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We found out early this month that technology giant Hewlett Packard (NYSE: HPQ) plans to split into two companies.
With the news coming just a week after online auction giant eBay (Nasdaq: EBAY) announced its own plans to spin off PayPal in a 2015 IPO, the Hewlett Packard split isn’t altogether unexpected.
The plan for Hewlett Packard is to break itself into two companies, separating its computer and printer divisions from its faster-growing corporate hardware and technology services divisions.
Hewlett Packard CEO Meg Whitman – who climbed the corporate ladder during her time as CEO at eBay – will become CEO of the new faster-growing enterprise division and remain chairman of the company that includes Hewlett Packard’s computer and printer divisions.
Hewlett Packard stock jumped almost 5% on the news and is down only 3% since then, bucking the S&P 500’s 4% decline and the Nasdaq’s 4.5% decline.
According to Fortune, recent studies have shown that company split-ups end up being good for shareholders, resulting in higher returns as long as the shareholders receive shares of the new company as opposed to a cash payment.
The move is seen as a way to separate a more established but slower growing division of a large company from its newer, faster growing and more innovative divisions.
Hewlett Packard and eBay aren’t the only major companies to split themselves up in recent weeks. Data security firm Symantec (Nasdaq: SYMC) also recently announced a corporate breakup.
Tech titan Marc Andreessen told Bloomberg this week that he thinks every single old and big tech company will be forced to break up in the coming years. Andreessen rose to fame as the co-author/co-founder of the earliest web browsers including Netscape, has become a tremendously successful venture capitalist and sits on several corporate boards including those of Hewlett Packard, eBay and Facebook (Nasdaq: FB).
He said this of breaking up the oldest technology giants:
If they’re more than 20 years old, then they’ll probably benefit from being broken up, and many of them will probably be forced to do it if they don’t do it voluntarily…I feel so good I’m involved with HP and eBay…especially with HP. It’s really getting ahead of what would probably happen anyway.
But why? Why is it that these tech companies need to break up?
“There is opportunity to more and better if you’re smaller and more nimble…Your ability to fight five- or six-front wars at the same time is just really challenging,” Andreessen says, citing increased competition and disruption from innovative startups like those funded by his venture capital fund, Andreessen Horrowitz.
An additional reason for corporate breakups such as the Hewlett Packard split is that these companies are all “supercheap,” as Andreessen describes them.
“There’s a conventional view that there’s this little tech bubble.” But, he says, the big companies like Hewlett Packard, Oracle (NYSE: ORCL), Cisco (Nasdaq: CSCO) and more are all trading at very low valuations – single digit price-to-earnings valuations in some cases. The idea is that breaking them up will boost valuations and increase shareholder value.
While it remains to be seen which “old” titans of tech will voluntarily break themselves up, one thing seems clear. Logic – as well as someone with their finger on the industry’s pulse – tells me that breaking up a company as diverse as Hewlett Packard is a good thing.
Thus, I’m inclined to think the Hewlett Packard split is great for investors. Stay tuned to see which other companies head down the same path.
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