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# Hewlett-Packard Split Comes as More Investors Say Big Isn’t Better

## H-P Plans Breakup as Corporations Spin Off Businesses and Break Up at a Near-Record Pace

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By
David Benoit,
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- David Benoit
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Theo Francis and
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connect
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- David Benoit
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- James R. Hagerty
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Oct. 6, 2014 8:51 p.m. ET

Hewlett-Packard CEO Meg Whitman said Monday the two companies will be on very different courses. Shown, an ad for H-P in a Best Buy store. Getty Images

Corporate giants are spinning off business lines and breaking themselves up at a near-record pace, as size increasingly looks like a negative to investors concerned about fierce global competition and slower growth.

Big had long been a synonym for better in corporate America—for CEOs expanding their companies and for investors looking for insulation from sudden changes in markets. But these days the sun isn’t shining on empire builders. Investors are pressing companies to part ways with slower-growing businesses and focus their efforts on more-promising operations.

Hewlett-Packard Co. HPQ -4.50% Hewlett-Packard Co. U.S.: NYSE $35.21 -1.66 -4.50% Oct. 7, 2014 4:00 pm Volume (Delayed 15m) : 21.18M AFTER HOURS $35.23 +0.02 +0.06% Oct. 7, 2014 4:09 pm Volume (Delayed 15m) : P/E Ratio 13.09 Market Cap $65.69 Billion Dividend Yield 1.82% Rev. per Employee $354,132 10/07/14 The 10-Point: Gerard Baker on ... 10/06/14 H-P CIO Ramon Baez Says Critic... 10/06/14 Hewlett-Packard Set to Break U... More quote details and news » HPQ in Your Value Your Change Short position , which helped invent the computer business, is moving away from PCs. PepsiCo Inc. PEP -0.31% PepsiCo Inc. U.S.: NYSE $93.08 -0.29 -0.31% Oct. 7, 2014 3:59 pm Volume (Delayed 15m) : 6.27M AFTER HOURS $93.19 +0.11 +0.12% Oct. 7, 2014 4:07 pm Volume (Delayed 15m) : P/E Ratio 20.79 Market Cap $140.88 Billion Dividend Yield 2.81% Rev. per Employee $242,861 10/06/14 Hewlett-Packard Split Comes as... 10/06/14 DOJ’s West Explains Move to Pe... 10/02/14 Companies in Mexico Find Healt... More quote details and news » PEP in Your Value Your Change Short position is under pressure to separate its soft drinks and snacks divisions. Even the quintessential conglomerate General Electric Co. GE -1.63% General Electric Co. U.S.: NYSE $24.81 -0.41 -1.63% Oct. 7, 2014 4:00 pm Volume (Delayed 15m) : 28.66M AFTER HOURS $24.82 +0.01 +0.04% Oct. 7, 2014 4:13 pm Volume (Delayed 15m) : P/E Ratio 17.26 Market Cap $254.86 Billion Dividend Yield 3.55% Rev. per Employee $471,622 10/06/14 The CIO Function Will Survive,... 10/06/14 Hewlett-Packard Split Comes as... 10/06/14 U.S. Regulators to Review ‘Sys... More quote details and news » GE in Your Value Your Change Short position is facing a renewed argument from a prominent Wall Street analyst that it makes no sense to be selling CT scanners and medical diagnostics along with power plants, aircraft engines and locomotives.

Conglomerates have been built and dismantled before. But the new push is unusually forceful, driven by activist hedge funds that have amassed $111 billion in money to invest, according to industry tracker HFR, a war chest that lets them take on bigger and bigger targets.

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Against that backdrop, corporations around the world have sold or spun off $1.6 trillion worth of subsidiaries and business lines so far this year, just behind 2007’s record-setting pace, according to data provider Dealogic. Some companies are moving in the opposite direction, such as with AT&T Inc. T -0.48% AT&T Inc. U.S.: NYSE $35.32 -0.17 -0.48% Oct. 7, 2014 3:59 pm Volume (Delayed 15m) : 18.36M AFTER HOURS $35.35 +0.03 +0.08% Oct. 7, 2014 4:11 pm Volume (Delayed 15m) : P/E Ratio 10.36 Market Cap $183.38 Billion Dividend Yield 5.21% Rev. per Employee $536,510 10/06/14 Hewlett-Packard Split Comes as... 10/06/14 Telco Iliad Shouldn’t Stretch ... 10/06/14 AT&T Scores Most Effective Wir... More quote details and news » T in Your Value Your Change Short position ’s $49 billion deal to buy satellite broadcaster DirecTV. DTV -0.60% DIRECTV U.S.: Nasdaq $87.36 -0.53 -0.60% Oct. 7, 2014 3:59 pm Volume (Delayed 15m) : 3.57M AFTER HOURS $87.34 -0.02 -0.02% Oct. 7, 2014 4:03 pm Volume (Delayed 15m) : P/E Ratio 15.77 Market Cap $44.05 Billion Dividend Yield N/A Rev. per Employee $1,023,280 10/06/14 Hewlett-Packard Split Comes as... 10/03/14 More Cable Companies Take TV O... 10/02/14 Stocks to Watch: Constellation... More quote details and news » DTV in Your Value Your Change Short position Still, the pressure has changed the tone of discussions in the boardroom, where directors and executives are taking a closer look at their portfolio of businesses.

