Bangalore: Hewlett-Packard Co. (HP), the world’s largest maker of personal computers, might change its ownership in Bangalore’s Mphasis Ltd as part of reviving the US firm that has struggled to transition into a services-driven business after a string of failed acquisitions.
add_main_imageHP has a 60% holding in Mphasis, which operates as a separate India-listed entity but derives more than half of its business from the Palo Alto, California-based company. Mphasis has been trying to reduce this dependence on HP as orders decline from the struggling parent company.
HP acquired Mphasis in 2008 when it purchased the Bangalore company’s former parent Electronic Data Systems Corp. (EDS).NextMAds
“The ownership structure at Mphasis could change over the next couple of years. It probably needs to as it drives a lot of confusion in the market over this,” Mike Nefkens, executive vice-president, HP Enterprise Services, said in an interview during a visit to Bangalore earlier this week.
“We either need to be in or we need to be out and have a partner arrangement with them. They will be partners of ours, whether they are part of the HP family or not,” he said.
Both HP and Mphasis will benefit if the former decides to sell its stake in the Indian unit, said an analyst at a domestic brokerage firm but who didn’t want to be named.
“For HP, it will free up cash for other investments if it gets decent valuations from private equity firms, while for Mphasis, which has been hurt by declining quarterly revenues from HP, it presents an opportunity to be bought and sold by PE players to big overseas players trying to make inroads into India,” said the analyst.
Ever since Meg Whitman took over as its chief executive in September 2011, HP has been trying to strengthen its services business as consumers increasingly opt for tablet devices and smartphones over personal computers. Global desktop and laptop shipments declined by 14% in the March quarter, technology researcher IDC said last week.
HP’s services business contributed about $35 billion to its total revenue of $120 billion in 2012, but this was a 2.2% decline over the previous year.sixthMAds
“What’s happened over the last four-five years has been very tough on our clients and employees,” said Nefkens. “We’re really focused now on revitalizing the business. Services will get back to growth—we’re looking at 2015.”
HP, he said, is seeing strong demand for its services business in Europe, especially from banking and financial services companies in troubled economies such as Spain that are looking to cut costs by outsourcing work to technology companies elsewhere.
The respite comes after HP last year had to write off the value of its two big acquisitions—EDS that it bought for $13.2 billion and Autonomy Corp. that it acquired in 2011 for $12 billion—as it struggled with its thrust on services.
“HP bought EDS and never really understood the services business to the extent that they needed to and it’s taken them nearly four-five years to really understand the value and understand the drivers and services,” said Nefkens. “We really made a huge error on how we integrated EDS into the HP world and, as a result, it cost us two-three years of momentum.”
HP also struggled with frequent changes at its top management. Then chief executive officer (CEO) and chairman Mark Hurd had to resign in 2010 over allegations of sexual harassment. He was replaced by Leo Apotheker as CEO, but he lasted less than one year before Whitman was given charge.
After she took over, Whitman appointed Nefkens as acting head of the company’s enterprise services business in August 2012, replacing John Visentin. And earlier this month, Ray Lane stepped down as board chairman.
As part of its transition efforts now, HP is looking to shift away from traditional low-margin IT services projects and betting heavily on new areas such as mobility, cloud computing and big data.
“We’re really looking to help our clients move from more of the traditional space into these areas, so most of our investment is going into these areas,” said Nefkens.
Experts say HP has a long way to go before it can catch up with large rivals such as International Business Machines Corp. (IBM) and Accenture Plc. in consulting services. “HP has been complacent over the past few years in enterprise services,” said Frederic Giron, vice-president and principal analyst at Forrester Research Inc. “They are in the middle now and that’s a difficult position to be in.”
“To measure the HP advancement in the mean term, we need to see stability in strategy and leadership, increasing cooperation across the units, signal of financial recovery and signals of fast growth in the most innovative offerings (cloud, mobile, analytics) while with a limited absolute impact on overall financials,” said Claudio Da Rold, vice-president at technology researcher Gartner Inc., in an email response.
Phil Fersht, founder of outsourcing advisory firm HfS Research, said: “While HP’s leadership is desperate to calm down the panic and reassure the industry, it remains committed to IT Services and BPO (business process outsourcing), the underlying issue is that firm is struggling to win deals against the likes of Accenture and IBM—it struggles to undercut on price and the firm’s brand is suffering after five years of poor performance (ever since the takeover of EDS). Finding competitive differentiation proof points is very, very hard in today’s cut throat IT services market.”
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