Shrinking to Grow? Why eBay, Yahoo and HP Are Re-Scaling

Organizational and financial trends can be as viral as diseases or pop culture icons.

Within a couple of weeks, eBay has announced the spin-off of PayPal, HP is reported to be calving its PC and printer division as a separate entity and in the rather frigid glow of the post-Alibaba IPO, Yahoo is being forced to ponder its potentially smaller operational future.

That Meg Whitman was the CEO of eBay and is now the CEO of HP is probably more than a random coincidence. History suggests that her East Coast roots and traditional business training have impressed upon her the importance of staying on the good side of the capital markets where the trend is your friend.

And what the markets want is for managers to leave the value creation - and more importantly, extraction - to them. They will pick the portfolio of businesses  in which they want to invest, thanks all the same: they have no interest in paying someone else to do that for them. You do what you do - design new products, create new markets, invent new technologies - they will figure out when to buy and sell the corporatized result.

There is a certain cyclicality to this: conglomeration goes in and out of favor, as does concentration on the core. There are always anomalies like Alibaba, though Chinese businesses tend to get a pass because most Europeans and Americans cant speak the language all that well in an economy where opaque socio-political rules can determine success or failure. But the basic rule is that the big guys in finance want to make the decisions when it comes to adding or subtracting.

The eBay divestiture makes strategic sense but probably happened sooner rather than later due to the pressure of a notorious greenmailer who has reinvented himself as an ostensibly more respectable private equity investor. HP troubles have long been evident, not the least due to the tragi-comic ineptitude of its board whose egotism is exceeded only by its inability to govern. This spin-off has been bruited about for years.

That these actions are happening now signals that the limits of scale for second-tier companies have been reached. The building blocks are being reassembled in new ways to prepare for whatever the future may hold. Even Larry Ellison's announced re-engineering of responsibilities may be a sign that an old era is ending, even if the shape and direction of the new one is not yet apparent. The only certainty is that finance and technology remain critical to each other's success, however that may be redefined. JL

Richard Waters comments in two articles in the Financial Times:

In the technology world, grafting growing companies on to more mature ones is always prone to instability. Investors hanker for pure growth plays. The future and the past often make for uncomfortable bedfellows
An enterprising investment banker can come up with a strategic justification for combining almost any two businesses under one corporate roof. But, in the technology world, grafting growing companies on to more mature ones is always prone to instability. The needs of the emerging business often come second to the mature one, but investors hanker for pure growth plays. The future and the past often make for uncomfortable bedfellows.

For eBay, which reversed course this week to say it would spin-off its faster-growing PayPal division, this point of instability has finally arrived. Yahoo is also moving closer to its moment of truth, with an increasingly vocal group of shareholders looking ahead to a company more narrowly focused on its US media business, even if the end-game may be still some way off.

Stripping eBay and Yahoo back to their original cores would be a seminal moment for these two survivors of the first internet era. Pared to their respective ecommerce and media businesses, both companies might get a fresh chance to reinvent themselves – though they might equally find themselves squeezed between the dominant platforms that are coming to dictate online behaviour.

Adding to the intrigue is the wholehearted vote of confidence Wall Street has just given to a new style of internet conglomerate. Alibaba appears to be breaking all the rules of disciplined expansion. But, given the massive potential of its domestic ecommerce business, investors are prepared to turn a blind eye to signs of indiscipline – and unlike eBay and Yahoo, Alibaba’s governance arrangements mean it will never have to engage in running battles with activist shareholders.

Ebay’s move signalled the final unravelling of former chief executive Meg Whitman’s strategy to graft extra services on to its auction business, and forge a deeper “community”. By communicating via Skype – which eBay had bought in 2005 – and paying with PayPal, the theory went, users would be more likely to connect, negotiate and transact, greasing the wheels of commerce.

PayPal and Skype are internet utilities whose value reaches far beyond eBay, so holding three distinct online platforms would always prove a challenge. Skype was spun off in 2011; its subsequent acquisition by Microsoft was a sign of how big internet groups covet such utilities – and a warning to PayPal and eBay of what may lie ahead, even if each has a prospective valuation of more than $30bn.

