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11.02.2005

Fiorina’s fate was staked on merger’s success

By Stacy Cowley, IDG News Service (New York Bureau)

Three and a half years after Carly Fiorina stood onstage with Compaq Computer Corp. Chief Executive Officer (CEO) Michael Capellas and unveiled a stunning plan to merge their companies, the final act of that saga played out last week’s Wednesday, as Hewlett-Packard Co.’s board brought down the curtain on Fiorina’s reign as the company’s leader.

Fiorina fought every inch of the way to pull off the historic, US$21 billion merger, and in the end, she couldn’t escape from its gravitational pull. The Compaq deal gave HP a vast product portfolio Fiorina pledged would be more than the sum of its parts. While Fiorina wrung out savings from streamlining operations, the merger hasn’t translated to market dominance within HP’s various divisions; of its major product lines, only its printer group holds an industry-leading position.

HP’s board attributed Fiorina’s dismissal to differences in how to execute the company’s strategy, not over the strategy itself. Fiorina argued that HP needed diversity and bulk - a plan that has come under fire from some ana-lysts and investors eager to see HP jettison its struggling PC division and showcase its money-spinning printers line. Calls to split the company into parts are frequently issued, and with Fiorina’s departure, the company’s future as a whole is back in question.

HP’s new chairman and interim CEO deflected queries with press about whether the board will consider a split, but they re-iterated that HP isn’t looking to change its strategy; it simply wants to speed its execution. One HP exec interviewed separately backed that view: "The management team and board are aligned on strategy," said Nora Denzel, HP’s general manager of software and leader of the company’s adaptive enterprise efforts. "The differences were on how to execute the plan."

Fiorina has struggled for years with the operational end of her transformational vision. In November 2000, HP spent $470 million buying middleware maker Bluestone, only to later abandon the middleware business. Before landing Compaq, Fiorina negotiated with Pricewaterhouse- Coopers (PwC) to buy its consulting business. That deal fell through over its price tag, which climbed as high as $18 billion. Two years later, IBM Corp. scooped up PwC Consulting for $3.5 billion.

The recruiter who brought Fiorina to HP in 1999, executive search firm Christian & Timbers CEO Stephen Mader, sees HP at a transitional point and expects the company to recruit a CEO in the mold of Lou Gerstner, who came to IBM in 1992 with no technical background and engineered a turnaround. Gerstner took a sluggish company famous for its hardware and reshaped it as a flexible services provider. Mader expects HP to name a CEO within the next several months, and he thinks that the outside appointment will "come out of left field."

"They need someone like Gerstner, who will come in and marshal the troops by saying to every third person, ‘You don’t agree with the strategy? You’re fired’", Mader said.

That approach might please investors, but it wouldn’t be popular with the staff at HP. Fiorina pushed a company known for its genteel culture to be more aggressive, and employees often resented the change. Some were cele-brating her departure on Wednesday. Analysts say HP’s challenge is to wring more value out of its diversity. "HP has not created these virtuous circles where different units cross-sell each other," said Ovum analyst Douglas Hayward. "We are not saying that strategy needs to change entirely, but it’s not working as well as it should."

Fiorina allowed HP’s business units a significant degree of autonomy, which made it challenging to convince the industry HP was better off remaining one company, according to Gartner analyst Andrew Butler.

"There was no single strategy apart from perhaps ,invent!‘ What was never apparent was exactly how they were creating this synergy," Butler said. "People want to see how a quasi-independent PC- division and a quasi-independent storage and server division work together."

Ovum is among those urging HP to sell off its PC business. Until a new CEO is named, such a drastic move is unlikely. Goldman Sachs issued a research note saying it sees HP’s insistence that Fiorina’s ouster was over operational, not strategic disagreements as an implication the company isn’t looking to split off units.

HP’s enterprise group has been among the most scrutinized since the merger. A botched roll-out of an order processing system last year left the company with hundreds of millions of dollars in unprocessed orders and resulted in the dismissal of Peter Blackmore, executive vice president of Customer Solutions Group, along with two other senior sales executives.

The group has consistently struggled to obtain profitability and increase market share. In 2000, HP and Compaq’s com-bined worldwide server business would have represented the number-one company on the market, with revenues of over $15 billion and a 28 percent market share, according to Gartner. Today, the post-merger HP must take a back-seat to IBM, which has seen its share grow from 25 to 31 percent between 2000 and 2004. HP has seen its server revenues decline to $9.5 billion; its share of the server market slip to 27 percent.

The company’s storage division has been also troubled, plagued by slipping market share. HP cut back on the storage spe-cialists within its sales & support organization and lost its technological edge to companies like EMC Corp., said Gartner analyst Roger Cox. He believes that the constant pressure to show profitability within the enterprise group has forced HP to cut spending on support and research and development, which have in turn made the company less competitive.

In the short term, HP is likely to continue operating smoothly.

Where HP will go next depends on its CEO selection. The company has few options for an internal promotion, though one name bandied about is Ann Livermore, who runs the Techno-logy Services Group encompassing HP’s enterprise storage and systems, software and services units. Livermore has an "old HP" style preferred by the staff to Fiorina’s more autocratic approach and would be a popular choice with employees, but perhaps not with Wall Street analysts looking for a more dramatic change, said Gartner analyst Butler.