Activist investor Trian Fund Management LP, which has successfully pressed for the breakup of companies as diverse as Kraft, Wendy’s WEN -2.09% Wendy's Co. U.S.: Nasdaq $7.96 -0.17 -2.09% Oct. 7, 2014 4:00 pm Volume (Delayed 15m) : 3.85M AFTER HOURS $7.95 -0.01 -0.13% Oct. 7, 2014 4:07 pm Volume (Delayed 15m) : P/E Ratio 28.92 Market Cap $3.00 Billion Dividend Yield 2.51% Rev. per Employee $61,616 10/06/14 Hewlett-Packard Split Comes as... 08/26/14 Burger King Deal Draws Tax Cri... 08/26/14 Burger King, Tim Hortons: Grow... More quote details and news » WEN in Your Value Your Change span class="n-values"> Short position and Ingersoll-Rand IR -1.31% Ingersoll-Rand PLC U.S.: NYSE $55.93 -0.74 -1.31% Oct. 7, 2014 4:00 pm Volume (Delayed 15m) : 2.63M AFTER HOURS $57.04 +1.11 +1.98% Oct. 7, 2014 4:09 pm Volume (Delayed 15m) : P/E Ratio 26.14 Market Cap $15.09 Billion Dividend Yield 1.79% Rev. per Employee $275,507 10/06/14 Hewlett-Packard Split Comes as... 09/17/14 Read Trian's Letter to DuPont 09/16/14 Trian Makes Case to Break Up D... More quote details and news » IR in Your Value Your Change Short position PLC, argues that companies now have to earn the privilege of being a conglomerate. Its point is that diversifying rarely pays off, an argument it is pushing at Pepsi and chemical giant DuPont Co. DD -1.65% E.I. DuPont de Nemours & Co. U.S.: NYSE $69.00 -1.16 -1.65% Oct. 7, 2014 3:59 pm Volume (Delayed 15m) : 3.78M AFTER HOURS $69.04 +0.04 +0.06% Oct. 7, 2014 4:03 pm Volume (Delayed 15m) : P/E Ratio 21.56 Market Cap $64.65 Billion Dividend Yield 2.72% Rev. per Employee $552,922 10/06/14 Hewlett-Packard Split Comes as... 10/03/14 Chemical Makers Explore a Merg... 09/28/14 Perovskite Offers Shot at Chea... More quote details and news » DD in Your Value Your Change Short position

Both of those companies are resisting the split-ups Trian wants, though DuPont has announced a plan to separate a unit that makes up about 20% of its revenue.

Trian’s argument has some support in the data. Shares of North American conglomerates underperformed their more focused rivals by 11.4% on average from 2000 to 2010, according to a study from Anil Shivdasani, a finance professor at the University of North Carolina Kenan-Flagler Business School. Shares of companies that announced a spinoff outperformed peers by 6% in the three months around the announcement. Professor Shivdasani said Monday the data remained similar through the end of last year.

H-P’s stock rose 4.7% on Monday after the company said it would split into two companies, one consisting of its personal-computer and printer businesses, the other selling computer servers, data-storage gear, software, consulting operations and other services for corporate-technology departments.

Chief Executive Meg Whitman said Monday that the two companies will be on very different courses. The new PC and printer business, HP Inc., will be milked for cash that will be earmarked for returns to stockholders. The other, Hewlett-Packard Enterprise, which Ms. Whitman will run, will focus on growth through a faster pace of investment in new products and through acquisitions, H-P executives said on a conference call with analysts.

