http://www.businessweek.com/articles/2013-01-10/can-meg-whitman-reverse-hewlett-packards-free-fall

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Can Meg Whitman Reverse Hewlett-Packard's Free Fall?


Can Meg Whitman Reverse Hewlett-Packard's Free Fall?

Photo illustration by 731; Photographs by AP Photo; Bloomberg (2)

On Jan. 16, Hewlett-Packard (HPQ) plans to hold a ribbon-cutting to show off an overhauled customer meeting center at its headquarters in Palo Alto. A year in the making, the complex creates a striking first impression. The off-white 1980s-vintage entryway has been updated with an ultra-modern look—lots of open space and blue lighting. Peer through the floor-to-ceiling glass walls, and you see that the space has been rebuilt around an old, bending oak tree in the middle of a courtyard: William Hewlett and David Packard planted it there back in the 1960s. “Without overstating things, this is symbolic of the rebirth of Hewlett-Packard anchored by the foundation of that oak tree,” says Meg Whitman, who works in a cubicle in the same building.

Whitman, HP’s fourth chief executive in two and a half years, is eager to project calm. She tries to have a swim each morning at a public park near her home before heading to the office. In person, she can be playful, dancing in her chair while explaining the country music-themed ringtone on her phone. For the most part, though, she’s direct about her past and HP’s future.

People outside Silicon Valley may know Whitman best for her short-lived political career. After a successful 10 years as CEO of EBay (EBAY), she made an unsuccessful run at the California governor’s office in 2010. She argued with a former housekeeper in the press about how she treated the help and whether or not Whitman knew she had hired an undocumented worker. The squabble was a final kick to the head for a struggling $150 million campaign, but Whitman says she learned a few things about resolve from the experience. “Running for political office was the hardest thing I have ever done,” she says. “When things seem challenging here, I go back to that.”

Things are challenging at HP—more, perhaps, than at any time in its history. Customers are buying less of two of HP’s most important products—PCs and printers—while the company has amassed debt and laid out billions on acquisitions that haven’t worked out. Wall Street analysts have kicked off the New Year by saying that Whitman ought to break up the company. Since August 2010 the company has lost 70 percent of its share price and close to $68 billion in value. Despite being a component of the Dow, HP currently is worth $29 billion, half a billion or so less than Carnival Cruise Lines (CCL), which has roughly one-ninth the revenue. “You just wonder how HP can possibly fall so far so fast,” says William George, a professor at Harvard Business School and board member of ExxonMobil (XOM), Goldman Sachs (GS), and the Mayo Clinic. “You look at HP’s share price and think, ‘Are you kidding me? That’s all it’s worth?’ ”

It’s true that HP has a collection of now commoditized businesses such as PCs, servers, and printers, and that its products look dated in some areas. But many of these businesses remain cash machines, with HP generating more than $12 billion in operating income a year. The disarray at the top of the org chart, though, has just been too much. “This is one of the great corporate destructions of all time,” says George. “They will continue drifting and disappointing their shareholders unless they’re ready to make some really hard decisions.”

Whitman says she’ll make them, but needs time to really change things. “Five years,” she says. “Some people don’t like that answer.”
 
 
Before HP, no one had heard of inventing things in a garage and changing the world. “HP is the model for the idea that as a startup you can become one of the biggest and most important companies,” says Leslie Berlin, the project historian for the Silicon Valley Archives at Stanford University. “It’s an idea that’s still vitally important for the Valley.”

Through the years, HP has shifted—not always nimbly, though usually successfully—from producing scientific tools to calculators to PCs to printers to data center gear. Hewlett and Packard mastered the balance of spending enough on R&D to come up with new products, while making lots of money on the old ones.

Along the way, HP crystallized many of the mores of Silicon Valley’s business culture, creating a casual office environment run by engineers, with workers sharing in the company’s performance. “This was a company founded by good men with good employees that built good products,” Berlin says. “It functioned as sort of the moral core of the Valley.”

The roots of HP’s decline go back at least to the 1990s. Carly Fiorina, Mark Hurd’s predecessor and the first outsider hired for the CEO job, spent her tenure doing away with what she saw as stodgy management principles baked into HP’s DNA—such as an abhorrence of large-scale layoffs—that were slowing it down. In 1999, HP sold Agilent Technologies (A), the electronic instruments division closest to HP’s roots.

Two years later, after an acrimonious shareholder battle between Fiorina and Bill Hewlett’s son Walter, HP bought Compaq, the huge personal-computer manufacturer. That deal gave HP great heft but sapped it of a cohesive corporate culture and set it on the path toward becoming a slave to the supply chain rather than a company obsessed with invention. Fiorina was fired in early 2005 after she missed Wall Street’s numbers one time too many; it was under her watch that HP turned into a misfiring conglomerate and introduced the high-level intrigue that has plagued its leadership since.

