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What HP's Whitman Is Telling Analysts About the Split-Up

The PC company will be getting all the debt, and there's likely an acquisition on the horizon.

In a meeting with sell-side financial analysts in New York today, Hewlett-Packard CEO Meg Whitman and CFO Cathie Lesjak added a few details about what is going to happen as HP splits into two companies over the course of the next year.

Here, courtesy of a research note from Sanford Bernstein analyst Toni Sacconaghi, are a few highlights:

An acquisition in the range of $6 billion to $10 billion appears to be “imminent.” Whitman and Lesjak said that HP wants to stay more or less debt-free (not counting the debt it runs for its financing operation), but that it could borrow some money. Sacconaghi also writes that HP could exit the current quarter with net cash of about $7 billion and add another $2 billion in fiscal 2015 after paying dividends and executing buybacks. With Lesjak having referred to “material non-public” information for a second time in as many months on a conference call Monday, Sacconaghi says an M&A deal looks likely, though he believes that a combination with EMC — the company with which HP explored a deal over the summer — is off the table. Either way, he suggests it all points to a pending deal.

HP Inc., the PC and printing company, may begin its life with a fair amount of debt. Any debt that HP does take on that isn’t associated with the finance operation will be put on the balance sheet of HP Inc. Sacconaghi theorizes that if HP took on about $5 billion in debt before the spinoff, then HP Inc. would have a debt-to-EBITDA ratio of about 2.2. That would leave HP Enterprise with between $10 billion and $13 billion in gross cash ahead of the spinoff, and that’s after closing an acquisition. HP Inc. would get about $3 billion to $4 billion to run its business.

Whitman doesn’t expect Dell or Lenovo to acquire HP’s PC business. The PC industry is more or less split about three ways among Lenovo, HP and Dell, and then a bunch of others, including Acer, Asus and the off-brand so-called white-box companies. Whitman said she’s expecting more of these companies to consolidate, and says the “Big Three” more or less control about 100 percent of the market for corporate PCs. If Dell or Lenovo were to try to buy HP’s PC business, it would, in her opinion, trigger antitrust concerns among regulators.

The cost of breaking the company in two won’t be quite as high as many analysts had expected. It wasn’t so long ago that Lesjak said that by staying together, HP was saving a billion dollars a year in operating costs. Now that they intend to split the company, Lesjak says that losing that savings won’t be as bad as might have been the case a few years back. She basically reiterated what she told Re/code in an interview Monday, that these “dis-synergies” would amount to “substantially less” than $1 billion, but she didn’t elaborate.

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