HP revels in Fiorina's vision, Hurd's discipline

Big profits can do wonders for an executive's reputation.

Last year, after Hewlett-Packard CEO Carly Fiorina was unceremoniously dumped by the company's board of directors, many analysts and employees considered the move a statement about HP's controversial acquisition of Compaq in 2002. At the time, HP was still struggling to integrate its vast array of businesses, and several organizational upheavals had failed to pay off the way that Fiorina had envisioned. Wall Street was even calling for a breakup of the company as the only way to salvage the situation.

"It's important to remember how resurgent IBM was and how gangbusters Dell was going."

--Jonathan Eunice, Illuminata analyst

But HP's board held fast to the line that it was confident in the strategy that Fiorina had chosen with Compaq. The decision to remove Fiorina was prompted by the poor execution of that strategy, not the notion that adding Compaq's hefty PC and server market share to HP's high-end servers and printers could make the company a global hardware powerhouse, board members said in several statements.

More than a year later, after the aggressive cost-cutting tactics of new CEO Mark Hurd, HP is a Wall Street darling once again, without exiting any businesses or dramatically changing its strategy. HP's remaining employees and shareholders have reason to cheer, but Silicon Valley has to ask itself a painful question: Even if she wasn't the best person for the job, was Fiorina right?

The stated goals of HP's Compaq acquisition were to attain 8 percent to 10 percent operating margins, hold industry-leading market share in several categories, and achieve the cost savings that come along with size and scale that neither company could hope to achieve separately. So far in 2006, HP has come pretty close to those goals.

Last quarter, one of its most successful since the merger, HP's operating margin was 6.9 percent. The company is a market leader in printers and low-end servers, but trails Dell in PCs and IBM in services. And with $4.5 billion in net profits through the first nine months of its fiscal year, HP is on track to record more profit in 2006 than it did in the last two years combined.

An HP representative declined to commment for this article.

So what accounts for HP's current success? Clearly, Hurd's decision to lay off 15,000 employees has cut costs. HP's revenue grew only 5 percent in its fiscal third quarter compared to last year, but its profit jumped from only $100 million in last year's third-quarter to $1.4 billion this year.

Without Compaq's PCs and low-end servers, some analysts say it's hard to imagine where HP would be today. The company's printer division remains the engine for most of its profits, accounting for $884 million of the company's $1.4 billion in profits during the most recent quarter. However, high-end server growth has stalled as customers switch to cheaper, low-end servers based on Intel and Advanced Micro Devices's x86 chips. That trend has been going on for a long time, with even longtime, high-end server maker Sun taking the plunge into the low-cost server market.

HP also has more negotiating heft than it did before the merger. Back in 2001, HP and the former Compaq were at the mercy of their major suppliers, Microsoft and Intel, said Jonathan Eunice, an analyst with Illuminata. Microsoft and Intel knew they could play the two companies off of one another when it came to introducing new technology or hammering out contracts, he said.

The combined organization now has the size to negotiate agreements with alternative suppliers, like Advanced Micro Devices, without seriously affecting HP's relationships with its primary suppliers, Eunice said. It was hard to get to that point, but "sometimes you need to do ugly things," he said. "They're using their economic power to good effect."

One of the most cited objections to the acquisition was that HP would be subject to the "squeeze," unable to compete with IBM's breadth at the high end and Dell's nimble cost structure at the low end. "It's important to remember how resurgent IBM was and how gangbusters Dell was going," Eunice said.

IBM remains a formidable competitor, for the most lucrative corporate accounts with a software and services portfolio that overshadows everyone in technology, and a comfortable position on the high-end servers market with its Power-based systems. After slashing HP's headcount in the middle of 2005, Hurd has turned his attention to this market, adding companies like Peregrine Systems and Mercury Interactive to its software division.

[GrandpaN1947]

Fiorina was an idiot

Cutting 15,000 loyal AMERICAN H-P employees may APPEAR to be good for the bottom line, but the long term pain will come back to haunt H-P. H-P got nothing from Compaq that it couldn't have gotten on it's own through competitive pricing. Hurd has done nothing but follow through with Carly's short sighted plans. H-P is reaping the benifits of screwing their employees right now, but their creative long term competitiveness has left the company.

