BUSINESS

HP sells stake in Chinese storage and server unit for $2.3B amid tech tensions

05/21/2015 08:39 EDT | Updated 05/21/2016 05:59 EDT
NEW YORK, N.Y. - Hewlett-Packard is selling a controlling stake in its China server and storage unit, a move that comes as the Chinese government, apparently worried about U.S. cyberspying, has encouraged the use of local companies.

HP said Thursday it will sell the 51 per cent stake in the business for about $2.3 billion to Tsinghua Holdings, part of state-owned Tsinghua University. The sale will create a partnership to be called H3C.

HP said the move will accelerate growth in the country.

"HP is making a bold move to win in today's China," said CEO Meg Whitman. "Partnering with Tsinghua, one of China's most respected institutions, the new H3C will be able to drive even greater innovation for China, in China."

Analysts have noted that the Chinese government has been increasingly restrictive about international tech companies amid growing concerns that the U.S. has been spying on China remotely. Although no official restrictions have been confirmed, some big companies in China have stopped using U.S. tech services from companies like Symantec and IBM over the past few years.

Cantor Fitzgerald analyst Brian White said in a note to clients that the partnership is a positive step for HP "in light of the growing backlash against U.S. IT companies selling into China that has further accelerated sharply in recent months."

HP will maintain ownership of its other businesses in China, including business services, software, HP Helion Cloud and other operations.

"We believe the deal (with Tsinghua) will help HP become more competitive in the China market given the recent Chinese government preference to purchase technology from local vendors," said Wells Fargo analyst Maynard Um in a research note.

Gartner analyst Neil MacDonald noted the tension goes both ways, with the House Intelligence Committee issuing a report in 2012 saying Chinese telecom equipment makers Huawei Technologies Inc. and ZTE Corp. are potential security threats that Americans should avoid doing business with.

"We've seen the increased fracturing of IT along geopolitical lines (in general)," he said. "This is one way to address the ownership concerns."

H3C will have about 8,000 staffers and $3.1 billion in annual revenue. HP says the change will allow it to better serve customers in China.

Hewlett Packard Co., which is based in Palo Alto, California, is undergoing a broader restructuring as it prepares to split into two companies by Oct. 31.

The deal with Tsinghau Holdings is expected to close by the end of the year.

HP shares rose 76 cents, or 2.3 per cent, to $33.83. The stock is down almost 16 per cent since the beginning of the year.