Five things that could go wrong with the HP split

If you want a no-nonsense look at the challenges Hewlett-Packard faces, look no further than the “risk factors” it laid on the table in its 11 March 10-Q filing with the Securities and Exchange Commission.

Here is a list of five risks as seen by HP. 

1. Anticipated timeline of 1 November may slip

Make no mistake about it: The process of separating 750 legal entities in 166 countries is a Herculean task with a mind-boggling deadline given the complexities of the split. HP said in the 10-Q that “unanticipated developments” including delays in obtaining various tax opinions and government regulatory approvals and clearances could impact the split.

“The uncertainty of the financial markets and challenges in executing the separation, could delay or prevent the completion of the proposed separation, or cause the proposed separation to occur on terms or conditions that are different or less favorable than expected,” the company reported in the 10-Q filing.

As part of the split, HP must have three years of audited financial results for both Hewlett-Packard Enterprise and HP Inc.

2. Execution requires significant attention from top management

Executing the split, HP said in the filing, will “require significant time and attention from our senior management and employees, which could adversely affect our business, financial results and results of operations".

The CEO of a top North American HP enterprise partner, who did not want to be identified, said one of his fears is HP’s top management gets so caught up in the split that they take their eye off the ball and business suffers. “We worry that HP is going to lose some focus. People can’t do everything at the same time. It isn’t possible.”

So far, HP has gone to great lengths to make sure that it stays focused on driving its day-to-day business, assigning 450 of its employees in three separation management offices, or SMOs: Hewlett-Packard Enterprise, HP Inc. and Hewlett-Packard Corporate.

“We articulated from the start that we would set up a separate group of folks – the separation management office – to deal with the day-to-day mechanics of separating these two companies,” said Dion Weisler, who will be CEO of HP Inc.

“Ninety-nine and a half percent of us are focused maniacally on our business. That is what we need to do. We can’t lose sight of that.”

3. Separation could result in substantial tax liability

HP warned that it could incur certain tax costs from the split including "non-US tax expense resulting from the separations in multiple non-US tax jurisdictions."

That said, HP is going to great lengths to qualify the separation as a "reorganisation" in order to qualify the split as a tax-free transaction for federal income tax purposes.

In fact, HP is seeking a "private letter ruling" from the Internal Revenue Service and outside counsel on the tax-free status. But HP warned in the 10-Q that there can be "no assurance that the IRS will not challenge the conclusions reflected in the opinions or that a court would not sustain such a challenge".

HP cautioned in the 10-Q filing that it may not “realise some or all of the anticipated strategic, financial, operational, marketing or other benefits from the separation".

In fact, HP said the new companies will be “smaller, less diversified” with a “narrower business focus” and may be more “vulnerable to changing market conditions.”

HP partners, for their part, said they expect both businesses to have far fewer employees than they do today. The CEO of a top US-based enterprise partner, who did not want to be identified, said he sees both organisations moving to a leaner and meaner sales culture in the wake of the split.

“HP is shrinking its [direct] sales force,” said the CEO."I think it is going to be easier to transact business with HP from a partner perspective."

5. Split may ‘negatively impact’ partners, customers

HP said in the 10-Q that “uncertainty” related to the separation may lead customers and partners it does business with to “terminate or attempt to negotiate changes in existing business relationships, or consider entering into business relationships” with competitors.

At HP's recent Global Partner Conference (GPC) in Las Vegas, Steve Brazier, chief executive of channel-centric analyst firm Canalys, told CRN Australia that "what partners want is predictability not uncertainty".

"I think HP is going through a business transformation that has probably never been undertaken by any business of its scale. They demonstrated [at GPC] how very well prepared they are for that split in impressive detail but still it is a massive undertaking and we will have to see how it goes once the actual split occurs," said Brazier.

At the conference, CRN Australia also spoke to Tiffani Bova, distinguished analyst at Gartner, who said: "There is no scenario which HP would want to risk losing any business because of the separation, which for all intents and purposes is focused on accelerating its growth. Based on the attention paid towards reassuring the partners in Vegas, only time will tell if HP's aspirations of a seamless separation will come true."