William Hewlett and David Packard’s iconic 75-year-old Palo Alto company is dividing into a PC-printer business and an operation that sells business hardware, software and services.
San Jose-based eBay Inc. is peeling off its PayPal electronic payments unit.
Symantec Corp., based in Mountain View, is dividing its security software unit from its data storage software business.
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| HP, eBay and Symantec are all splitting up into smaller, more-focused companies in order to compete with younger competitors. |
An activist shareholder is calling for EMC Corp. to give up control of Palo Alto-based VMware Corp.
And an analyst has suggested that it’s also time for San Jose-based Cisco Systems Inc., to separate its businesses.
“Developments speak to the growing pressures/growth challenges that mature technology stalwarts ... are facing in today’s evolving technology landscape,” Daniel Ives, an analyst at FBR Capital Markets, said in a report.
Rapid adoption of mobile, the cloud and Big Data analysis are causing an unprecedented wave of separations at some of the most powerful companies in Silicon Valley and the world.
Collectively, the companies that have announced breakups — or are being pressed to take drastic action — employ more than 30,000 people in Silicon Valley.
The 2014 wave of breakups will ripple through Silicon Valley’s workforce and its commercial real estate scene — as well as global capital markets. In one sense, it reflects a healthy economy, with even lumbering giants like Hewlett-Packard Co. showing enough agility to attempt massive change. In another sense, it poses the ultimate challenge for the corporations that form the backbone of the tech economy: How to survive over long periods of time in the face of tectonic technological change.
Along the way, rest assured of one thing: The executives who engineer Silicon Valley’s splits are likely to walk away far wealthier than they would have otherwise — and the bankers who execute the divorces are in for a fee bonanza.
The HP Way
Hewlett-Packard, which employs 5,000 workers in Silicon Valley, is so representative of Silicon Valley’s business culture that the garage where it was born is a state historical landmark, so it embodies something of the other companies on the rocks.
“All of them are facing declines in their main markets and the central question is, how do they get growth?” said Prof. Charles O’Reilly of Stanford’s Graduate School of Business.
HP answered that question successfully several times in its 75-year history, shifting from instruments to minicomputers and then on to printers and PCs.
This came from an organization in which each division was responsible for both the mature products and coming up with new ideas in growth areas. “There was an immense amount of innovation,” O’Reilly said.
All of that ended under CEOs Carly Fiorina and Mark Hurd, who tightened up the organization and drove costs down — in part by strangling funding of research and development. While that helped them to excel at PCs and printers, it blinded them to the big shifts to tablets, smartphones and the cloud.
“Now they are basically a decade behind on key innovations and have lost the engine that allowed them to remain competitive,” O’Reilly said.
If HP’s plan fails and this icon of the Valley vanishes, chances are the emotional impact will be greater than the economic toll. That’s because its rivals are similarly heavily invested in the Bay Area, including Dell, IBM and other breakup candidates like EMC and Cisco.
Unlocking ‘shareholder value’
Angelo Zino, an analyst who follows HP and EMC at S&P Capital IQ, says his firm has strong “buy” recommendations on both stocks because they are undervalued and big companies with slow growth are looking for strategic ways to extract shareholder value.
That can mean breaking up the company, selling off assets or merging with another company, something that the Wall Street Journal reported that EMC and HP each discussed and rejected.
Those talks came over the summer after EMC came under breakup pressure from activist shareholder Elliott Management Corp., one of a group of such investment protagonists that have reportedly built up a collective war chest of about $111 billion.
Elliott wants EMC to break up its so-called “federation” of three businesses — EMC’s core storage and security business, virtualization pioneer VMware and cloud computing software developer Pivotal.
CEO Joe Tucci doesn’t like the idea, telling Bloomberg, “If you break it up, you just weaken every part. So I just think it’s better together.”
If EMC, which has 2,900 employees in Silicon Valley, fails, it could have a net positive impact on Silicon Valley. That’s because the businesses of its two forward-looking tech units, VMware and Pivotal, are based here and presumably could grow, with or without EMC. Moreover, many of the upstarts challenging EMC’s core business, like Pure Storage and Nimble Storage, would benefit.