View Graphics

That sort of split is typical in corporate breakups. Gannett Co. GCI -1.23% Gannett Co. Inc. U.S.: NYSE $28.98 -0.36 -1.23% Oct. 7, 2014 3:59 pm Volume (Delayed 15m) : 1.31M AFTER HOURS $28.97 -0.01 -0.05% Oct. 7, 2014 4:03 pm Volume (Delayed 15m) : P/E Ratio 15.03 Market Cap $6.68 Billion Dividend Yield 2.76% Rev. per Employee $173,576 10/06/14 Hewlett-Packard Split Comes as... 10/06/14 The Script for Corporate Split... 09/23/14 New L.A. Newspaper Ceases Publ... More quote details and news » GCI in Your Value Your Change Short position and News Corp, NWSA -2.89% News Corp Cl A U.S.: Nasdaq $15.47 -0.46 -2.89% Oct. 7, 2014 3:59 pm Volume (Delayed 15m) : 7.36M AFTER HOURS $15.47 -0.00 -0.01% Oct. 7, 2014 4:03 pm Volume (Delayed 15m) : P/E Ratio 37.74 Market Cap $9.20 Billion Dividend Yield N/A Rev. per Employee $389,727 10/06/14 Hewlett-Packard Split Comes as... 10/03/14 Ex-News Corp Editor Pleads Gui... 09/30/14 Cable Operator Suddenlink to D... More quote details and news » NWSA in Your Value Your Change Short position publisher of The Wall Street Journal, made similar decisions in separating their print-publishing businesses from faster-growing television or film businesses.

It doesn’t always work as expected. When ITT Corp. ITT -2.58% ITT Corp. U.S.: NYSE $42.70 -1.13 -2.58% Oct. 7, 2014 3:59 pm Volume (Delayed 15m) : 1.47M AFTER HOURS -- up, down, neutral --> $42.71 +0.01 +0.02% Oct. 7, 2014 4:00 pm Volume (Delayed 15m) : P/E Ratio 7.56 Market Cap $4.06 Billion Dividend Yield 1.03% Rev. per Employee $278,404 10/06/14 Hewlett-Packard Split Comes as... 07/29/14 Eaton CEO Says No Plans to Spi... More quote details and news » ITT in Your Value Your Change Short position divided itself into three separate companies in 2011, hopes were especially high for one of those spinoffs, Xylem Inc., XYL -4.02% Xylem Inc. U.S.: NYSE $34.15 -1.43 -4.02% Oct. 7, 2014 4:00 pm Volume (Delayed 15m) : 889,639 AFTER HOURS $34.71 +0.56 +1.64% Oct. 7, 2014 4:09 pm Volume (Delayed 15m) : P/E Ratio 22.78 Market Cap $6.41 Billion Dividend Yield 1.50% Rev. per Employee $312,560 10/06/14 Hewlett-Packard Split Comes as... More quote details and news » XYL in Your Value Your Change Short position which makes pumps, valves and water-treatment equipment. But revenue growth has been sluggish since then, partly due to weakness in Europe and slow sales to public utilities.

Since the spinoff, Xylem’s shares have risen about 36%, while the S&P 500 has climbed 53%. Revenue, which was about flat in 2012 and 2013, will grow by as much as 3.7% this year, Xylem has projected. The company also has said it would benefit long-term from global population growth, water scarcity and environmental concerns.

Meanwhile shares in ITT, which supplies brake pads for cars along with pumps used in oil, gas and chemical production, have more than doubled since the split. “We’re a lot closer to these businesses than we were previously,” said Chief Financial Officer Thomas Scalera, explaining the benefits of the split. “If we see things not going a certain way, wecan move in and take action a lot sooner.”

