HP's decision to merge its PC and printer divisions is hardly a profit-laden silver bullet, say analysts.
PALO ALTO, Calif. (TheStreet) -- HP's(:HPQ) decision to merge its PC and printer divisions may be a bold move, but it's hardly a profit-laden silver bullet, analysts said Wednesday.
HP, which needs to combat falling hardware sales, expects the merger to improve its go-to-market strategy, branding, supply chain and customer support. The realignment will also provide opportunities for cost savings, according to the Palo Alto, Calif.-based company.
The new division will be led by HP PC chief Todd Bradley, the executive vice president of Personal Systems Group since 2005.
Analysts, however, warn that the merger's payback could be limited. "While we believe there is room for cost synergies, we are not sure of the strategic benefits as we believe each division has a unique business model," explained Shaw Wu, an analyst at Sterne Agee, in a recent note. The product cycle for PCs and printers, he added, is shorter than that for printers, and customers typically buy the products at different times.
Wu acknowledged that the merger could potentially cut general and administrative expenses and sales and marketing costs for the divisions, but highlighted key differences between the two businesses.
"PCs are end-user devices that are sold directly to businesses and consumers, and this typically generates the bulk of the revenue and profits," he noted. "For printers, it is quite different, where a large part of the profits are based on selling consumables, including toner and ink cartridges, versus the printer hardware itself."
Credit Suisse analyst Kulbinder Garcha said that he would have liked more specific details about the merger from HP CEO Meg Whitman.
"While the company's reorganization is meant to streamline operations, help branding, and improve efficiency, no real targets have been set," he wrote. "Given this is the new CEO's first large reorganization, we would have expected some cost save targets which could protect the margin profile while the company continues to reinvest."
Confronted with a weakening PC market, HP's hardware sales certainly have been under pressure. Revenue from PSG, for example, tumbled 15% year-over-year during the company's recent fiscal first quarter, while IPG Imaging and Printing Group revenue dipped 7%.
Investors were underwhelmed by HP's merger announcement, pushing the company's stock down 57 cents, or 2.38%, to $23.41 on Wednesday. The Nasdaq was up 0.39% in afternoon action.
HP, of course, has been down this road before, opting to merge its PC and printer decisions under former CEO Carly Fiorina. The company, however, subsequently reversed the move.
"While Ms. Whitman should be commended for making a very difficult decision that will likely improve Hewlett-Packard's competitive position longer term, we would not be surprised if there were some short-term pitfalls during the transition," explained Brian Alexander, an analyst at Raymond James. "We are concerned that Todd Bradley's hard-driving operating style could create cultural challenges within IPG and perhaps lead to an exodus of talent."
Alexander also warns that the printer division needs much more R&D investment in relation to the PC business, a key issue that Bradley will have to address.
PSG accounted for just under a third of HP's revenue during its fiscal first quarter. IPG made up 21% of the firm's total sales.
--Written by James Rogers in New York.
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