HP's PC unit could be a tough sell

A high price and low margins may discourage prospective buyers of HP's Personal Systems Group unit

Hewlett-Packard may struggle to attract buyers for its Personal Systems Group (PSG), which might carry too high a price tag in a PC market struggling under the onslaught of tablets, analysts said.

HP, the world's largest PC vendor, this week said it would look at "strategic alternatives" such as the sale or spin-off of the PSG unit, which deals in PCs and mobile devices. Slow PC sales and their razor-thin margins are seen as a drag on HP as it emphasizes more profitable business areas such as enterprise software, services and hardware.

PSG is valued at around US$8 billion, said Shaw Wu, a financial analyst at Sterne Agee. The unit brought in $9.5 billion in revenue during the third quarter of fiscal 2011, a decline of 3 percent compared to the same quarter last year. HP's total revenue for the quarter was $31.2 billion.

HP's first order of business is discontinuing sales of webOS devices such as Pre and Veer smartphones and the TouchPad tablet, which have failed in the marketplace. Rather than wait out development of webOS software and related hardware, HP decided to cut its losses and move on to more profitable opportunities. Meanwhile, PC sales have buckled under the pressure of successful tablets such as Apple's iPad, signalling a major shift from traditional computing models, said HP's CEO, Leo Apotheker.

HP is emulating IBM, which sold its PC business to Lenovo in 2005 to focus on the higher-margin software and services business. Dell would remain the only major U.S. PC maker if HP's PC business is sold to a company outside the U.S. HP was the world's top PC maker with a 17.6 percent market share during the second quarter of this year, followed by Dell, which had a 12.5 percent market share. HP shipped 14.8 million PCs during the quarter, growing slightly from the year-ago quarter.

HP may have a difficult time finding a buyer for PSG as the PC market is a different place now from when IBM sold its business to Lenovo in 2005, said Cassandra Mooshian, an analyst at Technology Business Research.

"The margins are tighter, mature markets are riddled with economic uncertainty and components are increasingly more standardized across the industry," Mooshian said.

HP will likely divest its PC business by the end of 2012, Mooshian said.

The sheer amount of money required to purchase HP's PC unit may deter potential buyers, but such a purchase would still be a bargain, said David Daoud, research director at IDC. HP may be looking to sell the unit in a hurry, he said.

"There has to be [PC market] recovery in a couple of years," Daoud said. "But two years could be a long time for companies that have to deliver profits in a quarter."

The purchase of IBM's PC unit by Lenovo was unexpected, so a buyer could appear out of nowhere, but even that is less likely as the PC market is under duress today, Daoud said. Dell will likely have no interest as it is moving away from the consumer PC market to focus on enterprises, and Acer is cash-strapped and losing market share.

A spin-off is more likely, but Daoud speculated it was remotely possible that Lenovo would consider the purchase of HP's PC unit. A move by Lenovo may hinge on whether it judges its purchase of IBM's PC division as a success.

Much of Lenovo's PC market position comes from domination in the fast-growing China market, and it is looking to establish a big presence in the U.S., which HP's PSG could provide, Daoud said. Chinese investors may also shell out cash to make the acquisition possible. Lenovo was the world's third-largest PC maker with 12.2 percent of the market in the second quarter. Its shipments grew by 22.9 percent in that time, bucking the 2.6 percent worldwide PC shipment growth rate.

Billions in revenue and low operating profits make it difficult to project the market value of PSG, said Charles King, principal analyst at Pund-IT. If HP truly wants to fully divest itself from PSG, discounting the price would be an option, but shareholders could push back on that.

"Right now, a spin-off seems simpler, more likely to me. But funds from a deal would give Apotheker and company more cash for acquisitions and product development so it's likely they'll explore numerous options," King said.

There are questions about what HP may include to sweeten a deal, King said. HP offers printers and PC-related business services like system deployment, management and maintenance.

"Post-deal complexities, like how businesses that buy 'desktop to data center' HP solutions will be accommodated, could add further problems to any deal," King said.

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