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Losing the HP Way

Two years after Carly Fiorina pulled off a transforming merger, Hewlett-Packard looks huge, frail and confused.
Economist Staff, The Economist
August 25, 2004

In a job that requires being tough and even ruthless, also being one of the most charming bosses in your industry does not hurt. Carly Fiorina, the chief executive of Hewlett-Packard (HP), has that advantage. Attractive, stylish, a good conversational partner on topics ranging far beyond technology — she was a medievalist at college — Ms Fiorina stands out in the geeky, male world of computing. With so much yin to dazzle and distract, her aggressive yang instincts pack that much more force. Thus, in 2002, she pulled off one of the most controversial mergers ever, of HP and Compaq, over the bitter opposition of Walter Hewlett, a son of one of HP's founders, and despite a cliff-hanging 49% of HP's shareholders voting against it.

Her problem ever since has been to justify the beast she thereby created. HP's shares are worth less today than on the day before the merger was announced or on the day it closed. A consensus has emerged in the industry that the new HP, the tech industry's most sprawling conglomerate, has lost its focus and is being squeezed between two formidable rivals with much clearer business models, Dell and IBM. Where Dell stands for cheap, simple boxes in an industry that is commoditising, and IBM stands for patching together lots of fiddly subsystems in an industry that remains ridiculously complex, HP seems a lukewarm compromise.

As if to prove that thesis, HP announced on August 12th that its profit for the latest quarter, at $846m, was less than a year earlier and far below what Wall Street had been expecting. On the same day, Dell said that its quarterly profit was up by 29%, while IBM, which had already announced a 17% increase in quarterly profit, added that it would hire 18,800 people this year.

Stuck in the Middle with Carly
Ms Fiorina reacted by giving another glimpse of her tough side, firing three top executives on the spot, and stubbornly sticking with her strategy. For two years, she has, time and again, been intoning the same script. HP is far from "stuck" between Dell and IBM, she asserts. Instead, Dell, famous for its supply chain rather than its patents, represents "low tech and low cost", while IBM, best known for its armies of technology consultants, peddles "high tech and high cost", which leaves only HP to offer "high tech and low cost" and therefore "the best customer experience". Yet the pressure is starting to show. In a recent speech, Ms Fiorina started 11 sentences with an irritable "Frankly,...".

Her problem, in a nutshell, is that HP is trying to be all things to all kinds of customers, and is leaving more and more of them plain confused. HP dominates in the market for printers, both laser and inkjet, and both for consumers and companies. It is also strong in handheld computers and some other consumer electronics items, such as digital cameras. In desktop personal computers and notebooks, HP runs neck-and-neck with Dell as the world's biggest supplier.

But in enterprise computing, from storage systems to servers, the picture gets more complicated. Ms Fiorina's public-relations minions regularly circulate long and tedious lists of obscure sub-segments of the market in which HP has the largest market share — "fault-tolerant systems", "external storage systems", "tape drives", "virtualisation technology" and so on. Being big in so many different areas, they argue, means that HP is the "leader" and vindicates the merger.

The opposite is more likely. HP's profits disappointed precisely because the jumble of its business units selling to companies made a loss of $208m for the quarter. In each area, it turns out, HP is fighting separate wars against different and fiercely focused competitors — EMC in storage hardware, Veritas in storage software, StorageTek in tape drives, Sun Microsystems in Unix servers, IBM in consulting services, and so on. The only way that HP manages to stay in so many games, at least according to Dell, is by leaving its profit margins on the table for others — and above all for Dell itself.

This leaves HP in a most undesirable place in today's technology industry. Three years after the dotcom bust, corporate spending on technology is this year showing the first signs of growing again. But the improvement is almost trivial, and mostly limited to sub-segments such as security and integration software. "This is the recovery; enjoy it," recently sneered Larry Ellison, the boss of Oracle, the world's second-largest software company. All this means that only the strongest, most focused technology companies will benefit. HP does not seem to be one of them.

Yet HP's situation may not be entirely hopeless. Steven Milunovich, an influential analyst at Merrill Lynch, argues that, amid all the bitter fighting of the past three years, Ms Fiorina has simply become confused between two separate issues. One question is whether HP and Compaq, each weak in computers at the time of the merger, needed each other to bolster their position. The answer to that may well be yes. Quite another question is whether this means that HP must now forever remain a company that makes computers, printers, cameras and a host of other gadgets, as well as a company that sells to big companies, small companies and consumers. The answer is almost certainly no.


Ms Fiorina's best option is to address the "conglomerate discount" in HP's share price — in other words, to break up her company, says Mr Milunovich. Many of HP's investors would prefer to own only its stellar printing and imaging business, which need not apologise to anyone. This would also free the printer business to parry the distant threats from rivals such as Lexmark and Dell.

The Case for Being Beta Female
The remaining computer and storage businesses could then be further divided by customer focus — corporate versus consumer — or merged with rivals. The result would be several well-targeted companies that would either be genuine leaders (printers) or potentially profitable runners-up in corporate computing, the "Avis to IBM's Hertz", as Mr Milunovich puts it.

When this idea was formally put to her at an analyst meeting in June, Ms Fiorina responded by ignoring it, commenting only that HP was misunderstood by Wall Street — ie, that the market was wrong. It is unlikely that Ms Fiorina, who in her previous career oversaw the spin-off of Lucent from AT&T, is a stranger to the theory of corporate clarity. Could it be that years of conflict in testosterone-filled rooms have left her afflicted with that psychology so common among bosses of the other gender: the compulsion to rule the roost?




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