[Tanjore]

Sorry to say employees don't matter to corps

Sorry to say. Employess do matter when company is making money. They do not matter when the stock market is lagging and the business is strugling or the CEO are not getting their hefty bonuses.

[drfrost]

Carly made some huge mistakes in my opinion....

HP had never had forced lay-offs before Carly. HP had a tradition of valueing customers, stock owners AND employees. HP had a tradition of R&D innovation. HP was one THE places to work for an engineer. The "HP Way" was alive and weathering the "burst bubble" that most tech companies were going through. (I mean, let's face it, there's simply NO way to justify a P/E ratio of 100. The tech stocks were and are still over valued.)

Now, HP R&D is a shadow of what it used to be. HP doesn't even have a CPU design lab anymore (sold to Intel). The "HP Way" culture has been irrevocably destroyed. HP is now your standard short sighted corporation, valuing stock owners first, customers second and minimizing in any way it can those "costs" that represent it's employee base.

Carly single handedly destroyed the unique culture that made HP great. Can they make it as another Dell? Who knows... it doesn't really matter to me any more. The mind share is gone. Look for the next great innovation somewhere else because you aren't going to find it there.

[MattLPMP]

Compaq move wasn't visionary; Hurd is doing the right thing

I don't think the merger was quite as visionary as is being played off. Many analysts suggested the merger over a year ahead of Fiorina's press release, and Compaq's capabilities in storage systems remains unmatched in the x86 server world. Yes, Carly executed the deal, but I don't think it was her brainchild.

As a long-term HP and Dell customer, I can't stress enough how much HP has done right over the past year versus Dell. Dell's thin supply chain has led to numerous changed orders, while HP has changed its competitive tone from "Dell is a great competitor" to "we will always beat Dell". They are finally emphasizing that they provide BETTER hardware at a similar price. And HP's near-shore service groups best Dell's barely-English-speaking call centers hands down.

9 layers is too much, and I'm sure that HP's restructuring has only improved its ability to respond to the market. I'm very happy we stuck around as customers to reap the benefits.

[Too Old For IT]

Might Be Time To Reconsider HP

Time was, even after the merger, that you couldn't get the HP rep to return a call when you had a deal in the works. Last server upgrade sale we had to listen to some suit from HP yammer on about the "value" of HP software.

Hope some of that has changed. Down in the trenches, it is simply "beat Dell on price" and get the hardware to the delivery dock.

Operatons Knowledge Matters

Fiorina did some good things: put "invent" under the HP logo,
maybe acquiring Compaq. Fact is that the VAST MAJORITY of
mergers fail. Lots of data on this from Harvard Business School
and elsewhere, and she and Capella decided to merge anyways.
Fiorina could put pieces in place, but she could not get them to
produce. She was not what the organization needed to produce.
Hurd is. She also was preoccupied with being a rock star CEO
which was a total disconnect with Reality. She made a mess. Hurd
is making the mess into a masterpiece.

[Innerdaemon]

Fiorina devalued R&D

The fundamental reason people hated Fiorina and still do is that
she completely devalued R&D and rushed to make HP just
another services vendor. Services is lucrative but even IBM
depends on R&D - witness the $1B in royalties IBM earns
annually. Fiorina for some reason was convinved that HP could
not thrive as a R&D firm especially considering historically that
it had successfully tackled previous challenges (transitioning
from scientific equipment to electronic components, to medical
devices, to printers ..) She either did not understand where
technology was going or was convinced that HP couldn't get
there to make the move. Is Carly right? Maybe. Maybe not. There
are only two types of IT firms: companies that build (e.g. TI) and
companies that sell other firms products (e.g. Dell) . Fiorina
made HP the latter and its hard tell if thats for the better or
worse. Long-term I would place my chips on the former.

[pbookman]

Two Great CEO Choices

Fiorina blew up the inefficient, indecisive, unfocused HP culture. She made the big strategic moves. She started the revolution. Hurd was the perfect successor, but it took a Fiorina to create the situation in which he now thrives.

Give credit to HP's board for two great CEO choices.

For more on this, see "Piling on Carly" on www.bookmansbusiness.blogspot.com

[pbookman]

Two Great CEO Choices

Fiorina blew up the inefficient, indecisive, unfocused HP culture. She made the big strategic moves. She started the revolution. Hurd was the perfect successor, but it took a Fiorina to create the situation in which he now thrives.

