The hidden value of HP's PC business

DRAMATIC as HP's U-turn over the sale or spinoff of its PC division might be, the firm really had no option but to continue with the status quo.

When HP's then CEO Léo Apotheker announced that HP planned to spin off or sell its PC division most people were shocked. It was arguably this decision that cost Apotheker his job, and once his successor CEO Meg Whitman was installed, she almost immediately announced a review of Apotheker's decision, leading to yesterday's announcement that HP will continue making PCs, a resolution that is no big surprise.

Whitman might have lost the race to be California's governor but she knows something about being at the helm of a Fortune 500 company from her time at Ebay. HP's PC business might be low margin, it might even be unfashionable, but there is clear daylight between HP's PC operation and the second place PC maker, Lenovo. While Acer, Dell and now Lenovo fight over which one will take second place, HP serenely continues to hold the top spot in PC sales, something that provides more than just direct financial benefit.

Whitman realised that margins are not the only thing that matters to a business. Exactly the same could be said about Amazon, which announced lacklustre financial results after spending megabucks on its Kindle Fire tablet, but no sane business person would suggest that Amazon should exit the tablet market. The simple fact is that HP's 20-or-so per cent of the PC market is 20-or-so per cent that its rivals don't have.

HP's PC business is low margin, operating on the stack 'em high, sell 'em cheap strategy, but it still brings in billions every year. At the time of Apotheker's surprise announcement, there was no credible strategy to replace the lost billions in revenue.

The markets and many analysts thought that HP had overpaid for British software firm Autonomy, and while HP was following IBM's highly successful lead into the services sector, there was no guarantee the company could pull it off. And most importantly, unlike IBM, the last 10 years have seen six different CEOs at HP, which has made it hardly a beacon of stability.

The difference between IBM and HP is that Big Blue managed to get a good price for its PC business, selling it at just the right time. Back in 2005 the PC business was still booming, with the biggest question being whether desktops were going to be replaced by laptops. Now the discussion has moved on to whether laptops are going to be replaced by tablets.

Given that HP's first real foray into the tablet market resulted in a device that had to be sold at a loss for a mere $99, any potential buyer would look at HP's PC business as consisting of dying technology. In many ways potential buyers would look at HP's PC division with its many forgettable desktops and laptops and ask, how much longer can it keep making money from a market that is widely tipped to decline as smartphones, tablets and other 'connected devices' come to market?