H-P vs DELL @ MarketWatch

Aug. 22, 2012, 1:55 p.m. EDT

Now it’s Dell being told: Junk PCs

Analysts disagree on call for spinoff, which echoes H-P proposal

By Benjamin Pimentel, MarketWatch

SAN FRANCISCO (MarketWatch) — What a difference a decade makes for manufacturers of personal computers.

Ten years ago, Hewlett-Packard Co. HPQ -0.31%  gobbled up Compaq Computer, setting up a two-way battle with Dell Inc. DELL +0.18%  over who’s the king of PCs. Dell took the lead after the merger, before H-P roared back to grab the crown. Read more about Dell and H-P.

But today, it doesn’t matter too much who’s on top. PCs have turned into a ball and chain that’s weighing both tech giants down, getting in the way of their bid to push into more profitable segments of the IT market.

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It’s gotten so bad, there’s been a push for H-P to spin off its PC business. Now, it’s Dell’s turn.

“Given the continued challenges in the PC business, we believe Dell should consider getting rid of this business and focus on expanding its enterprise solutions business,” Topeka Capital analyst Brian White wrote in a note, following Dell’s disappointing earnings report.

It’s a controversial view, mainly because Dell’s sales are still so heavily tied to PCs.

“Well, that’s kind of tough when 65%-70% of its revenue is tied to PCs,” Sterne Agee’s Shaw Wu said.

Crawford Del Prete, an analyst with IDC, also disagrees with the proposal, saying Dell “would find that there are very few (if any) buyers that will fairly value the business.”

“They need to take into account that the PC business drives cost efficiencies for the server and storage units,” he added. “Finally, Dell has deep account relationships with many small and midsize companies who have credit terms with Dell, and buy PCs and enterprise gear from Dell.” 

Roger Kay of Endpoint Technologies Associates said it would be “too draconian” for Dell to get out of the PC business.

Reuters

However, Rob Enderle of the Enderle Group didn’t quickly dismiss the idea, pointing out: “If you took out the PC business, they would have had a damn good quarter.”

Dell reported gains in its enterprise businesses, but said it took a hit in both desktop and notebook PC sales. H-P is expected to paint a similar picture when it reports results after Wednesday’s closing bell. Both H-P and Dell are pushing to expand into higher margin markets in corporate IT, and de-emphasizing their low-margin businesses, especially PCs.

Last year, H-P, which became the king of PCs after its 2002 merger with Compaq, even actually floated the idea of getting rid of its PC business. The announcement, under ex-Chief Executive Leo Apotheker, was a disaster which sent its share price plummeting. Current CEO Meg Whitman dropped the idea, saying H-P would be “better together.”

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But the idea of a spinoff remains alive. Earlier this month, UBS analyst Steven Milunovich argued that for H-P it may be “smart to be apart,” saying the company should spin off its PC and printer units.

The call is bound to get stronger as PCs continue to post sluggish growth.

A key problem for Dell, Enderle argued, is that it hasn’t been able to focus enough on PCs. There’s also the strong challenge from Lenovo, which became a major player in the space after buying IBM’s IBM +1.06% PC business a few years ago and is fast gaining market share. In fact, Enderle said, Lenovo LNVGY +0.18%  is a good model for Dell and H-P.

“All eyes are on Lenovo which has been growing pretty well as almost a PC pure play,” he added. And the reason is the company has devoted resources to that business. “Lenovo’s success shows you can do well here.”

One idea, he said, is for Dell to do with its PC business what data-storage-systems company EMC Corp. EMC +2.69%  did with software company VMware VMW +1.06%   — that is, to create a separate unit still within Dell’s orbit. “You create another unit that can better focus on its own business,” he said. “Dell would maintain ownership and oversight — but the division would gain more autonomy.”

But for Del Prete of IDC, the key for Dell is still patience.

“Dell needs to stay the course in my opinion,” he said. “They need to maximize the enterprise while maintaining a footprint in PC’s. They are in a very difficult transition that might no get better in the near term, but will improve long term as the enterprise delivers higher margins.” 

Benjamin Pimentel is a MarketWatch reporter based in San Francisco.