Give credit to HP's board for two great CEO choices.

[AMPerez]

I agree...

I think Carly was starting the ball rolling when she was let go. For the most part every business has it's share of downsizing and making changes. True to form, all companies still, after many years of being in the biz, have to make changes sometimes even drastic ones.

Carly was on the right track and judged too quickly and let go before positive changes took effect.

[richardishere]

great article

In M&A, the deal is not always done.

[als]

Fiorina?

If Carly was such a great CEO, how come no one has hired her to run their ship? How come she has not had any offers?

[J.G.]

Old guys hated woman leader

Someone needed to come out and say it. If Fiorina were male, she would still be at HP.

As for subsequent positions, I'm not privy to offers she has received and neither are you.

[Explorer56]

PR at work to sell Carly's book

You're likely to see more articles along this line in the next month or so. Some may call this an atttempt to rewite history. Carly's public relations folks need to generate interest in her book, coming out in October. PR also scored a "60 Minutes" feature for September.

An amusing sidelight: On Amazon, her book is paired with "The Five Jerks You Meet on Earth" in the Better Together section.

In the long run, I believe the merger was a good idea, because it gave HP some things they couldn't get on their own: Leadership in x86 servers with the ProLiants and a great storage line with StorageWorks. Also, a doubling of the Service division enabled HP to win big accounts from IBM.

Without the merger, I believe either company would find itself in the same place Sun or Gateway is in today.

[HPLifer]

Even a broken clock is right twice a day

Give me a break. Most HP employees welcomed Fiorina as a breath of fresh air and someone who could market and lead our company more effectively. But, as it turned out, she was marketing Carly first and HP last. HP was always a profitable company until she came along. She alienated employee's with her haphazard strategy and poor execution. The merger was a joke because of the unbelievable amount of overlap and the lies and deceit of the Compaq management. There were many warning signs about how poor the performance of Compaq had become and the lack of integration of DEC and Tandem. But, that didnt matter; Carly was determined to build her empire at any cost to HP, its shareholders, customers and employees. It has been a nightmare. She kicked out many good, high performing HP Managers in favor of incompetent Compaq/DEC Management, the same folks that were driving Compaq into the ground. Luckily, that has changed for the most part and HP people have taken back HP. Hurd has been great, recognizing that he has to make lemonade out the lemons. We had too many people after the merger and it is a shame that folks had to lose their jobs. That was and is Carlys fault. We now have someone who actually understands business and has made changes in the company to move us back to the stature that HP has help in the business world. Carly may have done a few things right, but it was luck, not still, thats for sure. It is obvious that the apologists are out in preparation for the BOOK.

[drfrost]

I gave her the benefit of the doubt when the merger started....

When the merger started I defended Carly. I still don't honestly have enough evidence to evaluate whether that particular decision was a good one or not (though most of the evidence I have seen tends toward the latter). I am glad she didn't follow the advice of the analysts at the time who were calling for HP to be split up. Personally, I didn't like it when Agilent was split off either. Yes, I understand the desire to split off low margin businesses... especially in a time when a lot of customers were putting of capital purchases. But I think HP hang those employees out to dry when the market was at it's lowest.

[twasserman]

And now HP does software?

I don't think so. It's not in their corporate DNA, any more than it was in the DNA of Digital or Compaq. HP has consistently proven itself to be King Midas in Reverse where software is concerned, witness Softbench, eSpeak, and the disastrous post-acquisition management of Verifone and Bluestone. Billions of dollars and lots of people down the drain, thanks to Her Worship. OpenView is some weird fluke, but big chunks of the Mercury acquisition seem likely to go down the same rabbit hole. I wouldn't bet on any significant additional software revenue from HP as long as the revenue and profits from selling black inkjet cartridges overwhelm the potential of the software business.

[DiamondBridgeCenterfuge]

The appearance of luck and accounting majic lol

If you knew the proprietary crap they do to their pc's, the extremely poor service, pirate like execution of strategies and the epitome of poor client focus, care and communications, least of all to mention "accounting majic" you would not hesitate to investigate.