A classic split-up story involved Philip Morris. PM -0.73% Philip Morris International Inc. U.S.: NYSE $83.95 -0.62 -0.73% Oct. 7, 2014 3:59 pm Volume (Delayed 15m) : 4.06M AFTER HOURS $83.98 +0.03 +0.04% Oct. 7, 2014 4:13 pm Volume (Delayed 15m) : P/E Ratio 16.69 Market Cap $132.02 Billion Dividend Yield 4.76% Rev. per Employee $331,548 10/06/14 Hewlett-Packard Split Comes as... 10/05/14 Latest Threat to Corporate Ear... 09/12/14 BAT to Sell UK Government Appr... More quote details and news » PM in Your Value Your Change Short position In an effort to diversify, the tobacco company acquired Kraft Foods KRFT -1.32% Kraft Foods Group Inc. U.S.: Nasdaq $55.56 -0.75 -1.32% Oct. 7, 2014 4:00 pm Volume (Delayed 15m) : 2.10M AFTER HOURS $55.60 +0.04 +0.07% Oct. 7, 2014 4:03 pm Volume (Delayed 15m) : P/E Ratio 13.66 Market Cap $33.44 Billion Dividend Yield 3.78% Rev. per Employee $804,356 10/06/14 More Expensive Cup of Coffee? ... 10/06/14 Hewlett-Packard Split Comes as... 09/29/14 Treasury Wine Estates Ends Tak... More quote details and news » KRFT in Your Value Your Change Short position in 1988. But the company, now called Altria MO -1.01% Altria Group Inc. U.S.: NYSE $46.04 -0.47 -1.01% Oct. 7, 2014 3:59 pm Volume (Delayed 15m) : 5.12M AFTER HOURS $46.02 -0.02 -0.04% Oct. 7, 2014 4:03 pm Volume (Delayed 15m) : P/E Ratio 21.21 Market Cap $91.62 Billion Dividend Yield 4.52% Rev. per Employee $1,971,440 10/06/14 Hewlett-Packard Split Comes as... 10/05/14 Latest Threat to Corporate Ear... 09/15/14 SABMiller Adds to Beer's Deal-... More quote details and news » MO in Your Value Your Change Short position Group Inc., spun Kraft fully off to shareholders in 2007 and a year later spun off its international operations as Philip Morris International. In 2012, Kraft separated from its faster-growing global snacks operations, Mondelez International Inc. MDLZ -1.42% Mondelez International Inc. Cl A U.S.: Nasdaq $33.93 -0.49 -1.42% Oct. 7, 2014 4:00 pm Volume (Delayed 15m) : 7.36M AFTER HOURS $33.94 +0.01 +0.03% Oct. 7, 2014 4:03 pm Volume (Delayed 15m) : P/E Ratio 16.73 Market Cap $57.74 Billion Dividend Yield 1.77% Rev. per Employee $327,449 10/06/14 Hewlett-Packard Split Comes as... 10/01/14 Relational Investors Plans to ... 09/28/14 Digital Media to Take Center S... More quote details and news » MDLZ in Your Value Your Change Short position

Today, Altria and its progeny have a combined market capitalization of $315 billion, up 71% from 2007, before the Kraft spinoff. By contrast, the S&P 500 has gained 38.5% during that period.

One big company that has long defied the trend toward more focus is 3M Co. MMM -1.89% 3M Co. U.S.: NYSE $137.69 -2.65 -1.89% Oct. 7, 2014 3:59 pm Volume (Delayed 15m) : 2.94M AFTER HOURS $137.79 +0.10 +0.07% Oct. 7, 2014 4:03 pm Volume (Delayed 15m) : P/E Ratio 19.06 Market Cap $90.83 Billion Dividend Yield 2.48% Rev. per Employee $354,698 10/06/14 Hewlett-Packard Split Comes as... 09/08/14 Super Glues Are the Secret to ... 08/06/14 Target Publicly Endorses Same-... More quote details and news » MMM in Your Value Your Change Short position The St. Paul, Minn.-based company produces adhesives, abrasives, coatings and films used in thousands of industrial and consumer applications. Its vast array of products includes Scotch tape, films used to brighten computer screens, adhesives used in making cars, and electronic book-tracking systems for libraries.

The question of breaking up 3M hardly ever comes up in discussions with investors, partly because 3M has been a very consistent generator of profits, said Jeffrey Sprague, managing partner of Vertical Research Partners in Stamford, Conn. The company has increased its dividend in each of the past 56 years. 3M shares are trading at about 17 times estimated earnings for 2015, compared with 15 times for General Electric and United Technologies Corp. UTX -2.70% United Technologies Corp. U.S.: NYSE $101.41 -2.81 -2.70% Oct. 7, 2014 3:59 pm Volume (Delayed 15m) : 5.60M AFTER HOURS $101.46 +0.05 +0.05% Oct. 7, 2014 4:03 pm Volume (Delayed 15m) : P/E Ratio 15.85 Market Cap $95.52 Billion Dividend Yield 2.33% Rev. per Employee $302,783 10/06/14 Hewlett-Packard Split Comes as... 10/02/14 Pratt & Whitney's Commercial E... 09/25/14 Dollar's Rise Affects Overseas... More quote details and news » UTX in Your Value Your Change Short position /span> , Mr. Sprague said. “It’s hard to make an argument that you need to do any kind of radical surgery,” he said.

General Electric also remains a defender of the model. Chief Executive Jeff Immelt says GE is able to spread the wealth of its research-and-development operations across disparate businesses—such as using similar technological advancements to improve efficiency in its jet engines, gas-power turbines and locomotives.

Still, GE has responded to investor discontent and a long-dormant stock price by shedding elements of what Mr. Immelt has branded “noncore” businesses. In recent years, Mr. Immelt sold off NBCUniversal, cut a deal to exit the appliances business and oversaw an initial public offering of the company’s retail-finance operations at GE Capital.

