HP Faces Pressure in Replacing Fiorina

By Jeffrey Burt  |  Posted 2005-02-14

HP Faces Pressure in Replacing Fiorina

Now comes the hard part. Having dispatched Carly Fiorina as chairman and CEO of Hewlett-Packard Co. last week, HP board members are faced with the daunting task of finding someone who can accomplish what the estimable Fiorina couldnt—make HPs enterprise business worth the $19 billion the company paid for Compaq Computer Corp. in 2002.

Fiorinas successor will have to find a way to more tightly align HPs disparate business groups and products and give the Palo Alto, Calif., company a clearer vision, said enterprise customers and industry analysts.

Her departure especially will add fuel to the debate among financial analysts over whether HP—and its customers—would be better served by spinning off some of its businesses—in particular, printers, imaging and PCs.

"HP-Compaq certainly has had a major focus on the consumer market," said John Halamka, CIO of Harvard Medical School and CareGroup Health System, in Boston, which uses some 200 Wintel and Unix HP servers.

"You have to ask whether the current focus on the consumer market distracted a company that has traditionally focused on the enterprise. Id love to see a company focused on my marketplace. The high-end Compaq gear was extraordinarily reliable, and the high-end HP gear has had more failures."

Read more here about Carly Fiorinas departure from HP.

In announcing Fiorinas departure, HP executives said that the companys board of directors was committed to the strategy she had laid out but that better execution was needed.

However, analysts said such statements were curious, given the companys problems since the Compaq acquisition. Execution has been a problem at HP, but the strategy needs to be cleared up.

"I find this sort of singular focus on execution a little surprising because there are strategy issues that need to be discussed," said Gordon Haff, an analyst with Illuminata Inc. "Theyre lacking a truly integrated strategy."

HP also finds itself pressured on several fronts. In the server area, HP is battling Dell Inc. on the low end and IBM on the high end.

In addition, HP is competing with Dell in PCs and with IBM in services, and it must stem the bleeding of its embattled storage business.

Right now, HPs Imaging and Printing unit accounts for the bulk of the companys profits. Because of this, the pressure to spin off parts of the company will increase.

During a meeting with financial analysts in December, Fiorina said the board had debated that issue three times over the previous few years and each time agreed with her that it was a bad idea. Thirty-six-year HP veteran Robert Wayman, the chief financial officer and interim CEO until Fiorinas replacement is found, reiterated that last week.

"We have a unique portfolio, one that is stronger together than apart," Wayman said.

Fiorinas departure means that the idea will nevertheless be revisited. Leslie Fiering, an analyst with Gartner Inc., said HP has been slow to respond to trends in its PC business—releasing notebooks with Intel Corp.s Centrino mobile technology after competitors did, for example—an indication that HP had difficulty integrating Compaqs engineering units with its own.

"Compare Gateways eMachines acquisition," said Fiering in San Jose, Calif. "The speed with which they were delivered suggests that the design teams integrated and got to work almost immediately after the acquisition."

Next Page: The search for a successor.

Search for a Successor

Frank Gillett, an analyst with Forrester Research Inc., in Cambridge, Mass., suggested that if the directors decide to keep the company intact, it might need to reorganize along printer, commodity and premium lines.

Patricia Dunn, an HP director since 1998 who was named to replace Fiorina as chairman, said the board would immediately launch a search for a successor.

Dunn said all qualified candidates—both internal and external—would be considered, but she hinted that the next CEO will likely come from outside HP.

Two top internal candidates are Ann Livermore, executive vice president of the Technology Solutions Group—which includes enterprise hardware and services—and Vyomesh Joshi, executive vice president of the Imaging and Personal Systems Group. Livermore had been considered a candidate for the CEO job before Fiorina came on board in 1999.

Other names that surfaced soon after the resignation include former Compaq CEO and current MCI Corp. Chairman and CEO Michael Capellas and former Oracle Corp. President and Chief Operating Officer Ray Lane.

Neither Dunn nor Wayman would talk about the qualifications necessary in the next CEO, although Dunn did say the person would be expected to be "more hands-on" in executing the companys strategy.

HPs board will replace a high-profile executive who put her plan in place to rapidly grow a stagnant company but was unable to capitalize on it.

Fiorina may have overseen the largest corporate merger in the IT industry, but it was difficult to move the company forward after the purchase. In the end, that proved to be her downfall.

Click here to read more about Fiorinas ouster.

"The fact is that, although the merger certainly wasnt the disaster a lot of the naysayers said it was going to be, the company has struggled since the merger," said Illuminatas Haff, in Nashua, N.H. "There have been operational issues and no consistent results. By all appearances, the HP board didnt have the confidence in Carlys abilities going forward."

Indeed, the board of directors had been discussing a change for several weeks and on the afternoon of Feb. 8 finally came to a decision, asking Fiorina to step down, Dunn said.

"It is not a sudden decision," Dunn said. "We have had a series of deliberations over the course of weeks and longer. It may seem precipitous, but it was a well-deliberated decision."

Fiorina agreed that she and the board differed on HPs direction. "While I regret the board and I have differences about how to execute HPs strategy, I respect their decision," she said in a statement.

Fiorina had big plans for HP after the companys acquisition of Compaq and believed she had the pieces in place to challenge IBM.

Fiorina, at the time an executive at Lucent Technologies Inc., came to HP in 1999, charged with the job of reviving a company heavily reliant on its profitable printer business but with an enterprise business stuck in neutral.

Fiorina streamlined the company, whittling down the dozens of business units to a few, increasing profits and growing its product portfolio.

In 2001, she announced HPs intention to buy rival Compaq, and after a bruising proxy fight with director Walter Hewlett, the son of one of the companys founders, HP completed the purchase in May 2002.

Next Page: A smooth acquisition.

A Smooth Acquisition

The acquisition itself went reasonably smoothly, observers said. HP was able to merge the companies and product lines well. It was after the merger that the key problems arose.

Fiorina reorganized several business units, last year folding the enterprise storage and server business into the services unit, and last month bringing the PC business under the control of the Imaging and Printing Group.

Problems surfaced in the third quarter of last year, when the Enterprise Storage and Server Group, hobbled by mistakes in a massive SAP AG migration and by deep discounting by some resellers, reported a $208 million loss.

HP rebounded in the fourth quarter, but criticism of Fiorina continued to grow.

Reports began circulating last month that the board, concerned with HPs results under Fiorina, was debating distributing some of her duties to other executives, something HP spokespeople denied.

Under Fiorina, HP became caught in two tough paradoxes, Forresters Gillett said. It wanted to be a vendor of commodity products that could compete with Dell on the low end but also be a premium dealer of distinctive technology.

At the same time, it was making an aggressive push into the commercial space. "Each one of these is tough," Gillett said. "Putting them both together is really difficult."

The result was a company that could do all these things, though none exceptionally well, and that was unable to clearly define itself to the industry and its customers.

Customers are waiting to see if the impact of Fiorinas resignation will filter down to them.

"Whenever you have a larger enterprise and you strike a strategic partnership with a vendor, you assess the continuity of the products and services," said Nelson Ramos, CIO and enterprise IT strategist for Sutter Health, in Modesto, Calif., and an eWEEK Corporate Partner. "The concern is how different organizations that comprise HP are realigned. Once the new leadership comes in, some product lines may be emphasized over others."

Senior editors Carmen Nobel and Paula Musich contributed to this report.

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