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Hewlett-Packard: Break-Up Unlikely In Near-Term

 February 07, 2013 02:14 PM

(By Mani) When Dell, Inc. (NASDAQ: DELL) had agreed to go private in $24.4 billion deal, many felt that Hewlett-Packard Company (NYSE: HPQ) could be next in line. But, HP not only mocked the idea but also teased Dell for the move, saying Dell faces an extended period of uncertainty and transition would not be good for its customers.

As fundamentals deteriorate, private equity investors and activists may seek a restructuring to steady the ship. The restructuring could lead to a break up of the company itself. Wall Street analysts have opined that HP should break up, probably into enterprise and PCs/printers.

[Related -Should You Buy HP's Stellar Rebound?]

California-based Hewlett-Packard, popularly known as HP, is rumored to have examined the merits of breaking up. However, iStock believes that the company is not in a position to split, at least in the near-term given current debt load and expectations for deteriorating profits.

For breaking up, HP should need public support and an improved balance sheet, which would require time and/or material asset sales.

"We are still of the view that the company remains focused on executing its "fix & rebuild" strategy for now. We continue to believe that full value won't be realized without structural change, such as a breakup. However, we see such actions as unlikely at this time," UBS analyst Steven Milunovich wrote in a note to clients.

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After excluding HPFS external debt and short-term commercial paper, HP's core debt is estimated to be roughly $18 billion. In addition, the company has roughly $5 billion in other obligations and commitments. Including an additional $2 billion in breakup costs/business investment, a split HP would need to shoulder more than $25 billion in debt at an investment grade level.

HP is numero uno in printers, likely a huge cash cow for years to come. It also leads in PCs, also a cash generator and probably profitable for at least the next few years given high, variable costs.

Meanwhile, Enterprise Systems is being revitalized with leadership in Intel servers, a more competitive storage offering, and an early bet on software-defined networking. HP owns the sixth largest software company.

Investors remain concerned about HP's deteriorating fundamentals. Beyond the obvious decline in PCs, there are issues with printers and technical services – both high-profit segments:

In this era of software-as-a-service, smartphones and tablets, cloud computing, bring-your-own-device, HP is finding difficult to get new avenues for growth.

Printer growth may tumble as Canon's recent results suggest that HP is losing share in the Inkjet while secular forces, including waning consumer demand, will likely induce continued pressure. Canon also warned that a recovery in consumables would need to be predicated by improving hardware trends first.

"Given our fundamental view and price target valuation of $12 or 30% lower, the stock's current level would then imply a 50% probability that the company will breakup. We do argue that the company should breakup, though see a lack of financial flexibility and deteriorating fundamentals for such a move to come to fruition over the next 12-18 months," Milunovich said.



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