GE’s stock remains stuck near $25 a share, down 10% this year, and some on Wall Street want the company to go further. Scott Davis, a research analyst at Barclays Capital, said earlier this month that investors increasingly want GE to shed its $18 billion health-care business, and that GE should at least evaluate the possibility of breaking itself up.

On Monday, GE announced a new chief for its health-care business, and Mr. Immelt reiterated that it is a core part of the company.

“The thesis of trying to optimize shareholder value by either splitting off or maintaining a co-mingled business is one that is debatable by company,” said David Haffner, CEO of Leggett & Platt Inc., LEG -2.07% Leggett & Platt Inc. U.S.: NYSE $34.04 -0.72 -2.07% Oct. 7, 2014 3:59 pm Volume (Delayed 15m) : 977,546 AFTER HOURS $34.04 -0.00 -0.01% Oct. 7, 2014 4:03 pm Volume (Delayed 15m) : P/E Ratio 46.67 Market Cap $4.80 Billion Dividend Yield 3.64% Rev. per Employee $200,809 10/06/14 Hewlett-Packard Split Comes as... 08/20/14 Stocks to Watch: Lowe's, Ameri... 08/19/14 Sneaking Away to Email? Why CE... More quote details and news » LEG in Your Value Your Change Short position a manufacturer of furniture, automobile components and other products such as drawn steel wire. “My concern is that if we were to split our businesses apart, it wouldn’t necessarily improve profitability. Contrarily, I think that it would increase the amount of overhead and cost of oversight.”

Finance researchers say investors tend to put a “diversification penalty” on companies that try to do too much. Announcing a spinoff typically boosts to the parent company’s stock by about 3.3% better than market returns, according to an analysis of existing research compiled by Dartmouth finance professor B. Espen Eckbo and Karin S. Thorburn of the Norwegian School of Economics in Bergen.

Longer term, the results are less clear. Across 166 spinoffs since 1980 in which a parent company with revenues of $1 billion or more sold a unit to investors through an IPO, returns have roughly matched the market, says Jay Ritter, a University of Florida finance professor who tracks IPOs. Recent studies of other spinoffs arrive at similar conclusions.

The trend is good for Wall Street. According to Dealogic, corporate breakups have produced a bonanza for investment banks—$9.4 billion in fees so far this year.

—Bob Tita, Dana Mattioli and Ted Mann contributed to this article.

Write to David Benoit at david.benoit@wsj.com, Theo Francis at theo.francis@wsj.com and James R. Hagerty at bob.hagerty@wsj.com

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Bryan Smith subscriber 5pts

GE sold it's appliance division to Electrolux for 3.3 billion.

http://www.usatoday.com/story/money/business/2014/09/08/ge-appliances-sold-to-electrolux/15270661/

Robert J. Sacino subscriber 5pts

It sounds almost Biblical but as long-term shareholders of ITT common, we were pleased to acquire the following spinoffs: ITT (ITT), Starwood Hotels (HOT), Hartford Insurance (HIG), Rayonier (RYN), Excelis (XLS) and Xylem (XYL) and recently, Rayonier Advance Materials (RYAM) and Vectrus (VEC). ITT appears to be a classic example when “the sum [value] of the parts is greater than the whole.”

Memo to Wall Street: Could General Electric be another ITT waiting to be broken-up? Some of us on Main Street think so..

Judah Richardson subscriber 5pts

How much of the market cap appreciation is due to the stock market recovery though?

"General Electric also remains a defender of the model."

- That's a technicality. GE doesn't spin off LOBs, they sell them.

Ed Walton subscriber 5pts

In practice central-planning by the corporate world isn’t very efficient either.

Gene Henriksen subscriber 5pts

So we are on the break-up side of the merger/break-up cycle. Seems like a repeat of the '60s and '70s. CEOs want mergers so they can get big paydays for pulling off the costly scheme, lay people off, get Wall Street excited about promised but seemingly never achieved savings and then leave an unmanageable mess in the next CEOs lap. Why didn't HP simply sell their PC and printer business to Compaq? Where are the economic results of Compaq's acquisition of DEC with VAX clusters and Tandem with the wonderful Non-Stop Cluster software? Is Bank of America better off now than before buying Countrywide? Boards of Directors should be ashamed of this enormous waste of money.

Gary Wraughton user 5pts

In stark contrast, both the Federal Government and the Too-Big-To-Fail Banks that caused the crisis of 2008 are getting bigger

Frank Anderson subscriber 5pts

What the company needs is a new board and senior management group. Financial engineering can only go so far.

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