NEWSWIRE - March 3, 1999
Topic: Divestitures and Valuation
Source: "H-P to Spin Off Its Measurement Operations,"
by David Hamilton and Scott Thurm, Wall Street Journal,
Wednesday, March 3, 1999, page A3.
Synopsis of Articles:
After the markets closed on Tuesday, March 2, Hewlett-Packard
Co. announced its intention to divide itself into two distinct
operating units. It will accomplish this by spinning off divisions
manufacturing measurement, medical, specialized electronic,
and chemical analysis equipment. These divisions collectively
comprise 16% of H-P’s overall revenues. The remaining
products, computers and printers represent the core divisions
that the firm has chosen to focus on. This action provides
evidence that it is possible for a firm to grow too large
and too diverse. While much of our analysis of firm value
dwells on growth of future cash flow or earnings, the H-P
divestiture suggests that size alone may impede growth. Corporate
insiders suggest that this will "energize the company’s
work force and sharpen its competitive instincts." AT&T
successfully divested into three separate corporations (AT&T,
NCR, and Lucent Technologies) in 1996 after coming to a similar
conclusion. While the ensuing discussion focuses on finance,
it is possible to assess the motivation for this shift from
a management or marketing perspective as well.
Questions:
1. Explain the role of growth in the basic dividend discount
model. From the perspective of the model, is more growth preferred
to less growth?
2. Explain how a corporation’s growth and subsequent
size can be an advantage in the market place. How can size
become a disadvantage? Again using a simple valuation model,
explain how H-P’s planned divestiture could add value
to its current investors.
3. From a management or marketing perspective, why would
H-P’s planned divestiture add value to shareholders?
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