I had communicated with Mark Hurd months ago and am still waiting on something more than being put off and a resonable response.

Like their service and attention to quality offerings, they are too busy to be responsible for their offerings.

[DiamondBridgeCenterfuge]

Prognosis misleading

If you knew the proprietary crap they do to their pc's, the extremely poor service, pirate like execution of strategies and the epitome of poor client focus, care and communications, least of all to mention "accounting majic" you would not hesitate to investigate.

I had communicated with Mark Hurd months ago and am still waiting on something more than being put off and a resonable response.

Like their service and attention to quality offerings, they are too busy to be responsible for their offerings.

[Seaspray0]

As a former Compaq employee...

I'm glad to see the best of compaq's server and desktop line still perpetuated under the HP label while dumping the worst of what compaq made. As a former employee, I can still recognize the influence the evo and proliant in hp's current offerings. HP has returned to the approach of making the PC more generic in it's construction versus dell which has moved to proprietary construction (i.e. you can't change the hardware with anything generic). Along with dell restricting themselves to intel chips, I can see where HP under the correct leadership has leveraged the company to putting dell into trouble. HP and Compaq merging was a good deal, but not with Forino at the helm.

[Lou Sander]

Chop off their heads? Or turn it around?

"[Fiorina] sought to be the center of HP, to centralize decision making. But she started having to do layoffs, and the amount of money that each business unit manager could control was so centralized, no one felt they had knobs or dials or any axes of control," Eunice said.

Axes about which things rotate, or axes with which they are hacked?

[billtodd]

Kind of late to be responding

but I only happened on this when tracking the unfolding HP BoD 'plumbers' fiasco (Krazit having been one of the targets, I suspect he may hold a somewhat more skeptical view of HP now).

"HP's stock has outperformed the Dow Jones index, the Nasdaq, the S&P 500 and the stocks of its three major competitors (Dell, IBM, and Sun) in the years since the merger" was worded *very* carefully: at the time of the merger, HP stock had dropped from about $24/share just before the merger announcement and for the time between then and completion of the merger had been languishing around $16 - $18/share, and didn't get back up significantly over $24/share until long after Fiorina got the boot. So it was *very* easy in the carefully-chosen period for it to have 'out-performed' the market, whereas what's significant is whether its performance from the point just prior to the merger announcement to now did, in terms of evaluating whether the merger was good for stockholders or not.

Hurd may have pleased Wall Street (that's ridiculously easy to do these days: just cut a lot and don't worry about the effect it will have a year or more out), but by cutting a great deal of muscle rather than mostly fat he and Carly have destroyed any hope of HP's remaining an 'inventive' company rather than a mere box-builder. It's difficult to see how that's good for stockholders (at least long-term) or, for that matter, for America: if we don't continue to innovate to help support our standard of living, someone else will - and with no means of support, said standard of living will go down the toilet.

[jontemple]

I wonder how many ADs Cnet will get from Fiorina's book

Propaganda and revisionist history.
HP has become the "Packard Bell" of the industry. A change to low quality, offshore China made trash, low prices for low, low quality.
Her vision was the strip the company and put resources into her personal checking acount, which she did. 100 million, probably more.
What a joke to measure HP by profits that only go to the CEO and Executive Management.
She took THE model U.S. Corporation, destroyed Hewlett/Packard's vision of quality, ethics, values and an amazing atmosphere to work at.
This at the expense of THOUSANDS and THOUSANDS of U.S. jobs, destruction of ethics and morality in the workplace. Besides the firing of the "best and the brightest" globally and destruction to the economy of the U.S., end of rewards for creativity, benefits fo workers, end of the best trained staff in the industry, money laundering schemes offshore and the current production of low quality, the best tech support in the industry to the worst support in the industry, illegal kickbacks retail stores to have retail stores have their garbage in a prominent place in the store.
Talk about being an "Al Qada Type", Anti-American, selfish, Fasicst. This valueless, , anti-Christian, Anti-Human trash that things that laying off 15,000 humnans is a good thing because it makes the CEO richer gets me sick.
Carly is a sociopath and has done and will continue to do anything to destroy whatever is in front of her and give her more fame, control and money. She has destroyed so many lives and the best Corporate culture that the U.S. has ever had.

Jon