HP split can be a long-term positive for MphasiS

Reflecting the new business mantra of specialisation, Hewlett–Packard (HP) has decided to split its business in two, separating its personal-computer and printer businesses from its corporate hardware and services operation. This would result in two US listed companies each with revenue of $50 billion.

The move will also result in further downsizing; adding 5,000 employees to the existing list of 29,000 identified for lay-offs. The 34,000 layoffs account for 10.24% of its global workforce of 331,800.

But what will be the impact of a split in HP on its Indian ventures? HP’s India operations (unlisted) are largely in the research and development (R&D) space and is likely to be least impacted. However, HP also holds a 60% stake in MphasiS, which reacted negatively to the news falling by nearly 3.5% in intra-day deals on Tuesday. MphasiS believes that it’s too early to comment on the development, and rightly so, as was pointed out in this article in Business Standard that the impact in India will only be felt after 12-15 months.

As regards MphasiS, HP is not only a stakeholder, but is also a key driver of business for the company. As per MphasiS’ first quarter results presentation, HP not only gives Mphasis business, but also sources business for the company, which is represented as ‘HP Channel’ sales that accounted for 36% of all revenue of MphasiS in June 2014 quarter, down from 41% in June 2013 quarter. Of the 110 clients who account for more than $1 million of revenue, 53 have been acquired by the HP Channel.

Focus area

Beyond doubt that contribution of HP and its channels is significant on MphasiS’ business, but how will these be impacted going forward? To answer the question we need to look at the focus area for the parent company.

The recently announced split will create two companies – one that will be handling the PC and printer business (will be known as HP Inc.) and the second will be selling services and hardware such as servers and data-storage systems to corporations (HP Enterprise), along with software and financial services.

In a conference call after the announcement, HP’s management said that HP Enterprise will be its growth engine. Chief Executive Meg Whitman said the breakup would make the new company more nimble and enable it to invest in products and acquisitions to better address its markets.

HP’s management had planned to hive-off the PC business in 2011, but decided to hold on to it on shareholder pressure. The decision however, led to the departure of its then Chief Executive Leo Apotheker.

According to a Wall Street Journal article, HP was in talks to merge with data-storage equipment maker EMC Corp.; a deal that would have created an industry giant with a market value of roughly $130 billion. Although the talks recently ended, the separation could pave the way for HP’s corporate hardware and services business to ultimately be combined with EMC.

Though it might take time, MphasiS might benefit from the increased focus of the parent in services business. In the current fiscal however, it has been reported that business from HP channel sales might come down by $100 million, due to HP’s failure to bag some important renewal based contracts.