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HP's Meg Whitman: Splitting Up Is the Right Thing to Do

HP's executives explain their plans to split the company.


Since Meg Whitman first took over as chief executive of Hewlett-Packard in 2011, the argument that HP was “better together” has remained one of the backbones of her strategic thesis.

Taking over as she did in the wake of the Autonomy shit show and a controversial attempt to divest the PC business by her predecessor, the about-face announcement today that HP will split in two is a rather stunning turn of events.

In an interview with Re/code moments after the announcement this morning, Whitman and CFO Cathie Lesjak argued that nothing has changed in the strategy and the split is merely a tactical response in an existing game plan.

They also explained what has changed since 2011, how the split will work and what M&A activity will look like following the split, and they suggested that more job cuts will come.

Re/code: Meg, today’s announcement to split the company in two appears to be a reversal of your “HP is better together” strategy. What fundamentally has changed?

Whitman: One HP was absolutely the right thing to do at the start. We had to turn around the company. We had to fix the balance sheet. We had to get each business optimized. … There was so much work to do. It was the right thing to do that work as one HP. The turnaround made today possible. We were in no shape then to do anything other than hunker down. We are in much better shape now than we were then. Now we’re in a position to create two market-leading companies which serve different customers. … It’s actually the next step in the turnaround.

Lesjak: You should think about this as a tactical decision. The strategy remains the same. The tactic of splitting the company is one that is right for this time given the market forces that we’re experiencing.

The one significant criticism about this in the last 24 hours is that in splitting the companies, you lose your scale advantage. You will have less leverage with Intel or Seagate when it comes to negotiating supply deals for computers and servers and so on. I’ve also heard that you’re going to lose something in the way of $1 billion worth of operational synergies that in previous years would have bolstered a case for keeping the company together. How will you cope with both of these things?

Whitman: Here is the good news: We now have two scale companies. One was a $110 billion and now they’ll be two $57 billion companies. We will still be among the handful of top customers of the companies you mention. Counterintuitively, though, being their largest customer can sometimes be a disadvantage. They don’t want to be as dependent on a single customer. … We will have a supply chain arrangement that will allow us to negotiate with them as one company when it makes sense to do that, and to negotiate as two companies when that makes sense. We think it will make us more effective.

Lesjak: Also we think that the cost of lost synergies is significantly less than $1 billion. One of the biggest factors there is that we don’t have to rebrand one of the companies with a new name, as HP Inc. will carry the HP brand.

In leading up to this decision you obviously considered other options. There was the EMC deal that didn’t happen. What other options have you considered?

Whitman: I won’t comment on specific rumors or speculation. But I will say that this board has been very thoughtful about thinking through the HP strategy and how we position ourselves going forward. They studied what all the various alternatives were, and they were in agreement all along the way. The decision to split the company up was not made until very recently.

Clarify for me the situation with job cuts. I understand that the new number of total cuts is now 55,000. Is that a new program or an old program and will there be more cuts as the split takes place?

Lesjak: We basically increased the number of employee cuts under the 2012 plan. If you recall in the second quarter we talked about increasing that number to 50,000. We have now concluded that the new number is 55,000. And those are independent of the separation. It’s fairly typical as you start to disengage the two parts of the company that you see additional opportunities for cuts. We haven’t carved out any specific numbers yet, but that’s what typically happens in these situations. But the new number is 55,000 independent of the separation.

You’ve signaled for some time that you’re interested in doing an M&A deal, but that was before this split. How does the change affect that?

Whitman: We have signaled that over the last few quarters. We have a $4.7 billion net cash position in the operating company. I think you will see that there will be more M&A activity at the Hewlett-Packard Enterprise company than at HP Inc.

Anyone with enough money behind them can and probably will make an attempt to acquire at least one of these companies or at least part of one of them by offering a potentially superior offer to the shareholders. Do you anticipate this, and does your spin-out plan allow for responding to a competing offer from an outside party?

Whitman: Anything can happen in the world of business and technology. What I will say is these will be two market-leading companies with strong balance sheets and with good leadership teams. It will take a year to do the split, but we intend for them to be strong independent companies.

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