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By: Wee Teck Loo

In yet another shocking development in a highly eventful week during which Google Inc purchased Motorola Mobility, Hewlett-Packard has announced plans to divest its PC division and focus on high growth and profitable businesses.

Announcements

HP’s announcement revealed a detailed plan, supplementing its corporate strategy announced in March 2011, and includes:

  1. Moving HP into higher-value, higher-margin growth categories
  2. Sharpening HP’s focus on its strategic growth priorities of cloud, solutions and software, with an emphasis on enterprise, commercial and government markets
  3. Increasing investment in innovation to drive differentiation

HP will be exploring strategic alternatives for its Personal Systems Group, shutting down the operations for webOS devices and exploring strategic alternatives for webOS software.

Moving away from thin margins

The announcement to spin off its Personal Systems Group (PSG) will see the company follow in the footsteps of IBM which sold its PC division to Lenovo in 2005. The sale saw Lenovo grow to become a global manufacturer rather than just a Chinese one. IBM, on the other hand, was able to focus on higher margin enterprise business rather than being involved in the cut-throat consumer business.

As seen in the following chart, PSG is the largest revenue contributor among HP’s six divisions, but in terms of profit pales in comparison to divisions like Imaging and Printing Group. In fact, PSG’s operating profit is just 5.9% of its revenue, not a very attractive return from a business perspective.

Buying the market leader

According to Euromonitor International’s research, HP enjoyed a market leading retail volume share of 16.5% in computers in 2010, with Acer Inc and Dell Inc trailing closely behind. Acer Inc and Lenovo Group Ltd have been rapidly expanding in recent years via the mergers and acquisitions route.

That said, buying HP is probably a step too far for either company and any resulting combined entity would be overly massive and complicated in structure, with the potential for significant redundancies in terms of operational staff and offices.

Taking Dell as a case in point, its latest quarterly earnings, ending June 2011, from its consumer business were reported at US$2.9 billion, with operating profit at a miserly 2.5% of its revenue. It’s doubtful that Dell would be keen to purchase HP’s PC business from a financial perspective.

Buying control

With the exception of Research In Motion (maker of Blackberry) and Apple, most smartphone and tablet manufacturers are relegated to just making hardware and licensing software from third parties. The scenario mirrors the exact same situation in the computer domain where Intel and Microsoft basically define the direction of the market. As the balance sheets of Dell and HP show, this is not hugely profitable.

HP’s webOS, on the other hand, may appeal to manufacturers like HTC Corp with an ambition to be more than a passive partner in the OS ecosystem. HTC’s Sense UI, which is an interface built on top of Android’s interface, is well regarded by users and a differentiator for the company. HTC could make further improvements to webOS and develop a full range of smartphones and tablets running on the new webOS.

In fact, one distinct advantage of webOS over Android is that the same software stack can be implemented on both tablets and smartphones. Android OS has two different software platforms for tablets and smartphones.

Chinese manufacturers like Huawei Technologies Co and ZTC Communications could be tempted to pitch for webOS as these companies try to expand beyond China and launch an assault on the global market.

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