Analysts Split on HP’s Direction

Carly’s out. Now what?

Wednesday’s resignation of Hewlett-Packard Co. Chief Executive and Chairwoman Carly Fiorina -- so high-profile a figure she’s known in Silicon Valley by her first name alone -- triggered a flurry of predictions about the high-tech company’s future.

Some industry experts said HP should sell or spin off its printing business.

Some said it should expand Fiorina’s foray into entertainment technology and consumer electronics.

Others said it should take a deep breath and figure out what it wants to be.

“I think they now have to say what their core business is and nurture that,” said James Owers, a professor of finance at Georgia State University.

While leaving the door open to a later change of direction, HP board members resisted suggestions that a new chief executive would be brought in to break up the company. HP grew dramatically under Fiorina after the controversial 2002 acquisition of Compaq Computer Corp.

HP Chairwoman Patricia Dunn and interim CEO Bob Wayman said the company would instead search for a chief executive who would pull together the disparate parts of the company.

Those words, however, did little to quell a tide of speculation over the future of HP, an $80-billion company with a wide swath of businesses, including printers, computers, consulting services and consumer electronics.

Among the most popular suggestions was that the company spin off its printer business, which last quarter accounted for 30% of its revenue and 85% of its operating profit.

Advocates of a breakup include Steven Milunovich, a computer analyst at Merrill Lynch & Co., who argued that the printer business alone would be worth more than HP is currently valued by Wall Street.

Some analysts said such a spinoff could be worth as much as $25 a share -- well above HP’s Wednesday closing price of $21.53.

Other analysts argued for keeping the company whole.

Richard Gardner at Smith Barney said HP would be better off coupling the low-margin PC business with its profitable printer business.

“There is a cost benefit to having computing and printing under one roof ... which HP would lose if the two divisions were separated,” Gardner wrote in a note to investors.

Gardner said HP would need the cost advantage to be able to compete with Dell Inc., the Round Rock, Texas, company that last year overtook HP as the world’s largest PC maker.

Tim Bajarin of Creative Strategies had a similar view, calling the company’s diversity an asset.

As an example, he pointed to HP’s approach to the movie business. HP is positioning itself to sell products and services for making movies, distributing them electronically, guarding them against piracy and playing them in the home.

One of Fiorina’s accomplishments was to broaden HP’s lineup of products through acquisitions, most notably the mammoth $19-billion purchase of Compaq.

Uday Karmarkar, a management professor at the UCLA Anderson School of Management, said these steps moved HP in the wrong direction, pushing it “into the commodity end of that business,” where margins are low and competition is fierce.

A smarter move would be to follow IBM Corp.’s lead and beef up consulting services, Karmarkar said. HP walked away from a proposed $18-billion acquisition of PricewaterhouseCoopers’ consultant business in 2000, but Karmarkar predicted that Fiorina’s replacement would take the company more deeply into services.

And if HP really wants to make money, he said, it will spend more time selling services to banks, insurance companies and mortgage brokers and steer away from developing technology for Hollywood studios. In Hollywood, Karmarkar said, “the personalities grab all the money -- you don’t make it on equipment.”

Some, however, view Hollywood as HP’s best bet for growth.

At January’s Consumer Electronics Show in Las Vegas, HP highlighted its partnerships with Hollywood producers, including a collaboration with Jeffrey Katzenberg, co-founder of DreamWorks SKG, to provide powerful computers that helped produce the movie “Shark Tale.” It also unveiled a collection of devices aimed at delivering entertainment in the living room.

“Part of it is technology to make a ‘Shrek 3’ movie, but it’s also technology to bring multimedia to the living room, the back seats of cars, people’s pockets,” said Mark Stahlman, equity analyst at Caris & Co. “Their focus going forward is growing the company as the most aggressive consumer electronics company on Earth.”

Others disagree, arguing that HP may be spreading itself too thin by taking on the likes of Sony Corp., which has far deeper experience in entertainment and consumer electronics.

“The portfolio is too large and distracting,” said Rod Bare, an analyst at investment research firm Morningstar in Chicago. “And now they’re entering consumer electronics with TVs, which is a brutal world.”

Instead, HP should focus on its core strengths, some said.

“The market is looking for consistent profitability, mainly in its core computing segment,” said Nick Nilarp, senior director at Fitch Ratings in New York, a debt-rating firm. “One quarter, it’s good. The next, it’s not. Their success revolves around consistent execution.”

Times staff writers David Colker, Terril Yue Jones and James S. Granelli contributed to this report.

*

(BEGIN TEXT OF INFOBOX)

Who will succeed Fiorina?

With the resignation Wednesday of Hewlett-Packard CEO Carly Fiorina, industry insiders immediately began to speculate on a successor. Although none would comment, four executives were the focus of the buzz:

Michael Capellas, 50

Getting the nod would be sweet revenge for the man who was head of Compaq Computer before it was absorbed by HP in 2002. But he already has a big job: CEO of MCI.

*

Vyomesh Joshi, 50

Newly elevated to head HP’s combined personal-computer and printer divisions, he has been climbing through the ranks since he joined the company in 1980 as a research engineer.

*

Ann Livermore, 48

Another insider, she runs HP’s business technology group, which includes software and storage. Since joining HP in 1982, she has worked mostly on business products and services.

*

Michael Zafirovski, 51

He joined Motorola in 2000 and was credited with turning around its mobile phone business, but he quit last month. He had been passed over for the job of chief executive.

*

Graphics reporting by David Colker