Understanding the HP split
HP is splitting itself into "enterprise" and "consumer" companies. Why the split? Isn't the goal of big companies to get bigger? Well, no, that's just the cynical view of companies. The actual goal is to deliver value to stockholders. Splitting delivers value in two ways. The first is that it "exposes" the underlying business. The second is that it avoids dis-economies of scale.Conglomerates like GE (General Electric) have a problem. While some businesses do well and grow, other businesses fail and shrink. You can't buy stock in the individual components of GE's business you think are growing, you have to take all or none. GE Medical has been growing fast, but you can't invest in it individually.
Thus, big companies frequently spin out such companies, either to divest themselves of the dead weight that isn't growing, or conversely, to let a growing part of these business to fly free without being held back by the deadweight. The fast growing parts of a business aren't inherently better. They tend to also be riskier, meaning that while their stock may surge, they have equal probability of going bankrupt soon.
We can see how this philosophy worked in the case of HP's Continue reading