Most infamously, members of Fiorina’s board leaked information about their meetings to reporters, and company directors then proceeded to spy on HP employees and reporters to figure out who had done the leaking. HP “was considered a bit of a model board for a long time,” says Charles Elson, director of the University of Delaware’s Weinberg Center for Corporate Governance. “When Carly came in, that changed.”

What HP could have used in March 2005 was a unifying principle, if not a return to its foundational identity. What it got was Hurd. A suit-wearing, Baylor football-loving, foul-mouthed alpha male, he had been running NCR (NCR) in Dayton for two years when he took over at HP. Hurd had done well at NCR, which made cash registers, automated teller machines, and, at the time, data warehousing software that the world’s largest companies used to keep track of and analyze their merchandise, customers, and sales.

Few people beyond the Wall Street analysts covering the company had any idea who he was. It would turn out that Hurd was practically a human cash register: Flash a spreadsheet in front of him and he would remember every figure on every line. HP had a dizzying array of businesses—low-profit PCs, printers it virtually gave away to sell ink, high-end supercomputers, software sold via multiyear licenses, and a services arm that charged by the hour.

In short order, businesses such as PCs and servers that often lost money became very profitable. Hurd hit Wall Street’s revenue numbers in 21 out of 22 quarters and increased profits 22 quarters in a row. HP’s revenue rose 63 percent, while its share price doubled. “Mark Hurd was cutting costs and doing a good job of it,” says Jayson Noland, an analyst at Robert W. Baird. “But you can’t cut costs forever, and investors wanted to see growth.”

According to interviews with dozens of former HP executives—almost all of whom refused to speak on the record to avoid alienating the company, but who are fans of Hurd—he came close to operating HP with a founder’s authority. He was for all intents and purposes the CEO, CFO, COO, and head salesman. “Within 30 to 45 days of Mark joining HP, there was not a single person at HP that could say that he had not been affected by Mark in some way,” says Sandeep Johri, a former vice president at the company. “They might not always have been happy about the effect, but they had felt it.”

Any request for outside consultants had to pass Hurd’s desk. HP went from spending about $100 million a year on firms such as McKinsey and Bain & Co. to almost nothing. A yearly bonus system got broken up into quarters; employees who were used to sharing a bonus pool were now meticulously and frequently ranked and rewarded based on their achievements. Hurd called for the lowest 10 percent of performers to be fired each year. He also had all the company’s executives interviewed and then analyzed by Heidrick & Struggles (HSII), an executive recruiting and talent evaluation firm, and personally reviewed the assessments.

If sales of a certain type of printer slowed, the person in charge of the product soon received a brutal, curse-filled reprimand from Hurd. If real estate costs were out of whack in Vietnam or a currency shift in Brazil was hurting server margins, he knew about it. One executive recalls Hurd discovering 715 people in San Diego working on tens of thousands of printer drivers and getting the team pared down to 64 people and a handful of drivers. “It’s hard to believe that in a company of 300,000 people one guy can have that much influence, but he did,” says Johri.

Whatever Hurd’s influence, HP’s board didn’t consider him indispensable, and forced his resignation in August 2010. The board had learned of a complaint sent by a former marketing contractor named Jodie Fisher that accused Hurd of sexual harassment. Hurd denied the allegations and recoiled at the notion of making the complaint public, while a handful of board members accused him of trying to obfuscate his relationship with Fisher. “The board recognizes that this change in leadership is unexpected news for everyone associated with HP, but we have strong leaders driving our businesses, and strong teams of employees driving performance,” HP director Robert Ryan said at the time. An HP investigation into the matter unearthed e-mails between Hurd and Fisher that undermined her harassment claims. HP’s board threw Hurd out anyway.
 
 
Three days after he’d resigned as CEO under pressure from the company’s board of directors, Hurd received an e-mail from Steve Jobs. The Apple (AAPL) founder wanted to know if Hurd needed someone to talk to. Jobs had lived through a similar experience decades earlier when Apple’s board turned on him, an analogy Hurd and Jobs’s mutual friend and Oracle (ORCL) CEO Larry Ellison was quick to draw, condemning Hurd’s ouster as “the worst personnel decision since the idiots on the Apple board fired Steve Jobs many years ago.”

Hurd met Jobs at his home in Palo Alto, according to people who know both men but did not wish to be identified, compromising a personal confidence. The pair spent more than two hours together, Jobs taking Hurd on his customary walk around the tree-lined neighborhood. At numerous points during their conversation, Jobs pleaded with Hurd to do whatever it took to set things right with the board so that Hurd could return. Jobs even offered to write a letter to HP’s directors and to call them up one by one.

Over the previous five years, Hurd had built HP into the largest technology company in the world; sales in 2010 were $126 billion. Shares were on a tear, and profits kept rising. Yet Jobs told Hurd and other friends that he thought the board would unwind HP’s progress and send the company spiraling into chaos.

