March 2, 1999 4:50 PM PST

HP feels the need for speed, agility

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The company's plan to spin off its testing and measurement division into a separate company and seek out a new CEO to replace Lew Platt is part of a larger, organic effort to reinvigorate a company that, even by HP standards, can't seem to keep up with its competitors or capitalize on its strengths.

During the hour-plus conference call, HP CEO Lew Platt, CFO Bob Wayman, and CEO of the test and measurement division Ned Barnholt used the word "agility" to describe the quality that HP lacks and needs to get back. Further spin-offs could occur, the company said.

One of the areas where the company lacked agility was putting its message out into the marketplace, said Platt in an interview.

"Some of our moves were tentative, because we were concerned what other people in the other business units would think," he said.

For example, HP--with its various business units--had a hard time marketing a single message. But Platt said that issue should be minimized after the split.

"If you are an HP employee, you can expect that going forward that you will find a culture based on the same values...but the practices need to be changed going forward so that we are more agile in the marketplace," Platt said. Among some specific problems, he said, "We have under-promoted the strategic successes we have had in the Internet space."

And, while HP is emphasizing the effects that will result from the spin-off, observers believe the hiring of a new CEO will have a larger effect. Platt, opined some sources, has acted too cautiously in the past and the company has over-emphasized low-margin businesses. Marketing and promotional activities have been especially sluggish.

"HP is a company with incredible strength, market position, and brand. But the real disappointment is they have been so under-utilized of late. I think that it's a crime, and the leadership team needs to sort that out and go forward," said Rick Belluzzo, chief executive of Silicon Graphics and former HP general manager of the company's computer organization.

"He is thoughtful, intelligent, and cautious, which is not necessarily a bad thing. It can be good for a $40 billion company," said Eric Lewis, an analyst at International Data Corporation. Lewis, however, added that large PC companies today "need a big leader" which Platt wasn't. The company has also been slow to react to market changes.

"Speed is not an HP trait," he said.

Under today's reorganization, HP will split off its testing and measurement division into a separate company with Ned Barnholt, the current general manager of the division, serving as CEO. All of HP's other divisions, which includes the PC hardware, software, and services division, will remain in one company.

HP hopes to hold an IPO for the division by October and complete the separation six months later, the company said. Further organizational changes could also occur, the company said. HP contemplated splitting off its printer and imaging division, for instance, but decided against the move for now, said Platt.

Platt will remain as CEO for now, but a committee has been formed to seek out his replacement, who would take over around the time the final transition is complete.

As part of the reorganization, Platt will also step down as chairman, unless the incoming CEO would like him to help out during the transition, he said.

If anything, these changes need to result in a more aggressive, decisive corporation, said Roger Kay, a computer analyst with IDC, a view shared by other analysts.

The company placed too much emphasis on its PC sales in the last fiscal quarter, Kay said. Low PC prices and an emphasis on consumer PCs, however, made this an unprofitable venture. The company needs to shift into "downstream" businesses such as providing ISP services, which will allow the company to capture revenue from its existing customer base.

Other companies such as Gateway are already corralling such revenue streams to their benefit, Kay and others have pointed out. Platt himself said that HP would begin to offer more Internet-based services, but did not elaborate in detail how, what, or when such services might come out.

Platt and Barnholt several times in their conference call today emphasized HP's need for a jump-start. Job one at the new test and measurement division will be to "create a powerful culture of speed, agility, and risk taking," Barnholt said.

While moving slow is an HP tradition, Platt, said some, exacerbated the problem.

Momentum lost
"When Lou took over the company, it had a lot of momentum. The test and measurement business was strong, the Unix and server business was progressing, the PC business was starting to go online and the printer business was as strong as ever," said a source close to HP. "He had a huge amount of good will created with the board and Wall Street."

But the bank of good will inherited at the beginning of his tenure was slowly depleted, as the company began losing out in the marketplace, and internal and external factors took hold.

One of the internal issues was dealing with the death of David Packard, a company co-founder and board member whose active leadership on the board has left the current board grappling with how to fill that void.

"David had instituted a lot of changes that had positioned the company for its better years. Now the board is having to learn how to be stronger," said a source.

Platt had this to say about his past 18-months performance: "The last year and half the results have not been spectacular," he said. "When things go well, you're on every magazine cover. When things aren't going well, people say you're slow to react."

Meanwhile, Platt has under-performed to shareholder expectations for the last couple of years, said one Wall Street analyst.

"That under-performance is reflected in the company's stock, which has trailed the S&P, and the run-ups of its competitors like IBM, Unisys, and Data General," said the analyst. "I've heard board members have been more vocal about the stock performance over the past 18 months."

Lack of communication with Wall Street
Acting as a weight on HP's stock price is the lack of guidance the company gives Wall Street, said the analyst.

"Because they give no guidance to the Street, when estimates are coming in too high, they don't make any efforts to reign those in, and that leads to earnings surprises and a beaten stock," he said. "IBM may post the same single digit growth as HP, but because their guidance to the Street is better, their stock performance doesn't suffer as much."

He added that HP's combination over the past several years of posting low to flat quarterly growth and missing estimates has "destroyed their confidence on the Street."

Platt, however, contends there were a few cases where estimates were missed by a few cents, but at times when they would be off the mark by a larger margin, Wall Street was informed.

He added that were also occasions when his company did not have enough information gathered in time to give Wall Street a heads-up for some of the smaller estimate misses.

In sizing up the company's operations, the company has been characterized as one that knows how to block and tackle in the bad times, but has yet to learn how to run with the ball and score in the good times.

Analysts agree that the split will help sharpen HP's focus and increase its mindshare among customers. But it's not expected to suddenly unlock increased valuation in the company, said Richard Chu, an analyst with SG Cowen & Company.

"Although the test and measurement business has had a tough year, it's not like you're unfettering the computer business from another business that's been a continual drag on earnings," he said.

Stephanie Miles contributed to this story.

 

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