HP to offer first look at spinoff testing company

The test and measurement organization--which makes semiconductor testing devices and other products--lies at the heart of HP's history, but it's less known to consumers than its computer and printer business.

Earlier this year, the Silicon Valley giant announced that it would spin off the division into a separate company in an effort to streamline operations. An initial public stock offering may take place toward the end of the year.

Ned Barnholt, who has been at HP since 1966 and who will remain chief executive of the test and measurement division, will disclose the name in a press conference tomorrow.

While the test and measurement organization, called "NewCo" for the time being, accounts for only 20 percent of the company's revenues, that's still a lot of money. In fiscal 1998, the organization had revenues of $7.6 billion, HP said, which could make it one of the largest companies to hold an IPO to date.

Landor Associates, the company HP hired to pick the new name and figure out an image for NewCo, declined to share specifics of the naming process.

Landor, based in San Francisco, has helped many firms with their corporate images, including Netscape, Xerox, Microsoft, Compaq Computer, and PlanetRX, said spokesman David Redhill.

NewCo makes and sells a wide variety of products, including electronics testing equipment, portable heart defibrillators for airplanes, chemical testing devices, devices to test chips, and high-speed networking components.

Poised for more growth
NewCo's revenues should continue to shine, driven by a rebounding economy in Asia. As semiconductors get increasingly advanced, the test equipment needed to design and test them become increasingly important, and NewCo is a major player in that equipment.

"Improvement in Asia is especially critical to [NewCo], which historically does about 25 to 30 percent of its business there," Barnholt told financial analysts last month.

For the quarter ending in April, NewCo revenues jumped 20 percent in Japan and 32 percent in the Asia-Pacific region, he said.

In addition, Barnholt said NewCo's profitability has improved with cost-cutting measures last year. By closing a chip facility and selling unprofitable businesses in 1998, NewCo's employee count dropped by 3,700, or about 8 percent, he said.

However, the delay of the Rambus memory technology has hurt NewCo, he said. The new architecture is backed by Intel, Dell Computer, and other computing heavyweights, but building Rambus memory chips has proved to be more expensive than expected.

NewCo is focusing on testing equipment for Rambus, but "demand has not yet ramped as quickly as hoped," Barnholt said.

Overall, though, NewCo is positioned well. "The real growth business for them is in microprocessor [testing]," said Joe Ferlazzo of Technology Business Research. Ironically, though, that market has struggled financially, and that's where HP has been hit hardest, he said.

The spinoff should liberate NewCo from the rest of HP, which wasn't giving NewCo "the attention or resources it should have been getting," Ferlazzo said. "I think this will free them to be much more aggressive."

Semiconductor test revenues is a good opportunity, said Bill McClean of IC Insights. "As the feature size [of chips] gets smaller, the testing of these components is getting more and more difficult," he said, so test equipment "is going to be receiving more and more attention in the industry."

Because chips have become so complex, with millions of tiny circuits, "even two years ago, it was literally impossible to test every combination of every transistor," McClean said. But testing is important so companies such as Intel aren't afflicted with disasters such as the calculation bug that hit its first Pentium chips.

In the long term, revenues from medical equipment have been declining, while revenues from chemical testing equipment haven't been growing, Ferlazzo added.

HP initially said public trading of NewCo stock likely would begin in September or October, but in late May the firm said mid-November to January 2000 was more likely. A total of 15 percent of the company's stock will be traded publicly, and the remaining 85 percent will stay with current HP shareholders.

In fiscal 1998, HP's computing and imaging had 83 percent of HP's revenue but 64 percent of its employees. That means that the test and measurement side of the house generated less revenue per employee.

In the spinoff, the test and measurement organization will get more than 90 of HP's 600 facilities in 130 countries, outgoing chief executive Lew Platt has said.