* Exiting PCs, kicks off dramatic overhaul
* Options include spinoff for PCs, will buy Autonomy
* Shares resume slide after suspension
(Rewrites first paragraph, adds analyst's comments, updates
By Poornima Gupta and Megan Davies
SAN FRANCISCO/NEW YORK, Aug 18 Hewlett-Packard
Co (HPQ.N) is considering a dramatic turn away from the
struggling PC business by spinning it off into a separate
company and is buying British software maker Autonomy Corp
AUTN.L for $11.7 billion, focusing on faster-growing
Underscoring the problems plaguing what was once its core
business, the iconic Silicon Valley company also plans to kill
WebOS-based phones and the TouchPad tablet, which was launched
in June but has failed to excite consumers.
The barrage of news, which forced HP to announce
third-quarter earnings an hour early, masked a sharp reduction
in HP's estimates for full-year revenue and earnings that sent
its shares 6 percent down to a 52-week low. They slid another 7
percent to $27.50 in after-hours trade.
HP CEO Leo Apotheker is responding to mounting pressure to
fire up growth just as global economic and tech-spending
outlooks darken. Like other PC makers, it is struggling to come
up with an answer for Apple Inc's (AAPL.O) iPhones and iPads,
which are gobbling up PC market share.
The announcement is the second this week to show how
quickly technology companies are transforming as they jockey
for position to cope with radical changes in consumer demand.
Google Inc (GOOG.O) on Monday announced it was buying mobile
handset maker Motorola Mobility (MMI.N) for $12.5 billion,
launching the Internet search and mobile software company into
manufacturing for the first time.
HP's third-largest acquisition ever and its potential
departure from the PC arena sets in motion a transformation
that recalls International Business Machine Corp's (IBM.N)
overhaul of the last decade.
HP "is saying 'I want to be more like IBM.' They divested
their PC business and they got more involved in software," said
FBN Securities analyst Shelby Seyrafi.
"The PC industry is a very challenged one because of the
slow growth in that sector. For those companies like HP which
don't have a strong tablet offering, they are victims of the
encroachment of Apple's iPads and tablets on their notebook
business. So they're vulnerable to losing share."
The acquisition of cloud search-software specialist
Autonomy, which analysts say may draw rival bids, marks its
boldest foray into the software and technology services after
Apotheker came on board with a mandate to drive innovation.
Speculation has swirled for months that HP was no longer
keen on keeping a PC business struggling with low growth and
Sources told Reuters in June that private equity firms from
Blackstone Group (BX.N) and Kohlberg Kravis Roberts [KKR.UL] to
TPG Capital [TPG.UL] 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. [ID:nN1E75S0GT]
A PC spinoff marks a historic shift 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."
Apotheker's job: restore credibility [ID:nN28140915]
Analysts' views [ID:nN1E77H1IA]
HP's 10 largest deals since 2000 [ID:nN1E77H1IC]
LEO MAKES BOLD MOVE
Spinning off the PC division, run by personal systems group
chief Todd Bradley, would mark one of the biggest makeovers for
the company since 1999, when it spun off its measurement and
components businesses to form Agilent Technologies (A.N).
In 2001, it engineered an acquisition of PC rival Compaq,
laying the foundation for its later domination of the sector.
Some alternatives HP is exploring include hiving off its PC
business into a separate company through a spin-off or other
transaction that would likely be tax-free to U.S. shareholders.
HP expects the process to be completed within 12-18 months.
Apotheker, a former chief of European software giant SAP AG
(SAPG.DE), 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 (PG.N) among a long list of major corporate customers that
use its software to search and organize unstructured data like
emails. It said the offer values its fully diluted share
capital at 7.09 billion pounds ($11.7 billion). The British
firm's CFO, Sushovan Hussain, is on a visit to California, a
source told Reuters. [ID:nL6E7IR1CC]
"HP would be buying this as part of a refocus of the
business 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 also includes smartphones,
tablets and the WebOS operating system, pulling in about $41
billion in revenue but only about 13 percent of profit.
HP's decision to discontinue the TouchPad -- which hit the
store shelves in July with much costly fanfare -- follows poor
demand. It was discounted by $100 a month after it was launched
in a market dominated by the iPad. WebOS came with the $1.2
billion acquisition of Palm last year.
"There were also a lot of missteps, such as launching it a
month before it was ready and pricing it the same as the iPad
2," said Current Analysis' Avi Greengart. "It was a great
operating system. Everybody was pulling for it but a lot of
people weren't buying it."
Going forward, HP expects further pressure on its revenue
and cut its full-year forecast for the third straight quarter.
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.
Barclays Capital and Perella Weinberg are advising HP,
while Qatalyst Partners, Goldman Sachs, Citigroup, Merrill
Lynch, UBS and JPMorgan Chase are advising Autonomy.
(Additional reporting by Sinead Carew in New York, Bill Rigby
in Seattle, Alexei Oreskovic in San Francisco, Victoria Rowley,
Georgina Prodhan and Paul Sandle in London, Paritosh Bansal in
New York and Bill Rigby in Seattle; Writing by Edwin Chan;
Editing by Richard Chang)