The stresses causing John Donahoe, chief executive, to unbundle eBay are also starting to weigh on Marissa Mayer, his counterpart at Yahoo, though her calculations are of a different nature. Thanks to the foresight of co-founder and former CEO Jerry Yang, Ms Mayer has come into an enviable inheritance. It has a 16.3 per cent stake in Alibaba and 35.5 per cent of Yahoo Japan – and the group’s cash pile of about $8.5bn (nearly $6bn of it from selling shares in Alibaba’s recent IPO) is itself worth more than the value most analysts ascribe to Yahoo’s underlying business. Unpicking these assets in a tax-efficient way is the main route to enriching Yahoo shareholders.

How this will play out is likely to be determined far from Yahoo’s headquarters. Jack Ma, boss of Alibaba, has made no secret of his desire to take back Yahoo’s stake, although this is not high on his list of priorities, according to one person familiar with the company. SoftBank, which controls Yahoo Japan, would be hard-pressed to move on Yahoo without Mr Ma’s involvement, because an outright acquisition would push his own stake in Alibaba to close to 50 per cent. Ms Mayer, meanwhile, cannot start selling her remaining Alibaba shares until a year after the IPO, putting off any immediate need for a decision.

To judge by comments from activist investor Starboard Value, however, Ms Mayer’s plans for her cash pile are starting to make some shareholders nervous. The promise to distribute half of the Alibaba proceeds would still leave her with $5.5bn to spend on acquisitions – a field in which Yahoo has not excelled in the past. The $1.1bn purchase of Tumblr last year left investors underwhelmed.
The 27-month honeymoon period Ms Mayer enjoyed at CEO ahead of the Alibaba IPO may look like a missed opportunity to reposition Yahoo’s core business more aggressively. With activists nipping at her heels, the end game may soon begin.

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Hewlett-Packard is to spin off its PC and printer arm from its software and corporate hardware business, in a move that will split the struggling US technology conglomerate in two.

The move marks a reversal for Meg Whitman, the former eBay boss who was brought in three years ago to turn round the then ailing technology conglomerate.

One of her first acts at the company was to ditch a proposal to shed the PC division made by her predecessor, Léo Apotheker, though she has since left the option open for more radical actions to deal with HP’s problems.

Ms Whitman will be chief executive of Hewlett-Packard Enterprise, which will be home to its software and corporate hardware business. Dion Weisler, an executive in HP’s printing and personal systems business, will become chief executive of the unit. Patricia Russo, an HP director and former chief executive of Alcatel-Lucent, will become chairman of HP Enterprise.

The move would end a controversial 13-year chapter in HP’s history that began when Carly Fiorina, then chief executive, agreed to buy Compaq Computer, one of the largest US PC makers. Dissent from some members of the HP founders’ families almost led to a rejection of the deal by shareholders.
Ms Fiorina was plagued by years of integration problems at the PC division, though she and other HP executives argued over the years that making PCs gave HP an advantage in its industry-standard server business, which relies on similar technology. Ms Whitman has succeeded in stabilising HP’s finances and revived flagging shareholder confidence by stringent cost-cutting. However, revenues have contracted and she has struggled to bolster sagging competitiveness in all four of the main business divisions.
Based on last year’s revenues, both parts of HP would have ranked among the 50 largest US companies, according to the annual ranking produced by Fortune.

HP’s PC and printer businesses produced revenues of $55.9bn in its last financial year, almost identical to the combined $55.7bn of its enterprise computing, services and software divisions.

The spin-off plan comes a week after eBay unveiled a similar bifurcation by spinning off its PayPal division to shareholders.

Both companies have faced pressure to improve their bottom lines and had previously argued for keeping their full range of businesses intact, before eventually bowing to a split.
Ms Whitman’s decision to keep the PC division three years ago was seen at the time as the most practical response to a crisis at the company following Mr Apotheker’s botched attempt to reshape HP’s portfolio of businesses.
His announcement that he was considering spinning off PCs was seen on Wall Street as potentially disastrous for the business, since uncertainty about its future threatened to dent sales.

Mr Apotheker also failed with a simultaneous attempt to push HP deeper into software, paying $11bn for UK software company Autonomy. HP later wrote down $8.8bn of the purchase price.

Last quarter, HP’s PC division ended two years of falling shipments, but growth in the business was markedly slower than those of rivals Dell and Lenovo, the Chinese group that recently overtook HP as the world’s largest PC seller by volume.

In May, the company said it would axe up to 16,000 jobs as part of its turnround, bringing the total number of forecast job cuts to as many as 50,000.