HP Counting on Apotheker to Drive Growth in Software Business

By Fahmida Y. Rashid  |  Posted 2010-10-01

HP Counting on Apotheker to Drive Growth in Software Business

With software veteran Leo Apotheker at the helm, Hewlett-Packard is poised to bring applications into its arsenal of PCs and servers.

It took only 55 days, but the technology giant announced Sept. 30 that it had chosen Apotheker, who last sat in SAP's top seat, to be the new HP CEO. Apotheker replaced Mark Hurd, who left amid a scandal involving accusations of sexual harassment and claims of improper expenses, then was hired as Oracle co-president.

HP introduced its new CEO to investors on a conference call on Oct. 1. During the call, Apotheker said he believed Hewlett-Packard was uniquely positioned as big technology companies pull together hardware, software and services businesses, but it was "undervalued," he said.

"There are few companies that can even come close to what HP can do in hardware," Apotheker said.

However, HP is "not grounded" in software, he said, and the company needs to pay more attention to building up that part of the business.

"Software is the glue," Apotheker said. "It's how we can make sure that the various parts of our technology work together."

Industry analysts say HP needs to dramatically expand its software portfolio to lessen its dependence on low-margin PC sales and to successfully fight back rivals such as Oracle, Cisco Systems and IBM, which offer comprehensive software offerings integrated with hardware. In introducing Apotheker, HP officials said the company needed a strong executive that could steer the company internationally, especially into high-growth and emerging markets, experience that Apotheker brings to the table.

Apotheker, whose name had not appeared during the flood of rumors about possible HP CEO choices, spent most of his career at SAP in various senior executive roles. He rose from deputy CEO to co-CEO before finally becoming the sole CEO in 2009. During his 18-month tenure, he cut costs and oversaw some of the company's biggest acquisitions, before abruptly in February resigning after SAP had its first annual sales drop since 2003.

While calling the board "unpredictable" and Apotheker a "wild card," Gleacher & Company analyst Brian Marshall wrote in a research note that the appointment was not a "thesis changer." Under Hurd, HP has been moving aggressively into the software and services businesses, and appointing someone with proven software expertise merely cements the company's strategic direction.

Marshall called software the company's "Achilles heel," as software accounted for an anemic 3 percent of total revenues, but acknowledged that HP has been aggressively acquiring companies to help build up the business, including 3PAR, Palm and EDS.

As the world's biggest maker of business-management software, SAP can help HP establish itself in the enterprise software space. "We would not be surprised to see HP and SAP get closer," Cowen and Co. analyst Peter Goldmacher said in a research note.

When pressed about a relationship with SAP, Apotheker played it safe on the conference call, saying merely the two companies were partners and there could be "great opportunities" ahead.

Apotheker Hiring Hurls Competitive Challenge at Oracle

Many analysts felt the appointment filled a gap in HP's senior talent pool, which was already strong in hardware and services. Having added an executive with extensive software experience, "HP is now a three-way player," wrote Technology Business Research analyst Stuart Williams.

Williams predicted that Apotheker will "reinvigorate" the portfolio under the HP Software and Enterprise Server, Storage and Networking divisions as a first step. He also noted that HP had recently hired ex-Microsoft executive and Windows veteran Bill Veghte as the head of the HP Software and Services division.

The HP board also named former Oracle President Ray Lane as "nonexecutive" company chairman, which is apparently an advisory role. Currently a managing partner at venture capital firm Kleiner Perkins Caufield & Byers, Lane will take up his post Nov. 1, the same day as Apotheker's start and the beginning of HP's fiscal year.

There has been a lot of friction between HP and Oracle in the past few months, beginning with Oracle CEO Larry Ellison lambasting the board for firing Hurd, Hurd joining Oracle as co-president, and HP's lawsuit attempting to block the appointment. While the two companies acted like cordial friends at the recent Oracle OpenWorld show in San Francisco, HP's decision to name the former head of Oracle's bitter enterprise software rival as its new CEO and then name a former Oracle president and CEO to HP's board can only be viewed as a direct challenge.

On the conference call, Apotheker merely reiterated HP's commitment to combining hardware, software and services, saying, "We will execute our strategy, and I am sure Oracle would focus on their own strategy as well."

Despite its reaffirming the company's strategic direction, no one foresaw Apotheker's appointment. Rumors had focused on internal candidates, with head of PC division Todd Bradley and enterprise chief Ann Livermore being mentioned most frequently, but there had been hints that the company would bring in an outsider instead. Bradley had even hinted at the possibility of his taking over the top job at TechCrunch's conference earlier in the week, answering a question with, "You can ask me next year, if I take the position."

"Our board of directors cast the net very far and very wide both internally and externally," Robert Ryan, the lead independent director of HP's board, said on the call. "We ended up with six people who could have done the job."

Apotheker has a big job to do, and he is clearly going to be paid very well to do it. According to papers filed with regulators, Apotheker will receive a $4 million signing bonus and a $4.6 million relocation allowance to work at HP. Within 30 days, HP will grant the new CEO 156,000 HP restricted shares-worth over $6 million at the current share price-vesting over two years. He will receive 728,000 more for meeting performance goals that will vest over three years. He is also eligible for a cash bonus between $2.4 million and $6 million in 2011, and his annual salary is $1.2 million.

"My heart is in being a CFO, and my family and I are pleased I'm going back to that," said HP Chief Financial Officer Cathie Lesjak, who had been acting as interim CEO. "I have never felt more confident about our business."

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