America’s Worst CEO Produces Tech’s Biggest Bargain: A Take On The HP Stock Split

  • Once HP splits in two, it will consist of two new and highly-vulnerable companies, both of which could fetch big bucks in a sale.
  • Potential bidders could include big cloud players like Google, Amazon and Microsoft.
  • The HP stock split could unveil a huge bargain, as $111 billion worth of sales is currently valued at about $59 billion.

I consider Meg Whitman of Hewlett-Packard (NYSE:HPQ) to be America’s worst CEO.

Since she took control of the company in 2011, it has gone nowhere save down. Sales have fallen from $127 billion in 2011 to $111 billion in 2014. They are on pace to fall further this year, which ends October 31. If that were accompanied by big profits it would be OK, but net income has gone from $7 billion to $5 billion, and they actually lost money in 2012.

She’s kept the company afloat by throwing people overboard. Headcount has fallen from 350,000 to 300,000 last year, and more layoffs are coming at HP.

Shareholders have been the big beneficiaries, which is why you haven’t seen Wall Street calling for Whitman’s head on a platter. In fact, the stock is up almost 50% since then, it’s paid out about $2.50/share in dividends. The float is down: financial engineering works.

So. Deep breath. Buy HP (HPQ).

Once the HP stock splits in two, a move currently expected in late October, it will consist of two new and highly-vulnerable companies, both of which could fetch big bucks in a sale. The two businesses are an enterprise “cloud” unit, mainly software and consulting after repeated failures of the Helion cloud offering to gain traction, and a commodity PC and printer business.

Right now the businesses, taken together, share a market cap of $63 billion, with annual sales running at $105 billion. That’s an unheard-of valuation for a technology company. Successful tech outfits sell at five times sales, or more. Even Amazon.Com, which is mostly a retailer, sells at almost two times its annual revenue. On a price-to-sales basis, this valuation is closer to Big Lots (BIG) than anything in the technology space.

So let’s sell it, starting with the cloud unit, which Whitman herself plans to run, dubbed HP Enterprise.

The first likely buyer is EMC (NYSE:EMC), which after buying VirtuStream for $1.2 billion in cash, has announced plans to go build its own enterprise cloud. The parent company makes storage units, it owns 80% of VMware (NYSE:VMW), which has a cloud operating system, and it owns most of The Pivotal Group, which has been building a cloud for the Internet of Things using cash from General Electric (GE). HP’s people could scale this thing fast, and it needs to scale fast. Plus, after the split EMC could do the deal, given its current market cap of $52 billion.

This does not by itself make the unit worthwhile. What makes it worthwhile are that there are other big cloud players who would like those same assets. A bidding war might include Google (NASDAQ:GOOGL), (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT) or even one of the telcos, like AT&T (NYSE:T) or Verizon (NYSE:VZ), into the game. It’s on the books at about $32 billion. It should fetch at least twice that.

And what of the other piece of the pie, HP’s printer and PC unit? That sale is already in process, thanks to HP's recent deal with the Tsinghua Group  for 51% of HP’s China business. Letting the Chinese in could set up an auction among Lenovo and other Chinese OEM groups, with the “synergies” of “lower cost manufacture” the draw.

The big prize would be the MultiJet Fusion printer technology HP has promised for 2016 and could bring the unit something close to its total sales, which were about $80 billion last year by my guesstimate.

You have to wait for the split to become effective before any shoes start dropping, but right now you’ve got a $111 billion sales company with a $59 billion in market cap, one I’ve guessed could be worth $140 billion when broken up.

Remember, this is the point of the economic cycle when mergers start to happen in rapid succession, as companies find it’s cheaper to buy growth than to create it. The timing of America’s Worst CEO could not be better.

Also see: HP stock analysis video for a quick round-up of key fundamentals.

Cover image licensed from: drserg / 123RF Stock Photo

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