Hardware, Software, And A Hedge Fund's Gamble

When activist investor Elliott Management disclosed a $1.5 billion stake in Hewlett Packard Enterprise (HPE), the headline was clear: another legacy tech giant had entered the crosshairs. But beneath the surface, this move is not a routine call for operational efficiency. It’s a high-stakes bet on reforming a company stuck between two distinct and difficult business models—enterprise hardware and legacy software.

For Elliott, a firm known for targeting sluggish tech giants and pushing for breakups or radical restructurings, the HPE investment signals confidence that value can still be extracted. For HPE, however, the road ahead is anything but simple. The company embodies the core challenges of managing a dual-core business in an era of cloud dominance and margin compression.

A Company Split Between Models

HPE’s business is structurally bifurcated. On one side, it sells infrastructure—servers, storage systems, and networking equipment—largely to enterprise and government clients. This business is capital intensive, cyclical, and increasingly commoditised. Margins are thin, and competition from both Chinese manufacturers and cloud-native hyperscalers is fierce.

On the other side, HPE has attempted a pivot toward high-value software and services: edge computing, AI workloads, and hybrid cloud solutions under its “GreenLake” brand. While strategically necessary, the transition has been slow and patchy. Revenue from these newer offerings remains modest relative to the company’s legacy hardware base, and HPE continues to trail leaders like Microsoft Azure and Amazon Web Services in cloud infrastructure.

The tension is clear. These two sides of the business—hardware and software—pull in different strategic directions, operate on different financial models, and appeal to different types of customers and investors.

Elliott’s Entry: Familiar Patterns, New Complexity

Elliott Management has a long history of targeting underperforming technology companies. In the past, it has taken activist positions in firms such as Citrix, Dell Technologies, SAP, and EMC. Its typical playbook includes a push for operational cost cuts, spin-offs of underperforming or non-core units, and financial engineering to drive shareholder returns.

In the case of HPE, Elliott’s early signals suggest a similar strategy may be in motion. Sources close to the matter suggest Elliott may push for a structural separation of HPE’s software and hardware businesses, similar to the VMware spin-off Elliott supported at Dell. Alternatively, it could advocate for a major cost-cutting program and a tighter focus on higher-margin offerings, without necessarily splitting the business.

But HPE poses a different challenge. Its software arm is not a clear, standalone platform like VMware. Much of its business remains deeply intertwined with hardware sales, making any separation complex from both a commercial and operational standpoint.

The Dual-Core Dilemma

Restructuring a company like HPE is inherently difficult because the financial, cultural, and technological DNA of the two halves is so different.

Hardware businesses are resource-heavy. They require supply chain efficiency, capital investment, and pricing discipline. They tend to rely on volume and scale rather than innovation alone. On the other hand, software businesses are increasingly subscription-based, agile, and focused on intellectual property. Their margins are significantly higher, but they demand different sales models, different engineering processes, and a different kind of talent.

Attempting to run both within the same organisation risks cultural dissonance and blurred strategic focus. Sales teams are pulled in opposing directions. R&D budgets are diluted. Investor narratives are muddled—hardware earnings compress valuations, even as software ambitions promise growth.

This isn’t a new problem. It has hampered other tech conglomerates before.

Precedent: Other Dual-Track Restructurings

Dell Technologies offers perhaps the closest comparison. After acquiring EMC, Dell tried to unify its hardware and software divisions but faced ongoing valuation issues. Elliott itself was involved in pushing for clarity, which eventually came in the form of VMware’s spin-off.

IBM, another legacy player, continues to struggle with the tension between its legacy infrastructure business and its software ambitions. Even after acquiring Red Hat, the company has yet to resolve market scepticism about its long-term positioning.

Cisco, though more successful, has also faced criticism for straddling both hardware and software markets without fully committing to a clear growth narrative.

HPE stands at a similar crossroads—but without the scale or proprietary platforms to cushion a misstep.

What Elliott Might Demand

Several scenarios are now on the table:

• Structural separation of HPE’s hardware and software divisions into distinct entities, potentially unlocking value by giving each a clearer mandate and capital structure.

• Streamlined operations, with aggressive cost-cutting in the hardware business and reinvestment in growth areas such as edge computing and AI services.

• Asset divestitures, focusing on non-core or underperforming divisions to reduce operational drag and sharpen market positioning.

Any of these would present execution challenges, but Elliott is likely to press for measurable changes with timelines and accountability baked into the process.

Risks Ahead

None of these options come without cost.

Restructuring HPE could introduce operational risk at a time when the company is already underperforming relative to peers. Customers may hesitate to commit to long-term contracts if the business model is seen as unstable. Talent may leave during uncertainty. Most importantly, execution missteps could further erode shareholder confidence.

There is also the competitive landscape to consider. The enterprise IT sector is in the midst of a consolidation wave, and firms like Microsoft, Google Cloud, and AWS continue to absorb market share. If HPE is too focused on internal restructuring, it may fall further behind in innovation and go-to-market capabilities.

What to Watch

In the coming months, key indicators of Elliott’s intent will include:

• Whether the fund issues a formal public letter or begins private engagement with the board.

• Changes in board composition or governance structure.

• HPE’s response—whether preemptive (e.g., announcing a review of business structure) or defensive.

• Investor reaction, particularly from institutional shareholders who may align with Elliott if they see upside in its proposals.

Conclusion

Elliott’s $1.5 billion investment in HPE is not just a bet on operational improvement. It’s a challenge to the viability of the dual-core enterprise model itself. With hardware commoditisation deepening and software innovation accelerating, companies like HPE must choose a path—or risk being left behind. Whether Elliott can force that decision—and whether HPE can execute it—may well define the company’s future.

Author: Gerardine Lucero