By offering Hurd counsel, Jobs wasn’t merely lending a friend psychological support. Rather, he was going to bat for the legacy of Bill Hewlett and Dave Packard. A healthy HP, Jobs urged, was essential to a healthy Silicon Valley. “It’s the founding company of the Valley,” says Bill Campbell, the chairman of Intuit (INTU) and an Apple board member. “You don’t want to see it go away.”

Jobs ultimately could not pull off a reconciliation between Hurd and HP. He passed away a little over a year later, but lived long enough to see his prediction borne out. A couple months after Hurd and Jobs talked, HP’s board picked Léo Apotheker as its new chief and tapped Ray Lane as the new chairman. Lane, a member of Silicon Valley’s old guard, took on a major role in restructuring the company—and has served as a constant during HP’s implosion.

As its fortunes have diminished, the new CEOs have tended to blame Hurd. He fired people, got rid of office space, eliminated benefits, and asked employees to do more with less quarter after quarter. The company, in this version of events, had become lean to the point of emaciation. By the end of Hurd’s tenure, HP’s internal technology systems were antiquated, and the company had no attractive products to offer in high-growth areas such as mobile and cloud computing. Moreover, morale had suffered as talented employees were culled via the mandatory ranking system, and top executives found Hurd to be less receptive to new ideas. While many of these criticisms have the ring of truth, they fail to capture why HP’s prospects got so much worse so quickly after Hurd left.

The impression that many people seem to have is that HP’s sales fell off a cliff because it made inadequate products. Not so: HP posted revenue of $126 billion in Hurd’s last year and $120.4 billion in 2012. It remains the dominant seller of corporate computing products in the world. “I see them looking more like a junior IBM (IBM) situation,” says Chris Bertelsen, chief investment officer at Global Financial Private Capital in Sarasota, Fla., which has $1.8 billion in assets under management and has been buying HP stock. “Meg could get this going,” he adds, underscoring that HP’s biggest challenge hasn’t been its core businesses, but its leadership. The company’s struggles are compounded by a debt-laden balance sheet. “It looks like the darkest hour now with the cash issues and the stock down,” says Ed Zander, the former CEO of Motorola. “I think it will survive, but the question is whether HP will be relevant again.”
 
 
As Jobs was advising Hurd to patch things up with the HP board, Larry Ellison, Hurd’s friend and tennis buddy, offered him a powerful platform to exact his vengeance. One month after Hurd departed HP, Ellison named him co-president of Oracle, an HP rival in the data center software and hardware business. (Hurd declined to comment for this article. Ellison did not respond to requests for an interview.)

When Hurd left, HP tapped CFO Cathie Lesjak as its interim chief executive officer. She had no aspirations to be CEO, though a number of HP division heads did. In the background, Marc Andreessen, the Netscape co-founder turned venture capitalist, began exerting more influence in his role as a board member and started a hunt for the company’s next leader. Lesjak assured investors and the press that HP would maintain the financial discipline imposed by Hurd, while looking for a replacement who understood software development and sales, and would encourage research and development. HP would stay lean and mean while growing in higher-profit areas and demonstrating more innovation. Instead, a new set of baffling moves followed.

First, Lesjak raised the company’s guidance for the upcoming quarter by about $500 million. Two weeks later, HP kicked off a bidding war with Dell (DELL) for the storage company 3PAR; it ended up paying $2.35 billion. Ten days after that, HP’s board approved a $10 billion share buyback. Following this flurry of activity, HP hired Apotheker as its new CEO and named Ray Lane as a new board member and executive chairman of the company.

Apotheker had spent decades at SAP (SAP), one of the world’s largest software makers, but had recently been let go after a short stint as CEO. Lane is known as an enterprise computing Mr. Fixit. During eight years at Oracle in the ’90s he worked alongside Ellison, helping to repair relationships with customers and imposing discipline on that company’s freewheeling sales culture. When he and Ellison had a falling out, Lane left for Kleiner Perkins Caufield & Byers, one of the Valley’s premier venture capital firms. The Apotheker-Lane combo signaled a shift away from hardware toward the higher-margin realm of business applications.

Apotheker started work in November 2010. In his first month as CEO, he once again hiked HP’s sales forecasts, only for HP to later miss the numbers and begin a pattern of disappointing Wall Street. Meanwhile, Apotheker got teased in the press for not even being in the U.S. to run HP; he was on a global “listening tour,” speaking to customers and HP employees, the company said at the time—not, they insisted, trying to hide from a subpoena to appear in a California lawsuit between Oracle and SAP.

