Competitive Intelligence

Sacked: Buck Stops at the Top as HP Dumps Carly Fiorina

Americans love nothing better than seeing corporate fat-cats get canned.

Today Hewlett-Packard decided it needed to outsource itself a new CEO, not one with a new strategy but one who could execute on it, after Carly Fiorina stepped down at the BoD's behest from the helm of the computer company she's spent the past six years transforming.

Sic Transit Fiorina

Perhaps Fiorina's worst sin was becoming the subject of charges by her lieutenants she'd become a bottleneck, and was interfering with the company’s ability to respond quickly to market changes. But, with a $21 million golden parachute, I wouldn't worry too much about where she'll land.

Surprising? No.

As architect of a controversial merger with Compaq that never produced the results she promised, HP turned in lousy financial results under one of the most powerful women in corporate America. HP was always something of an also-ran when it came to the way computers were bought and sold, but when the halcyon days of high margins departed with the go-go Dot-Com Bubble, so did the ability to get away with that sort of approach. As it stands today, HP trails Dell in PCs, EMC in storage and IBM in services... The only real winner in all of this has been Compaq, which would almost surely have been forced to sell off to Dell at a deep discount if HP hadn't swept in to save the day. The crown jewel of printing and imaging has lost a good deal of its luster as well, and the window of opportunity for a spin-off has narrowed substantially.

The REAL Reason She Got The Boot

Insiders say board dissatisfaction with Fiorina traces back to the November 2002 exit of former President Michael Capellas, who joined HP from Compaq and today heads MCI. Some board members wanted the position re-occupied. Recently, the board became convinced Fiorina would back down from her opposition and accept the appointment of a chief operating officer, given HP's spotty financial returns. "She was adamantly opposed to that," according to Rob Enderle, principal analyst at the Enderle Group. Fiorina's resistance brought the dispute to a crisis and sparked the decision to ask her to leave.

CFO Robert Wayman, who was named interim chief executive on Wednesday, said HP did not plan to reverse the Compaq deal but left the door open, saying the board would not be close-minded on strategy changes once it locates a new CEO. The board said its chief concern was to improve "execution" of strategy, although many on Wall Street hope HP will spin off its printing division, which delivers most of its profit, after Fiorina did the exact opposite by integrating it with the lagging PC division only two weeks ago.

HP shares, which have lost 63 percent of their value since Fiorina became CEO in July 1999, rose as much as 10 percent on Wednesday and closed up nearly 7 percent. Corporate recruiters saw Mike Zafirovski, Motorola's former chief operating officer, as a top contender to become CEO, while others pitched Michael Capellas, current CEO of communications company MCI and former Compaq chief, despite Capellas's link to the merger having been seen as a problem by some. Motorola's CEO, ex-Sun Microsystems exec Ed Zander, is considered another possible choice. Investors uniformly agree that, after dashing their hopes in three of the last nine quarters as it lost market share to Dell and IBM, anybody's got to be better than Carly.

Fiorina said in a statement, "While I regret the board and I have differences about how to execute HP's strategy, I respect their decision. HP is a great company and I wish all the people of HP much success in the future."

Truly, were it not for the ill-fated merger with Compaq, I frankly believe she could've become one of America's legendary corporate leaders - remembered as more Lou Gerstner than Bob Galvin. Maybe the ultimate lesson here is, in the era of mega-mergers, it's usually a bad idea to hang your career on successfully pulling it off.

David Katz, chief investment officer at Matrix Asset Advisors, one of the first HP investors to oppose the Compaq deal, said, "Today's announcement basically is a validation that Walter Hewlett was probably correct, that it was an ill-fated strategy," and added that a printer spinoff was still a possibility.

Meanwhile, Hewlett only said in a statement that he looked forward to HP fulfilling its promise. "HP has been a great company. It is facing a number of challenges." Despite Bear Stearns downgrading its rating on HP, saying Wednesday's gain reflected most of the possible upside from a potential break-up of the company, Wall Street generally liked the move.

Unquestionably, HP has lost its momentum since the Compaq merger, which we can see in hindsight offered hardly any value-add, while occupying huge management attention span in terms of distraction of time and resources. Over the past six years, HP has transitioned from a high-margin to a low-margin company.

Computers are commoditized and the Dell model of selling direct through a low-cost channel (the Web), getting and using the customers' money for a week without building inventory (not to mention paying vendors 45+ days terms) and then helping make experts out of their customers in the process by building a custom rig for everyone, is the only way to play and win the PC game any more.

From a technology standpoint, Itanium, through which HP partnered with Intel and did away with Compaq's older DEC Alpha chip, has been a disaster. It transferred its Precision Architecture to Intel as the basis for Itanium along with its silicon designers and shut down its chip foundries; and all of this was tied into an Itanium partnership that will return nothing to HP, and hardly more than that to Intel, while effectively closing down the chip-making line of business in the process. Sounds to me almost like Intel simply duped HP into putting itself out of business before it did. From that standpoint, the only winner in the 64-bit processor game has been AMD!

Finally, I have lots of friends in Silicon Valley who complain HP's corporate culture had been destroyed by cascading rounds of layoffs, after HP acquired Compaq having cut 16,800 jobs. What's needed to correct the cultural deterioration is an outsider who can come in and reinvigorate what has become a culture more akin to Larry Ellison's Oracle than Bill Gates' Microsoft.

If they don't end up with a value-extracting consolidator at the helm, that is. Stacey Quandt of the Robert Frances Group, said, "The door [is open] for the HP board to hire an executive to sell off pieces of the company, and the server and storage division would likely be on the top of the list. An asset-stripper CEO will most likely be Ms. Fiorina's replacement."

So, while competitors gaze on awaiting their chance to pounce, HP needs to get moving on fulfilling that promise Walter Hewlett is so in love with - the one it's touted to corporate IT customers for the past half-decade and more... As Eric Lundquist said at eWeek.com:

The biggest competitor HP now faces is time. Buoyed by a more optimistic economic outlook, corporations are once again spending money for technology purchases. HP's competitors have spent the last several years improving their product lines and service offerings. In the corporate world, technology decisions are now being made for 2005 and beyond, and HP needs to get on that short list of preferred vendors or risk being left behind.

- Arik

Posted by Arik Johnson at February 9, 2005 04:23 PM