HP kills tablets, confirms PC spin-off plans

HP also confirmed it is in acquisition talks with software maker Autonomy

Hewlett-Packard on Thursday said it will discontinue operations for webOS devices, specifically the TouchPad tablets and smartphones. It also confirmed that it is exploring the possible spin-off or sale of its Personal Systems Group (PSG), which dominates the global PC market.

The company's board of directors has authorized HP to explore options for the PSG unit. "HP will consider a broad range of options that may include, among others, a full or partial separation of PSG from HP through a spin-off or other transaction," the company said in a statement.

HP also confirmed it was in talks to acquire analytics software vendor Autonomy, though it did not provide further details. Reports from Bloomberg and the Wall Street Journal earlier on Thursday put a US$10 billion price tag on such a deal.

HP's Personal Systems Group, which sells PCs, tablets and smartphones, has the company's lowest profit margin although it accounted for nearly a third of HP's overall revenues in 2010. PC sales -- particularly consumer products -- tend to fluctuate more than business solutions and services as they are more sensitive to seasonal buying trends and economic trends, said Charles King, principal analyst at Pund-IT.

"By spinning off PCs, HP could effectively isolate potentially volatile financial numbers and their effect on its more stable, higher-margin businesses," King said.

HP is following in the footsteps of IBM, which spun off its PC business to Lenovo in 2005 to focus on the higher-margin software and services business. HP may also feel pressure from Apple, which has released highly profitable consumer products such as smartphones and tablets. Apple's tablets have hurt PC shipments, a market that HP dominates as the world's largest PC vendor.

HP is cutting its losses in the smartphone and tablet market quite speedily: it unveiled its TouchPad tablet and new smartphones with much fanfare only in February.

HP's PC business has been marginally profitable, but the margins have shrunk over the years, said Roger Kay, president of Endpoint Technologies Associates.

"It certainly goes against Carly Fiorina's theory of 'all's well together,'" Kay said. HP bought PC maker Compaq for $25 billion in 2002 when Fiorina was CEO.

Meanwhile, the possible purchase of Autonomy would be "completely in keeping with the increased focus on software and business solutions that HP's board had in mind when they hired [CEO] Leo Apotheker," said King.

Based in San Francisco and Cambridge, Massachusetts, Autonomy provides a variety of portal, enterprise search, content management and analysis tools to organizations.

"Autonomy focuses mostly on search and analytics of unstructured data and databases, which includes information that typically can't be captured within traditional relational databases," King said. It has grown a healthy business in the enterprise content space: Autonomy reported revenue of $870 million for 2010.

Traditionally, HP's enterprise services and hardware sales have dwarfed its software sales. For fiscal 2010, services generated almost $35 billion in net revenue and enterprise hardware generated $18.5 million, while software brought in $3.5 billion. Autonomy's sales could push that figure past the $4 billion mark

While starting in the enterprise search space with in-house technology, the company expanded its software portfolio through its acquisitions of Verity in 2005 and Interwoven in 2009. It also acquired informational governance software from CA Technologies in 2010.

Such a software portfolio would be "a natural complement to HP's efforts and technologies" in the enterprise content space, King said. It would dovetail particularly well with HP's Vertica database and 3PAR data storage products.

The software would also give HP a foothold in the emerging big data space, where it could build systems to compete with EMC's Greenplum and IBM's Netezza. "Both [of those] companies consider Big Data a market with a potentially huge future," King said.

In March, then-newly appointed HP CEO Apotheker announced that HP would concentrate more efforts on the data analytics and big data markets.

The PC business is the first obvious domino to fall as Apotheker tries to bring profitability to the company, said Ezra Gottheil, senior analyst at Technology Business Research.

"It's a much more exaggerated consequence of the [direction] the company decided to go with Leo Apotheker. Clearly the board wanted higher margins," Gottheil said. However, "HP will be challenged to drive software to be the kind of generator of profit that it is at IBM," Gottheil added.

But HP does potentially have something to lose if its PC business goes away -- such as some of the leverage it has in buying high-end server parts, Gottheil said.

(Joab Jackson in New York contributed to this story.)

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