Cisco situation
Cisco, the region’s second-biggest tech employer with 15,633 local workers, doesn’t have an activist angling at it, yet, but at least one analyst thinks it should.
Mark Sue of RBC Capital Markets, after the HP news broke, said the San Jose company could break off what he calls “Cisco Solutions” — its mature networking equipment business — from a riskier innovation business he calls “Cisco Cloud.”
“Cisco Cloud could pursue bold deals to acquire early stage tech companies and invest in R&D to drive growth from new technologies and solutions without concerns about cannibalizing Cisco’s legacy platforms,” he wrote.
But another analyst, Amitabh Passi of UBS, said a Cisco breakup doesn’t make sense for much the same reason Tucci has to not want to bust EMC apart.
“Sure, different businesses have different growth profiles, but we don’t see a compelling case to break apart the company when there are cross-selling and synergistic advantages,” he said.
Stanford professor O’Reilly, though, said Cisco may need to do something to jump start innovation. It tried something in 2007 it called “boards and councils” which tasked leaders of business units with generating new ideas that could become $1 billion businesses. That led to the push into consumer lines like the once-popular — but doomed — Flip camera. The idea was tossed in 2011.
“They screwed that one up,” O’Reilly said.
As with EMC, bad news for Cisco could be good news for others in the Valley, like its software-defined networking challengers PLUMgrid in Sunnyvale and Big Switch Networks in Santa Clara.
Undoing EBay’s PayPal acquisition
EBay, with 4,700 workers in San Jose, is another company that missed opportunities to innovate with its PayPal unit, according to one of the payments company’s original executives, Keith Rabois.
“PayPal has missed the last decade in the United States,” he said on Bloomberg TV. “In the United States, there has been an incredible innovation in payments over the last decade and PayPal hasn’t participated in any of it, whether it’s Square or Stripe, Braintree — which they had to acquire — Bitcoin, and the derivative consequences of Bitcoin.”
Rabois and other members of the “PayPal mafia” applauded eBay CEO John Donahoe’s decision late last month to do the spinoff that activist investor Carl Icahn had pushed for earlier in the year.
It was a move that caught many by surprise because Icahn had ended his proxy fight months before.
“We put a list of New Year predictions together every year and eBay spinning off PayPal was on there for a few years,” said Scott Kessler of S&P Capital IQ. “If you separate these businesses, they will become more focused and more innovative. You probably create better opportunities to create more value.”
EBay’s marketplace business is facing a potential challenge from Alibaba Group Holding Ltd., its much bigger Chinese counterpart, which just raised $25 billion in a historic IPO. That means that shrinkage at eBay may not send talent or resources directly to a local competitor.
But if PayPal falters, chances are that electronics payments groups at Google Inc., Apple Inc., Square or another local payment tech startup will arise to supplant it.
Symantec’s solution
Symantec Corp., which employs about 3,000 in Mountain View, is the latest big Valley tech name to announce a breakup.
It unveiled its plans on Thursday to separate its legacy data security business from the data storage software business it bought when it paid $13.5 billion for Veritas Software in 2004.
Slumping PC sales have cut the need for Symantec’s antivirus software but, as with Cisco, analysts are divided on the wisdom of the move.
Richard Williams of Summit Research in a note to shareholders written before the split was announced said he thinks it is a good idea: “In this case both Symantec (the security software company) and the erstwhile Veritas were viable businesses on their own.”
Also writing before the announcement, Kevin Buttigieg of MKM Partners wasn’t so sure, saying the move won’t help growth and operating margins and it’s not clear who the buyers of either unit might be.
“A break-up could be potentially very disruptive,” he wrote. “Following the acquisition of the storage business with Veritas Software, Symantec missed several quarters while consolidating back- and front-office functions in an effort to drive greater efficiencies.”
That kind of reasoning perks the ears of shareholders and activist investors circling Silicon Valley companies. With the split-ups of HP and eBay already announced, and the potential for more, 2014 is poised to become a signal year in the region’s business history.
And while the gyrations that the companies — and their employees — go through may cause discomfort, think of it as growing pains for Silicon Valley.
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