Those who have been around Wall Street long enough have seen fashions come and go. As a tech company observer for decades, I have sometimes wondered about the rationales given by eager investment bankers for their various, sometimes contradictory moves. And nowhere are these rationales more curious than with respect to whether a company does better as an ever-accumulating conglomerate or a thinning-down disaggregator of business units.
Hewlett-Packard (HP) would have to be high on anyone’s list of cases in point. Under former CEO Carly Fiorina, now seeking the Republican nomination for President (good luck with that), “better together” was the mantra. She sought to knit together two companies that I once called “Tweedledum and Tweedledee“: the original HP and Compaq Computer, former lion of the industry, then fallen on hard times. HP Blue and HP Red, as some staffers still call the California and Houston branches of the family, were almost exactly like one another in product line, reach, scale, and technology.
And yet Fiorina made a vociferous argument about how economies of scale were required for mere survival, let alone success. The deal suffered from the unfortunate timing of occurring around 9/11 and was sandbagged by various parties, including family of the original HP founders and board members. So, it took a while to consummate and even longer bear fruit. So long, in fact, that a discontented board ousted Fiorina before HP had time to become the leading PC vendor. That did not prevent her taking emeritus credit for that supposed success from her perch outside the company.
One could not argue that HP had anything really different from Compaq, since the key technologies in the bulk of their products were supplied by Intel and Microsoft. There were some minor distribution channel differences, and Compaq still owned, from its earlier merger with Digital Equipment, high-end computing assets that eventually became useful to HP. Be that as it may, HP did finally achieve the #1 position in the PC industry, a perhaps pyrrhic victory, given the diminished profit margins in the industry by then.
Now, several CEOs and scandals later, the company has decided to take the opposite course: splitting itself in two. When I told my teenage son that the two entities were called HP Inc (HPQ). and HP Enterprise (HPE), he looked at me funny and asked, “Why not just call them “Hewlett” and “Packard”? I explained that the founders were both long dead, and that the actual brand, Hewlett-Packard, was strong enough so that both spin-offs wanted to make use of its cachet.
The rationale this time around, promoted by CEO Meg Whitman and her board, was that the two entities were in different businesses and needed to go their own ways. HPQ holds the still-huge printer and PC businesses. Margins vary. HP’s printer business remains a sort-of monopoly and so commands beneficial returns. The PC industry in general continues to send most of its profits to Microsoft and Intel, and within that dismal picture, HP’s share is dropping. Both divisions are shrinking. But together they still throw off a lot of cash.
HPE is struggling to find its sea legs in the exciting new business of hybrid cloud computing. The company still needs a lot of investment to attain cruising altitude, but it should yield higher margins once it reaches scale. Why could HP not do what it had been doing, and finance HPE’s growth with the HPQ’s profits? Resentments among competing bishops in the empire aside, such a course would follow the classic conglomerate model. This is where the story gets a bit vague. Something about putting all the teak behind the HPE arrow and all the mahogany behind that of HPQ.
But the real answer to this question — and others around the industry, where cries of “Merge!” and “Divest!” strain to drown each other out — came to me as I was sitting with my good friend Bob Stearns in one of the better hole-in-the-wall breakfast eateries in Wellesley, Massachusetts. Back in the day, Stearns was a higher-up at Compaq, managing its strategic investments. He parted company with then-CEO Eckhard Pfeiffer over the Digital Equipment purchase (“Better together!”). Stearns predicted that the deal would bring disaster because it combined redundant and extraneous businesses, was a poor blend of cultures, and — perhaps most importantly — was excessively expensive. On the parting threshold, he prophesied Pfeiffer’s downfall within six months.
Stearns’s astute assessment proved prescient nearly to the day. But he himself did fine, having left before the implosion, and has been managing private investments ever since. As we sat there, having our fill of cholesterol and sodium, it took us naught but two minutes to arrive at the conclusion: Wall Street drives these fads. “How is Wall Street compensated?” Stearns asked semi-rhetorically. “Commissions!” he chortled. “And what generates commissions? He queried, fairly gleaming with joy. “Transactions!” we both shouted at once, drawing barely a glance from the other patrons.
Yes, my children, transactions. Transaction and fees. If it was better apart, put it together. If it was better together, pull it apart. HP, in particular, had lost its way and was therefore easy prey to wayward arguments made by this year’s crop of young investment bankers. “Unlock the value!” they goaded. “Simplify the business model!” they needled. “Every tub on its own end!” they insisted, citing wisdom from fairy tales.
And so the transaction occurred, generating vast fees for lawyers, bankers, and consultants. The benefit to shareholders, employees, and customers? Unclear.
However, at least we can now hold two apparently contradictory ideas in our heads at the same time. Better together or better apart? Could be either, depends where you start.
But one thing you can say, in and out of season, change for its own sake makes big piles for Wall Street.