date, but its enterprise hardware and services unit was a whopping 19% below year to date revenues a year prior. But even though the PC and printers business grew slightly this year, it lost its market leader position to Lenovo.

The supposed strategic reasoning behind the split is that streamlining the businesses will allow each one to better maneuver in the marketplace. Rather than focusing on one large behemoth, each company can have more dedicated and focused management to navigate the competitive needs of their marketplaces.

To be honest, I don’t really buy this strategic reasoning. I think the streamlining approach absolutely made sense in the eBay scenario, where eBay and Paypal are operating very different businesses and Paypal is hoping to sell to eBay’s competitors. However, HP’s two businesses are similar enough that they should still be able to generate efficiencies by keeping them together.

I doubt that either business will be significantly more efficient on its own. My doubt is further increased by the fact that Meg Whitman, HP’s CEO, shot down a split proposal three years ago. Now she has apparently changed her mind.

In reality, I think HP’s decision to split comes down to valuations and potential acquisitions, not strategy. Company valuations for the most part depend on “multiples.” A multiple is how much you multiply a company’s revenues or earnings by to get to a valuation for the company. For example, let’s say I wanted to buy Lisa’s pumpkin patch (going for seasonal appropriateness here). If similar pumpkin patches are being sold for 10 times their revenues, and Lisa’s pumpkin patch makes $1,000 in revenues for the year, I would pay Lisa $10,000 for her pumpkin patch.

Multiples are typically how analysts determine if stocks are trading for fair values and how other companies decide how much to pay for their acquisitions. The key about multiples though is that they change based on the industry. So a high growth industry like social media will have a higher multiple than a slower growth industry like retail.

This change in multiples is the key to HP’s split. Right now HP has a price to earnings ratio of 13.88, which means it is trading at almost 14 times its earnings. But if the enterprise business has a multiple of 10 times earnings and the computer business has a multiple of 20 times earnings (the average being 15 now), the sum of the two halves suddenly becomes greater than the original, whole business.

On top of this, splitting the two companies makes them easier to sell to or merge with another company. And if a company is being sold, you want its valuation as high as possible, which the split aids.

I’m not impressed by the HP split and will not be running to buy stock. To me this feels more like a numbers game than a strategic business move.


11 Comments on Hewlett-Packard’s split tries to make 2+2=5

  1. lose weight easily
    November 29, 2014 at 6:41 am (3 years ago)

    I would like to thank you for the efforts you’ve
    put in writing this blog. I really hope to view the same high-grade blog posts from
    you in the future as well. In fact, your creative writing abilities has motivated me to get my own blog now 😉

    • The Day Tradette
      December 1, 2014 at 5:08 pm (3 years ago)

      Thank you so much! Glad you’ve enjoyed it

  2. healthy low calorie recipes
    November 29, 2014 at 12:12 pm (3 years ago)

    Excellent blog here! Also your website loads up fast! What host are you using?

    Can I get your affiliate link to your host? I wish my website
    loaded up as quickly as yours lol

    • The Day Tradette
      December 1, 2014 at 5:18 pm (3 years ago)

      Thanks! I use bluehost – which is also super cheap!

      • The Day Tradette
        December 1, 2014 at 5:18 pm (3 years ago)

        P.s. Check the ad section for a link to Bluehost

  3. lose weight easily
    November 30, 2014 at 5:11 am (3 years ago)

    I blog quite often and I truly thank you for
    your content. The article has really peaked my interest.

    I will bookmark your website and keep checking for new details
    about once a week. I subscribed to your RSS
    feed as well.

    • The Day Tradette
      December 1, 2014 at 5:20 pm (3 years ago)

      Thanks so much!

  4. obesity diet
    December 1, 2014 at 10:46 am (3 years ago)

    What’s up, just wanted to mention, I loved this blog post.
    It was funny. Keep on posting!

    • The Day Tradette
      December 1, 2014 at 5:07 pm (3 years ago)

      Thanks so much!

  5. picking big foods
    December 1, 2014 at 3:05 pm (3 years ago)

    Howdy I am so excited I found your site, I really found you
    by mistake, while I was looking on Bing for something
    else, Anyhow I am here now and would just like to
    say many thanks for a marvelous post and a all round enjoyable blog (I also love the theme/design), I don’t have time to look
    over it all at the moment but I have book-marked it and also added in your RSS feeds, so when I have time
    I will be back to read a lot more, Please do keep up the great job.


Leave a Reply

Your email address will not be published. Required fields are marked *

Comment *