Hewlett-Packard Co wants to buy Autonomy Corp for $10.3 billion and is pondering a spinoff of its personal computing arm, setting in motion a transformation that mirrors IBM's successful overhaul last decade.
In a barrage of news that stunned Wall Street and triggered an early announcement of its third-quarter earnings, HP also announced it would kill a plethora of WebOS devices, including a TouchPad tablet that failed to excite consumers.
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An acquisition of Autonomy, which specializes in search software for email and documents, would rank as HP's third largest ever.
It has offered to buy all outstanding shares of Autonomy for $42.11 per share, HP said.
HP, a storied Silicon Valley icon that dominates the PC industry, and Chief Executive Leo Apotheker are responding to mounting pressure to fire up growth just as global economic and tech-spending outlooks darken, analysts said.
HP shares slid 6 percent to $29.48 after a topsy-turvy afternoon in which it veered between both gains and losses.
"Consumer PCs is the thing that's dragging that segment down. Because people aren't willing to pay up. They want the sexy iPad," said Fort Pitt Capital's Kim Forrest.
Autonomy is "a move for the future," Forrest added.
Speculation has swirled for months that HP was no longer keen on keeping a PC business struggling with low growth and single-digit margins.
Sources told Reuters in June that private equity firms from Blackstone Group and Kohlberg Kravis Roberts to TPG Capital would like HP to break up and sell them some of its units, arguing that the world's No. 1 PC maker and tech powerhouse is stretched too thin.
A PC spinoff marks a historic shift -- mirroring International Business Machines Corp's own transformation over the last decade -- for a company that Bill Hewlett and Dave Packard built into a sprawling $120 billion empire from a $538 garage operation in 1939.
"HP is recognizing what the world has recognized, which is hardware in terms of consumers is not a huge growth business anymore," said Michael Yoshikami, chief executive of YCMNET Advisors, a minor shareholder in HP.
"It's not where the money is. It's in keeping with the new CEO's perspective that they want to be more in services and more business oriented."
LEO MAKES BOLD MOVE
Spinning off the PC division, which is run by personal systems group chief Todd Bradley, would mark one of the biggest transformations for the company since 1999, when it spun off its measurement and components businesses to form Agilent Technologies.
In 2001, it engineered an acquisition of PC rival Compaq, laying the foundation for its later domination of the sector.
Apotheker, a former chief of European software giant SAP AG, had been expected to drive an expansion of the company's relatively small but very profitable software division -- including through major acquisitions.
Cambridge, England-based Autonomy counts Procter & Gamble Co among a long list of major corporate customers that use its software to search and organize unstructured data like emails. Last month, it posted a 16 percent jump in quarterly sales-driven demand for Internet-based cloud computing.
"HP would be buying this as part of a refocus of the business on software. They have been talking for a while about a focus on software," said Tim Daniels, technology, media and telecoms strategist at Olivetree Securities.
"Clients now don't have a problem accumulating data, the problem is the structuring of it. Eighty percent of the data on the Web now is unstructured: video, pictures, emails, etc."
KILLING THE TOUCHPAD?
HP's Personal Systems Group includes smartphones, tablets and the WebOS operating system apart from PCs, and pulls in about $41 billion in revenue but accounts for only about 13 percent of profit.
Its low-margin but high-volume PC business had been seen as a spinoff candidate for a while, given intense competition and the slide in consumer PC demand.
HP's decision to discontinue the TouchPad -- which hit the store shelves in July with a large marketing budget -- follows poor demand for the WebOS-based tablet. It was discounted by $100 a month after it was launched in a booming market dominated by Apple Inc's iPad.
The TouchPad was the result of the $1.2 billion acquisition of Palm last year, which was overseen by Todd Bradley, head of HP's PSG group.
Going forward, HP expects further pressure on its revenue and cut its full-year forecast for the third straight quarter.
Fiscal third-quarter revenue rose to $31.2 billion from $30.7 billion a year ago, in line with Wall Street expectations.
HP now expects full-year revenue of $127.2 billion to $127.6 billion, down from a previous estimate of $129 billion to $130 billion. It also cut its earnings per share estimate to a range of $3.59 to $3.70, down from its previous estimate of at least $4.27 per share.