Hewlett-Packard to Spin off PC Unit

Late last week, Hewlett-Packard (HPQ) announced it was in the process of spinning off its PC division.

Hewlett-Packard: A Rollercoaster of Mismanagement

Investing in Hewlett-Packard has been a rollercoaster over the past year, and not in the fun way.  Shares of HPQ have seen a 37.3% annual decline:

HPQ 1-yearHewlett-Packard’s poor performance is rooted in management problems.  Former CEO Mark Hurd was forced to resign following a sexual harassment investigation into his relationship with television star Jodie Fisher.  Hurd was widely believed to be doing a great job as CEO, but his ousting led to a panicked replacement process that promoted Leo Apotheker to the role of CEO.

Apotheker has been viewed as an ineffective and incompetent corporate leader.  While he may be taking the company in the right direction, his management has been weak and he does not appear to have control over the company.  Hewlett-Packard’s announcements have been plagued with leaks that make the company look frantic and panicky.

Trimming the Fat: Hewlett-Packard’s PC business

Last Thursday, Hewlett-Packard announced it was in plans to spin off its personal computing business.  Initially, the market reacted positively to the spin off, but after a short surge shares of HPQ lost over 20% of their value:

HPQ Crash

Personal computers have become low margin commodities

The PC business is tough to make it in these days.  Margins are so low, and competition so stiff, that Hewlett-Packard was having severe problems keeping up with their competition.

Apotheker (Hewlett-Packard’s CEO) came from a software background at rival firm SAP, so it would make sense that he would want to divert Hewlett-Packard’s focus to their software and services sectors.  In addition to spinning off its PC division, the company is acquiring software giant Autonomy for $11 billion.

How does Hewlett-Packard’s spin off affect my trading and investing strategy?

As we wrote in a previous blog, spin offs frequently provide opportunities where the market can misprice stocks.  One possible play in the Hewlett-Packard spin off would be to assess its software and service business relative to its competitors and make a relative value trade.  That is, if you think that Hewlett-Packard will outperform its rivals, you could buy Hewlett-Packard stock while shorting the stock of several competitors in the services industry such as Dell and Oracle.  Or alternatively, if you think Hewlett-Packard will under-perform in the industry, you could go short HPQ while investing in its competitors.

Either of these strategies is easy to execute using any of the best online brokerages.

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