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Hewlett Packard Enterprise bigwig chuckles at talk of buyout talks

Trimmed down biz 'possible' target for Dell, Cisco, Lenovo, Huawei and private equity

The number two at Hewlett Packard Enterprise has brushed off talk the slimmed-down organisation could be vulnerable to a takeover, as the company is again linked with “possible” buyers - this time around Huawei, Lenovo, Oracle, Cisco and, er, Dell.

Antonio Neri, executive veep and general manager for the Enterprise Group, told us the $28bn annual sales figures at HPE puts its on a par with “3M, Nike and McDonalds” and reckoned this placed the firm out of the reaches of most buyers.

Rivals Dell, Cisco and IBM are now much bulkier business but the HPE exec claimed his firm was “not sub-scale” and “didn’t think” HPE was ripe for a takeover.

HPE’s market cap is currently hovering around the $39bn mark. “You never know what [will] happen out there but we don’t think we are exposed.

“This company’s value is still very high for anybody to consider something like that, and I think in the end we believe our strategy will work, I think we can create tremendous shareholder value.”

In the past five years HP has shrunk from a $110bn-plus business to one that is 75 per cent smaller after a series of dramatic actions; the PC and print biz was spun out into a separate firm, HP Inc.

The remaining HPE then sold its stake in Indian outsourcer Mphasis; the Enterprise Services and Software divisions were also deemed surplus to requirements and those respective deals will be completed by March and late summer. Organic sales have also declined over that period.

Dismantling the organisation led to industry talk that HPE was now more of a bite-sized chunk for private equity suitors, with an offer of $40m rumoured to be on the table in July. Wall Street analysts have again questioned if the company will be bought.

Analyst Bernstein said this week HPE Remain Co - the Enterprise Group (servers, storage, networking, Technology Services, hybrid IT, etc) and Financial Services - has an “implied market cap” of an estimated $23bn and an enterprise value of $13bn once the spin-offs are completed.

Senior analyst Toni Sacconaghi said that HP is “potentially a reasonably-sized bite for a takeout”.

“We note that CEO Whitman has now been at HP for six years, just turned 60, and has a long held interest in politics. A sale of all of HPE could present an attractive final coup,” he wrote in a research note.

Sacconaghi claimed potential buyers could include Chinese giant Huawei, which has struggled to make a dent in the US market, Lenovo, Tsinghua, Oracle, Cisco and Dell but “all appear to have stumbling blocks”.

But Lenovo is still digesting the IBM’s x86 server and Motorola buys; and any deals with other Asian firms would likely result in intense scrutiny from the Committee on Foreign Investment in the US (CFIUS). Tsinghua already has a joint venture with HPE, H3C and currently buys the firm’s servers.

Dell has taken on a huge debt pile after hoovering up EMC. Oracle already made a mess of Sun’s hardware business, it likely doesn’t have the appetite for another mammoth integration and is attempting to shift all its business to the cloud.

A Cisco buy may make more sense, said Bernstein, given the server and storage portfolio overlaps or rather lack of them, but the combined market share for networking kit would possibly lead to anti-trust issues.

“On net, we believe a private equity buyout might be more likely: though the deal size ($18bn excluding HPFS net debt) would be high, we see the transaction as both doable and value creating,” Sacconaghi added.

KKR acquired First Data Corp for $29.2bn and Silver Lake did a deal with Dell for $28bn so a buy of HPE would be “large by historical standards, but by no means unprecedented”.

Bernstein said a buyout was just a “possibility, there are no high-probability buyers” and with HPE’s recent spate of tax-free spin-offs of ES and Software, “the tax-situation could be tricky”.

Neri told us the decision to scale back HPE would benefit it in the current environment.

“I would say smaller in this case gives you focus, sometimes bigger is a good thing,” he told us, “When there is disruption it is hard for a large company to move at the speed of the disruption”.

“Sometimes people say scale gives you better cost, actually it’s not [true]. We have proven through the HPI separation, that being independent and having more aggressive approaches in the way you do things gives you a better cost structure.

He said that “for the most part” the major divestments were over and done. “From the bigger company perspective I’d say yes, but as you know this market is moving lightening fast, you have to constantly lean in, figure out what changes you need to make”. ®

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