It’s been a rough several years for the once-mighty technology behemoths, HP and IBM, and while each has the cash and resources to chug along for years to come, both companies have struggled to find a foothold in a fast-changing market.
HP once represented the archetypal Silicon Valley company, a pillar of the computer world, a place where a teenage Steve Jobs worked one summer and cut his technology teeth. It was one of the most innovative companies in the tech world — in the 20th century. But as the 90s rolled into the 2000s, HP began to lose its way.
It started with Carly Fiorina’s schizophrenic leadership, spending big to get Compaq, while letting loose thousands of employees and publicly feuding with Walter Hewlett, the son of the company co-founder. After that came the march of the CEOs. Mark Hurd left in disgrace after a scandal. Next came Leo Apotheker who lasted just a year before the board cut him loose and in came current CEO Meg Whitman.
With that kind of tumult at the top, the company seemed to lack direction.
IBM with a similar industry pedigree, has been by comparison the height of stability, but that doesn’t mean it hasn’t suffered the slings and arrows of a changing technology landscape. IBM has seemed to recognize it has needed to change, but the bottom-line results have been just awful and rumors of big layoffs abound — the size of which has been widely debated.
How bad has it been for IBM? Very bad. Eleven straight quarterly losses bad, and it can’t seem to stanch the bleeding no matter how many moves it makes or companies it buys.
Both companies have spent a good part of the millennium trying to develop new technology, hire the right combination of people, even while laying off tens of thousands and spending billions buying companies. It’s been a whirlwind of change with little to show for it, at least if you judge by stock prices.
The fact is both of these companies have illustrated just how difficult it is for large organizations, which traditionally lack agility, to find a way to transform gracefully. They both clearly understand where the new markets lie — some combination of cloud, mobile, big data and Internet of things — and they surely talk the talk, but which one is in a better position to survive and thrive in the new world and can really walk the walk?
As an experiment, instead of trying to find ways to slag on the two companies, the two of us have decided to argue the bull cases for each. It’s a turnaround on how we usually do things. Alex will argue that HP is just fine, and Ron will make the case for IBM. We’ll then tie the two pieces of analysis together, and let you decide which company is in better and worse shape.
When HP announced that it would take an axe and cleave itself in two, the company noted that it was four years into a five-year turnaround. By that math, HP will pull the trigger on divorcing itself into discrete pieces roughly at the end of its turnaround period. October is a big month for the venerable giant.
Let’s presume you have two businesses. One, you describe as “cloud, big data, security and mobility in the New Style of IT.” The other? “[P]ersonal systems and printing.” If you could only own one, which would it be? HP agrees, which is why it is getting rid of its low-margin PC business, stapled to a declining ink refill job, and doubling down on its other work.
Interestingly, the two halves of HP have nearly precisely the same amount of revenue: around $14 billion per quarter.
HP as a personal computer maker excites me roughly as much as an empty can of lager. Is printing interesting? Here’s a quote from HP’s most recent quarterly report:
Hardly stunning. Personal computers, by the way, had flat revenue on a year-over-year basis in the quarter.
I think that we can say without much conceit that the future of HP’s soul is not in hardware, but in software and services. That sounds banal, but keep in mind that personal computers have an operating margin of 3.7 percent. Or, put another way, zero. So, the hardware side of HP is flat where it makes no money, and shrinking where it does.
Completing the hardware picture for HP is its Enterprise Group incomes, which were flat in the last quarter, but did generate a 15.6 percent operating margin. Flat is better than down.
And how is HP doing on the software and services side of things? The picture is also troubled. The company’s highest margin non-hardware business, Software, lost 5 percent of its top line, clocking 18 percent margin. HP Financial services contracted by 8 percent, and Application and Business Services saw its top line fall by 11 percent in the quarter.
So where is the sunlight? The willingness of HP to act. Splitting your company into two pieces is a massive task. Recall what the EU wanted to do to Microsoft, and how that company reacted. But there are green shoots: The company’s guidance is weak, but we are still operating in a pre-split era, so operational performance isn’t the best barometer. Instead, the company has plenty of cash, and is making big moves: HP is said to be eyeing Aruba Networks as an acquisition and is shifting around its cloud leadership quickly after installing a new leader.
Guts, cash, a plan for the future, and a business model for the present. HP isn’t in great shape, but it has all the pieces in place to regain its spot among the technology illuminati.
Not surprisingly, IBM has taken a similar approach in terms of focusing on software and services and getting rid of hardware. It shed its PC division years ago, selling it to Lenovo in 2004, the same company that bought its x86 server division last year. It dumped its chip business last year, actually paying Global Foundries $1.5B to take it off its hands, while absorbing a whopping $4.7B pretax charge.
IBM hasn’t given up on hardware altogether — it announced a new Z13 Mainframe earlier this year — but clearly, much like HP, it’s starting to look at other areas as the markets shift away from the highly profitable hardware business.
That focus has been using its still considerable financial clout to buy lots and lots of companies. In fact, it has built its cloud portfolio almost entirely with its checkbook. It bought Softlayer in June, 2013 giving it Infrastructure as a Service to compete with the likes of AWS, Google Cloud and Microsoft Azure. Since then it has spent billions beefing up its worldwide datacenters growing from the 13 Softlayer owned when it was purchased to 40 by the end of last year, banking on the idea that having local datacenters will appeal to many companies and countries in the long run.
It also has bought over hundred Software as a Service offerings and built BlueMix, its Platform as a Service offering. It’s built its own marketplace to distribute its SasS products and those built by BlueMix partners. In a few years, simply using money, IBM was able to build an entire cloud platform, and it’s also focusing on other areas like analytics taking advantage of Watson technology, security, social and mobile. It’s also supporting many open source projects, an area that’s clearly becoming increasingly important to customers who no longer want to be beholden to vendor lock-in.
IBM is a major contributor OpenStack and it has partnered with CloudFoundry, even though these products clearly compete with the IBM cloud stack. IBM has also staked a claim to the hybrid cloud management market trying to help companies manage data and applications across a diverse computing environment.
IBM seems to have a firm a plan and they are well on the way to implementing it. While it hasn’t seen the results, its stock hasn’t taken the beating you might expect given the results. What’s more it says, “it’s looking to generate $40B in 2018 revenue from cloud, analytics, mobile, social, and security solutions, up from $25B (27% of total revenue) in 2014,” according to Seeking Alpha.
If they can do that, they might be on their way to a tremendous turnaround, one that lets them spit in Disruption’s eye and transform into an entirely new organization.
If you aren’t too bullish on either firm after reading that keep in mind that each company is deep in a large transition, while at the same time operating as a public company. That is a notoriously difficult mix. And when a company has decades of corporate history, there will always be periods of chop.
HP and IBM are both navigating the same treacherous path. They grew up in time where bigger was better and suddenly, it’s a handicap. They are both strapped by some poor decisions and years of legacy products, but they both also have some ideas on how to change.
Both companies are experiencing growing pains as they adapt to a world where they must get leaner and more agile. Other companies that are executing similar existential shifts on how they do business include Microsoft and Adobe. And Microsoft is going to grow around 5 percent this year. Adobe is flat to middling. What do they have in common? They are all trying to transform.
So which of the two companies is in better shape? It’s hard to say in the middle of the transition, but one or both needs to figure out a way to get one or two of its large, higher-margin software products on double-digit growth trajectory, so that obsolescing cash flows become less of a threat to margins, and fade into being a more comfortable headache from the past. If they do that, they might be getting somewhere. If not, who knows?
Readers Poll: “So which company do you think is in better shape to survive disruption?” Leave a comment and let us know what you think.
