What will HP do with its PC business?

Hewlett-Packard said today that it is spinning off its PC unit as it tries to escape the financial throes of the increasingly low-margin PC business.

On top of confirming it is in talks to acquire Autonomy and essentially shuttering its WebOS operations, HP said its board of directors has authorized the exploration of strategic alternatives for its PC business, the Personal Systems Group (PSG).

"HP will consider a broad range of options that may include, among others, a full or partial separation of PSG from HP through a spin-off or other transaction," the company said. HP expects that the process could be completed within approximately 12-18 months.

The sale of its PC business would be high irony as it purchased Compaq in 2001 for a whopping $25 billion in a bid to become the largest PC company in the world, which it did. HP's PC business generated revenues of $41 billion in fiscal year 2010.

The problem is that profit margins on PC hardware are low. And to make matters worse, the market is shifting to to new products like the iPad. "Consumers are changing the use of the PC. The tablet's effect is real," said Leo Apotheker, HP president and chief executive officer, during the earnings conference call today.

If HP does unload its PC business, it would be following the lead of IBM, which jettisoned its PC business in 2005, selling it to Lenovo.

At the very least, a few options exist for HP.

IBM style: China's Lenovo Group acquired IBM's PC division, instantly creating the world's third-largest PC maker. Under the deal, IBM held on to an 18.9 percent stake in Lenovo, which paid $1.25 billion for the IBM PC unit and assumed debt, which brought the total cost to $1.75 billion.

Motorola style: Motorola announced in 2003 that its semiconductor division would be divested to create a new company, Freescale, which then did an IPO in July 2004.

NEC-Lenovo style: Something akin to Lenovo and NEC. In July of this year, the two companies announced the NEC Lenovo Japan Group, a joint venture that became Japan's largest PC provider, holding about 25 percent of Japan's PC market.

Private equity: Sells PC business to a group of investors who take it private.

Bob O'Donnell, an IDC analyst, said today in a phone interview that he believes a Motorola-like deal seems viable.

"I think the most likely is Freescale, where they become an independent, standalone entity," O'Donnell said. "It's not out of the realm of possibility that another vendor purchases the PSG (PC) business. That's a long shot, though. What's not clear is what happens to the printer division," he said.