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HP Fourth-Quarter Earnings Preview: Pending Split Could Lead to More M&A

HP is stronger than it was last year, but the coming breakup still raises questions.


As computing giant Hewlett-Packard prepares to report results for its fiscal fourth quarter today, there are still many unanswered questions about CEO Meg Whitman’s plans to split the company in two by next year, and whether that split may lead to more M&A activity.

Analysts are expecting HP to post a profit of $1.06 per share on sales of $28.8 billion. And the good news heading into today’s report is that HP is showing relative strength its two biggest lines of business — PCs and printers.

While PC sales are still on track to decline this year worldwide, the pace of that decline has slowed, and HP has aggressively started to retake some of the ground it has lost to Lenovo.

But investors will be listening for any new color on the company’s breakup plan, which HP announced last month. One company will be devoted to HP’s $57 billion PC and printing division (HP Inc.), and a second devoted to its $52 billion business selling corporate computing equipment and technology services (Hewlett-Packard Enterprise, which Whitman will run). HP is will likely to shed some 5,000 jobs as a result of the split.

Whitman has has offered up some details about how the split will work. And after it’s done, there’s a fair chance that one may be the target for a potential buyer, while the other will be a buyer of other properties.

Despite its massive size, there’s a case to be made that HP Inc. could be a target for an acquisition by rivals like Dell or Lenovo. For one thing, HP Inc. will be saddled with a fair amount of debt, though it’s not yet clear how much. Its number-two position in the PC market behind Lenovo will make it a tempting target for Dell, which could, in theory, finance a deal with help from its partner, Silver Lake. Such a move would likely trigger intense scrutiny by antitrust regulators around the world. The financing would be trickier still for Lenovo. Tricky, but in time, doable.

Hewlett-Packard Enterprise, meanwhile, could have as much as $14 billion in cash, meaning it will likely be on the M&A hunt from day one. And there are many potential targets. For a hint at HP’s intentions look at its recent deal for Eucalyptus Software, a cloud management startup. And while Whitman won’t say it today, it’s a fair bet that you can more expect deals like that, only bigger, after the split: Morgan Stanley analyst Katy Huberty says to expect a deal in the range of $12 billion to $16 billion.

There should also be some questions about the potential for divestitures. For instance, HP was said last month to be looking for a buyer of a majority stake in H3C, a Chinese networking company it got as part of a deal to acquire the networking company 3Com in 2010. HP hasn’t commented on the reports — expect questions about it today — and Huberty reckons it could eventually be worth about $5 billion to HP Enterprise.

This article originally appeared on

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