Could IBM Become the Next HP?

Repositioning is going to be more productive than 'right-sizing.' The big first generation tech companies are not going to cut their way to future growth.

While massive layoffs may free up some additional capital with which to make strategic acquisitions the sustainable advantages will come from reimagining the business they are in. JL

Anita Balakrishnan reports in CNBC:

The majority of future growth (are) coming from acquiring next-generation companies, not cost-cutting. With jobs already on the chopping board it may be too little, too late. There's a small window of opportunities that is closing to make the right acquisitions in the right places, these cost-cutting initiatives are not going to move the needle.

Hewlett-Packard is in the midst of reinventing itself by spinning off its hardware and printing business from its services business. But the fast-moving pace of changing technology has led to cost-cutting within the company, including the up to 30,000 workers expected to be laid off in the latest round, CEO Meg Whitman told CNBC on Wednesday.
As other "old-line tech" companies also try to reposition themselves on the cutting edge of the enterprise space, some analysts say it's just a matter of time before others need to dramatically cut costs. After all, HP is far from the only company experiencing the "tectonic shifts" Whitman described seeing over the past five years.

Meg Whitman, Hewlett-Packard chairman plans to cut nearly 30,000 jobs and restructure the company.

Intel and Blackberry, for instance, have both restructured to focus more resources on the "Internet of things" space, and less on hardware, according to quarterly earnings results. Microsoft, Dell and Japan's Fujitsu are also mounting a transformation, analysts said.
But one particularly close analogy to HP is IBM.

"There are fewer and fewer companies that are in the hardware and services part of the enterprise business, and HP and IBM are two," said Crawford Del Prete, chief research officer at IDC.
IBM, too, has cast off businesses like servers and microelectronics over the past few years and leaders there have toed a similar line to Whitman."Parts of our services business aren't delivering sufficient productivity in the base to fund the investments we're making," Martin Schroeter, IBM's senior vice president and chief financial officer, said in a July earnings announcement. "We are making the shift in our offerings ... but we need to drive more productivity to improve the profit profile."

At the end of 2014, both companies saw declining year-on-year revenues, with HP trailing 2013 by 1 percent and IBM trailing by almost 6 percent. And within enterprise services, HP had a 7 percent revenue drop, while IBM saw global business services revenue decline 3.1 percent, partially due to currency headwinds, though its analytics and cloud services businesses saw significant growth.
It's a comparison technology analyst Daniel Ives has made before. Ives, managing director of FBR Capital Markets, told Bloomberg in November that PC revenues have been tailwinds for so-called tech mummies, but that HP and IBM may need to make a game-changing acquisition in big data, cloud computing or cybersecurity to get on the "right side of the tech food chain."

"As these companies go along in their horse and carriage in the right lane, there's been massive headway while the next-generation tech benders are passing them in Maseratis on the left," Ives told CNBC. "Hardware has become so much more commoditized, and the growth is in software, so it's a very painful shift. The jury is still out if any of them, let alone all of them, could make the transition."
IBM and HP aren't quite parallel, however, Del Prete said.
Unlike IBM, HP's enterprise push still leverages its hardware business. IBM, on the other hand, has moved more quickly and aggressively toward large-scale business strategy consulting.

"I think that IBM is, right now, more versed in solving the really complex problems that customers have that require a consultative sell," Del Prete said. "HP is more experienced modernizing apps and supporting hardware—more transactional services."
To be sure, IBM has made strides in the past year, with the acquisition of cloud company SoftLayer and partnerships with Apple and Box. The "early success" of IBM's transformation led Argus Research analyst Jim Kelleher to upgrade the company's shares last month.
Indeed, both HP and IBM believe they can tack on growth long term, the companies said.
Read More Box CEO bullish on partnerships with Apple, IBM

But Ives said he sees the majority of future growth coming from acquiring next-generation companies, not cost-cutting. With jobs already on the chopping board, Ives said it may be too little, too late.
"There's a small window of opportunities that is closing to make the right acquisitions in the right places," Ives said. "These cost-cutting initiatives are not going to move the needle. A lot of these companies continue to not face the realities of a change in IT landscape, where they find themselves looking from the outside in on the party that is happening in cloud and big data. It's going to be a painful few years ahead."