H.P.

Weighs Spinning Off Its PC Unit

SAN FRANCISCO In a sweeping change for Hewlett-Packard, Leo Apotheker, the technology giants chief executive, said Thursday that he was considering spinning off the companys personal computer business into a separate company and spending $10 billion on Autonomy, a business software maker. By acquiring Autonomy, based in Britain, Mr. Apotheker would sharply refocus the company on business services and products. He has been trying to speed the companys growth, which has stagnated amid internal missteps, a sour economy and shifting consumer tastes. Mr. Apothekers plan includes killing off the TouchPad tablet, introduced into stores only weeks ago, Pre smartphones and other WebOS products it acquired last year when it bought Palm for $1.2 billion. A spinoff of the PC unit would also reverse H.P.s $25 billion acquisition of Compaq in 2002. Its Day 1 of the transformation, Mr. Apotheker said in an interview. He spoke of the difficult decisions that had to be made, but said he was seeking better performance from the company. Splitting off the PC unit would eliminate the drag of a slumping, low-margin business on H.P. Instead, Mr. Apotheker, who joined H.P. last year, is trying to move toward providing corporate customers with more services and cloud computing a term used to describe delivering products and services online that he says is more high value. The strategy challenges I.B.M and Oracle, two giants in the market. By unloading its computer business, H.P.s would follow in the footsteps of I.B.M., which sold its computer unit to Lenovo, a Chinese company, in 2005. H.P. said it would take 12 to 18 months to decide what to do with the PC unit. Meanwhile, it will continue to run the business as usual. Mr. Apotheker said the company did not intend to dispose of its printer business. Enterprise is where the growth is, thats where the margins are, said Brian Marshall, an analyst with Gleacher & Company.

Wall Street has been concerned about H.P.s growth ever since Mr. Apotheker joined the company, and the weakening economy has added to the uncertainty. A series of disappointing quarters and forecasts had sent the companys shares down nearly 22 percent since the start of the year before Thursday. Shares of H.P. fell $1.88, or 6 percent, to close at $29.51. Acquiring Autonomy, which makes software that searches and keeps track of corporate and government data, would greatly enhance H.P.s shift to software and business services. The company has become one of the biggest technology firms in Britain and counts BP, Ford Motor and the United States Defense Department among its customers. Autonomy would be H.P.s third-largest acquisition ever, after Compaq and Electronic Data Systems. The $10 billion offer for Autonomy would represent a rich 64 percent premium over its market value. It produced almost $1 billion in revenue in the 12 months that ended June 30. Mr. Apotheker said that Autonomy would get access to H.P.s huge customer base. Its products would be sold across H.P. business, he said. That also was H.P.s strategy in buying Compaq. It gave the company the scale to cut costs and secure favorable prices on parts. It was also supposed to give it clout with corporations that were also seeking printers, servers, storage and data management services. As recently as February, Todd Bradley, H.P.s executive vice president for the companys computer division, insisted in an interview that the PC was still a valuable part of H.P.s business. He dismissed speculation that the company would dump the unit. The PC business has been strategically important to H.P, he said. The strategic importance hasnt changed as the leadership changes. H.P. has dominated the PC business, but in recent months the industry has gone through a downward turn with the shift from desktops and laptops to tablets. In the third quarter, revenue from H.P.s personal computer sales fell 3 percent to $9.5 billion. Sales to consumers fell 17 percent although sales to corporate customers rose 9 percent. By jettisoning its tablet, along with its mobile phone business, H.P. would be surrendering in a fast-growing market dominated by

Apple. But so far, Apple is the only company that is selling a significant number of tablets. It sold more than $6 billion worth of iPads in the most recent quarter. Mr. Apotheker had bragged about the TouchPad tablet, in particular, calling it a serious challenger in an expanding market. His executives scoffed at critics of the product, calling the effort a marathon, not a sprint. But in the end, consumers balked at buying the device. H.P. quickly cut the price 20 percent and then decided to put it out of its misery after just two months. Mr. Apotheker said that the tablet had failed to live up to the financial milestones he set. H.P. said that it was considering licensing its WebOS software to other companies or selling it. Louis Miscioscia, an analyst with Collins Stewart, said that H.P.s overhaul would take years and that it remained early in the turnaround. The PC business would have inevitably declined, he said, while its tablet effort was too little too late. In technology, you cant be so far behind, Mr. Miscioscia said. You get too far behind and its really hard to leapfrog back in. In its earnings report on Thursday, H.P. showed that it was continuing to struggle with slow growth. It reported net income in the quarter ended July 31 grew 9 percent to $1.93 billion, or 93 cents a share, versus $1.77 billion, or 75 cents in the year-ago quarter. The company said revenue inched up nearly 1 percent, to $31.2 billion from $30.7 billion. The adjusted income of $1.10 a share was slightly above the expectations of Wall Street analysts. They had expected $1.09 a share and revenue of $31.19 billion, according to a survey of analysts by Thomson Reuters. H.P.s outlook for the fourth quarter was well below expectations. Revenue is expected to be $32.1 billion to $32.5 billion, short of the forecast from analysts of slightly more than $34 billion. Adjusted income is expected to be $1.12 to $1.16 a share, again below the $1.31 predicted by analysts.