“She’s a fighter,” say her friends and foes alike. Certainly Carly Fiorina, chief executive of Hewlett-Packard (HP), needs all her considerable spunk at the moment. The deal on which she has staked her career, a $24 billion merger with Compaq Computer, is teetering on the edge of collapse now that the David and Lucile Packard Foundation has said it will vote against it. With two other family foundations already hostile, that lines up 18% of the shares against the deal. This week Michael Capellas, chief executive of Compaq, hinted that his company might yet have a “standalone” future.
Even before the Compaq deal, Ms Fiorina had a big fight on her hands. She arrived at HP in 1999 with several qualities that set her apart from that venerable company’s previous top brass. She is young (only 47), glamorous and a woman, one of only half a dozen at the helm of a Fortune 500 company. She is not an engineer: her Stanford degree is in medieval history, and her skill is as a superb saleswoman. She was also an outsider, coming from a sparkling career at Lucent Technologies, a company that was still riding high when she left.
Ms Fiorina took over a company that saw its tolerant, people-oriented culture as one of its proudest achievements. But HP had lost pace and direction. It had been slow to notice the Internet; its PC business had not espoused Dell Computer’s winning model of direct sales; its share of the market for big servers was slipping. In hiring her, recalled Jay Keyworth, an HP board member, earlier this year, the directors asked her “to totally recreate and reinvent HP according to the original HP way”. She warned them that such a change would take at least three years. “Are you going to stick with me?” she asked. “We absolutely said yes,” said Mr Keyworth.
Three years are not up, but Ms Fiorina has found it harder to fulfil her brief than she expected. She tried to claim descent from the company’s famous founders: early on, she posed in a commercial in front of the garage in which David Packard and Bill Hewlett started the company 63 years ago. But she has had bad luck, compounded by bad judgment that may reflect either inexperience or her marketing past. Having notched up a sparkling first year, she promised a second that was even better. That unwise pledge, made a year ago, cost her credibility and support in the markets. She also failed to lead the company in a new direction when her attempt to buy the consulting arm of PricewaterhouseCoopers collapsed. That would have extended HP’s reach into IT services.
Above all, she seems to have found it hard to alter HP’s entrenched culture. She embarked on a high-speed programme of restructuring, to reduce bureaucracy. That stirred up irritation in a company whose managers were used to being left to run their baronies in peace. The economic downturn, and the consequent need for lay-offs, left her fighting a barrage of complaints from staff that she was brutally putting markets before people.
The merger with Compaq offered a way to solve several of these problems at once. It would ram through the cultural change that had proved so elusive. It would boost IT services. And it might restore HP’s fortunes in the market for PCs, where the combined company would have 19% of the world market, and for servers, where it would have 37%.
If Not, Then What?
Had the Compaq deal come a year earlier, and been steered by a more experienced leader, it might possibly have gone through. But Ms Fiorina seems to have underestimated the scepticism of the markets, which still remembered the hash Compaq made of its acquisition of Digital Equipment in 1998. She also misjudged the reaction of the founders’ children, led by David Packard and Walter Hewlett.
Mr Packard, an emotional philanthropist, was aghast at the scale of the lay-offs that the merger would entail — at least 15,000 jobs, bringing the loss during Ms Fiorina’s reign to one in six HP staff. When he publicly attacked the merger, he was deluged with admiring letters from HP staff, attacking Ms Fiorina’s high-handed management.
Mr Hewlett’s opposition is founded less on emotion than on disagreement with the deal’s rationale. Ms Fiorina, with her background in telecoms, exaggerates the importance of scale in the computer business. As a result, HP will hand over to Compaq shareholders one-third of the equity in its high-margin, market-dominant printing and imaging business, and get in exchange a stake in Compaq’s low-margin PC business. Scale in the PC business is less important than nimble execution, which means selling machines directly, something Compaq is only just starting to do. And merging the two server businesses will annoy many customers, who have existing investments in one of two technically incompatible product ranges.
An outside manager running a family firm always has a hard task. In a disagreement, the hired help usually goes, as Jacques Nasser did in October after losing the trust of Bill Ford. When the family firm is a quoted company, the tensions increase: family shareholders, with their large holdings of a single stock, dislike risk more than most other investors. This, argues the Fiorina camp, explains the approach of the Hewletts and Packards, whose HP stock finances generous donations to various good causes. They have a powerful incentive to “preserve wealth rather than to create it”.
Even if the merger collapses, HP will need to change. For the moment, though, Ms Fiorina is battling on. The real fight, she is bravely insisting, still lies ahead: the date for the shareholder vote will not be before February, and institutional investors have a tendency, in arguments with family shareholders, to support the management. But her wounds look mortal. It is surely only a matter of time.