Milunovich delivered the unsolicited advice in a Merrill Lynch research note published on Monday, a day before HP holds a meeting with securities analysts in San Jose.
In the note, Milunovich argues that HP can improve its strategic focus by breaking off into distinct organisations. He suggests either spinning off HP's imaging and printing business or breaking up the company into two divisions, one that sells to consumers and one that sells to corporate customers.
"Our strong intuition is that shareholders will benefit by HP eventually breaking up," Milunovich said. "As much as the company would argue that its divisions are separately run and optimised, we don't fully believe it."
Merrill Lynch said HP's management should "do the right thing for shareholders" and address the difficulty of maintaining its current competitive position. HP is being squeezed between Dell, which undercuts competitors on price, and IBM, which has a broad portfolio of goods and consulting services.
Milunovich said that overall, it appears that HP made a smart move in acquiring Compaq Computer, which improved the company's market share in servers, PCs and storage. To better compete, Milunovich said, HP should continue making acquisitions of other companies. He noted that HP would be the most likely acquirer of Sun Microsystems.
"We think HP's best course of action is to become the IBM alternative in enterprise computing, since competing with Dell at the low end appears futile," he said.
But to execute on the IBM-alternative strategy, HP needs more focus, he said. Milunovich conceded that there are some efficiencies to be gained in distributing and manufacturing both computers and printers but that overall, the imaging and printing parts of the business would benefit from independence.
"HP is the Campbell Soup of printing. It owns the category, so its main challenge is not share but growing the category," he said.
Meanwhile, the company's computer product line is diverse, including products from Compaq's own acquisitions of Digital Equipment and Tandem. Those products could be rebranded as part of a company split, while the imaging division could maintain the HP name.
HP spun off a medical testing unit, called Agilent Technolgies, in 1999.
Milunovich's advice for HP is not the first time he's recommended that a technology provider take dramatic steps. In October, he sent an open letter to Sun chief executive Scott McNealy, urging him to focus Sun on high-end computing and to exit some of Sun's smaller businesses, including Java, the UltraSparc processor and Linux on the desktop.
