Merrill Lynch's technology research analyst Steven Milunovich is urging Hewlett-Packard to split into two divisions, arguing that separation makes sense -- whether computer margins recover or not.

In a research report distributed ahead of Tuesday's HP analyst meeting, Milunovich recommended the company be split by product segments into printers and computers or by market into consumer and enterprise.

"We suggest the printer/consumer side keep the HP brand name. Consumers, which as an amalgam of brands already is likely to make acquisitions, could use a fresh identity," Milunovich wrote in the report co-authored by Merrill analyst Richard Farmer.

Milunovich, who created a stir last October when he called on Sun Microsystems to cut its focus or be acquired, said the HP/Compaq merger was "not a sufficient move to make computers competitive."

"HP had major holes in PC servers and storage that required filling. Our guess is that HP would be losing lots of money rather than being modestly profitable in computing if it had not merged with Compaq. But what's done is done. The second and equally important step is to break up the company," the analyst argued.

"Our strong intuition is that shareholders will benefit by HP eventually breaking up. Unlike IBM, HP has distinct businesses" that could perform better if operated separately.

"Management, however, shows no interest in breaking up. No doubt it would say there are synergies, especially in distribution, between PCs and printers and even printers and enterprise computing. But, as much as the company would argue that its divisions are separately run and optimized, we don't fully believe it," Milunovich said.

"We believe management and the board needs to prepare for splitting up the company in some form. The cultures and the business models could be optimized as concerns about how the other side of the house is affected are no longer relevant."

The report acknowledged that breaking up an $80 billion company was a "complicated problem," but suggested printers could be spun off successfully. "Yes, there are some synergies between printing and computing in bundling and distribution. But two separate organizations could work together if necessary."

"The most difficult part of this split might be dividing PCs into two new companies. Could the consumer and corporate PC segments be separated? Perhaps one side could take manufacturing responsibility and supply the product to the other side. Perhaps HP should exit the corporate PC business or at least look to reduce its risk," Milunovich said.

"The point is that shareholder value is likely to be created through increased focus."

HP was not immediately available to comment.


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