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2HRS2GO: Easy to see why HP and Agilent didn&#039&#039t fit

Now you're seeing another reason why Hewlett-Packard (NYSE: HWP) wanted to spin Agilent (NYSE: A) into a separate business.

Shares of Agilent rose this morning after the company announced 450 job cuts in its medical solutions unit.

HP always justified its division from a strategic point of view. Executives said the companies needed to focus themselves, so the core brand shed the large, but relatively unrelated, testing, analysis and medical equipment business, as well as the semiconductor components unit.

The move made sense. HP had grown into a large, confusing morass of semi-autonomous operations, so why not separate them? Protein analysis (to cite one product announced today by Agilent) certainly has little to do with laser printers or Unix servers.

But focus never seemed like the entire rationale for the split, because the company could have gone farther if its only goal was creating lean, targeted machines. In fact, some analysts had hoped the company would split not into two business but three completely separate units.

After all, printers in some ways are devices on a par with monitors and disk drives. They're very important parts of networks, but hardly can be described as core systems.

So why did HP hang onto the printer business while shedding Agilent? One reason is image -- at least on a consumer level, the HP name is probably associated with printers more than anything else. Printers also give HP the chance to write propaganda about "a powerful service delivery platform that will save you time and worry, and ... reinvent the way you do business."

But the primary factor for keeping printers and ditching Agilent stemmed from that most fundamental motivation of all: the bottom line.

The printing business makes money. Bundles of it. In the the company's fiscal second quarter ended April 30, Imaging and Printing was HP's most profitable business with operating margins of 13.53 percent, while maintaining year-over-year revenue growth of 13 percent.

To be fair, it should be noted that much of Agilent also posted reasonably strong numbers in the second quarter. But the company last month announced third quarter results would miss expectations because its test-and-measurement business is hurt by lack of capacity and parts shortages. And the healthcare business, a disappointment for awhile now, continues to lag -- Agilent predicted a third quarter loss of at least $30 million for HealthCare Solutions.

In fact, this round of job cuts comes solely in the healthcare unit, which tells you all need to know about how poorly that segment appears compared to the rest of Agilent. Yet in today's announcement, you also can see how Agilent simply wouldn't have let HP grow the way executives would prefer.

Agilent is a manufacturing business. You know, the sort of thing that investors in general seem to dislike these days, and not without reason.

Although HP is hanging onto a substantial hardware business with its computers and printers, the company really wants to become an uber-IT company like IBM. Services, S-O-L-U-T-I-O-N-S, oh, and by the way, we've got some great high-end servers over here.

Hardware margins tend to be mediocre; Agilent reported operating profit of 9.19 percent in the second quarter. And you're always held hostage by your component suppliers.

Several companies that make equipment related to the communications field have reported a tight market for parts. If you have the clout to command first dibs on everything, you might be able to get what you need, but at higher-than-normal prices. If you don't have the clout (or if the parts simply aren't available), you've got more serious problems.

Agilent is suffering from that right now, though the company insists it can meet its fourth quarter targets. Hopefully the company can make it, but either way, you can see why HP decided to send Agilent on its own: the business, though it might be a good one in toto, can't be counted on to reliably, consistently boost HP's revenue and profit growth at the levels HP investors demand. The dynamics prevent it. 22GO>