Internally, Apotheker did not make many friends. About half of HP’s executive vice presidents had been competing for his job, and former executives say he did little to reach out and win them over. There were other personality issues, too: Apotheker’s aloof demeanor and his seeming reluctance to dig into HP’s operational minutiae. As one high-ranking former executive in the services business recalls, at his first meeting with Apotheker—to provide the lowdown on the services business—he and a dozen people gathered in a conference room to hear the presentation, only to watch as Apotheker nodded off. The group waited uncomfortably for about 15 minutes. The CEO woke up and, to the gathering’s collective astonishment, said he wanted to move quickly past the financial details of the business, in order to talk about less specific customer satisfaction initiatives. Apotheker’s spokesman Sean Healy responds: “His typical workweek lasted 90 hours, visiting and researching sites long ignored by Palo Alto. With this schedule, it’s possible he drifted off a minute in one of what was hundreds of reviews he attended, in a bid to reorient HP’s long-term focus to metrics behind the financials, such as client satisfaction and product performance.”

Former executives recall how quickly HP returned to its free-spending, pre-Hurd ways. Apotheker dished out companywide raises and invited back the consultants. In part because of the circumstances of Hurd’s departure, many acted as if things he had done needed to be unwound. Apotheker, the former executives say, approved just about any plan if people described it as something Hurd had resisted.

By March 2011, Apotheker had been at HP for four months and finally held a press conference to lay out his plans. HP, he said, would install webOS, the mobile software made by Palm, across its PC and printer line, as well as on all new mobile devices. The company would also make a bold entrance into cloud computing, Apotheker said, even though it had no products at the time to do this.

Five months later, in August, Apotheker abandoned the Palm software plan, and the company announced it would be getting rid of its smartphone and tablet technology. HP also announced that, after being advised by McKinsey, it was considering selling off its $40 billion-per-year PC business. Then it lowered its earnings forecast for the coming quarter. And it was going to acquire Autonomy, a software maker that mines corporate data for legal and regulatory compliance purposes, for $10 billion, or 10 times its annual revenue.

The week of the announcements, Apotheker and his team held nonstop meetings to discuss the plan. At one, communications director Bill Wohl and a public-relations consultant named Joele Frank warned Apotheker that all these shifts would generate a big drop in the company’s stock price and a storm of negative press. Apotheker charged out of the meeting, came back to his office, and threw a chair at Wohl, adding that he didn’t ever want to see Frank in front of the board again, according to one person who was in the room. Apotheker spokesman Healy, who says the chair was more shoved than thrown, responds: “The passage of time clearly is directly related mathematically to exaggeration level.”

One month later, Apotheker was fired and replaced by Meg Whitman.
 
 
If HP’s tumultuous past two years can be said to have had an architect, it’s the chairman of the board, Ray Lane. He masterminded the January 2011 board shake-up that brought Whitman on as a director. (Lane, through HP, declined to comment for this article.) During the shuffle, HP tapped five new directors and released four Hurd-era holdovers. According to people familiar with the matter, Lane told directors Robert Ryan—also a director of Citigroup (C) and General Mills (GIS) and a Cornell University trustee—and Lucie Salhany, a former protégée of Barry Diller at Fox, that he needed to remove two anti-Hurd board members to balance the two Hurd loyalists he was removing. Then he proposed throwing a going-away party, these people said. It never happened. “I’m not sure what the hell is going on over there,” says Zander of HP’s board. “When you have all these changes going on, it’s tough to get things done.”

Lane has his defenders. “He’s always been straightforward and easy to deal with,” says Scott McNealy, the former CEO at Sun Microsystems, which counted Oracle as a close partner. McNealy characterizes Lane as an “economic volunteer” who has agreed to spend a large portion of his golden years trying to rescue HP from the abyss. “You are doing that for the good of the company, not to burnish your reputation,” McNealy says.

Several former HP executives disagree sharply with this assessment, characterizing Lane as power-hungry. “You can’t cut Ray Lane any slack because he brought in a lot of these board members who were close to him. The whole idea of a board is to give a company some institutional memory of what the company stands for and how it got there,” says George. “I think they have lost the essence of what they are.”

Since Lane joined HP’s board, the company has bought at least two companies affiliated with Lane. HP paid $350 million for the data analysis company Vertica, which Lane celebrates on his Kleiner bio page, and $1.5 billion for the security technology specialist ArcSight, also a Kleiner investment.

Lane also approved the acquisition of Autonomy, which has blown up. In November, HP said it would write down $8.8 billion of the $10 billion acquisition due to poor sales of the software, while also leveling charges of accounting fraud against Autonomy’s management. (Autonomy founder and former CEO Mike Lynch has denied these charges and set up a website defending Autonomy’s management point by point.)

Like Lane, Whitman has tried to distance herself from the Autonomy decision, telling analysts on a Nov. 20 conference call that the blame lies with Apotheker and former merger and acquisitions head and CTO Shane Robison, who departed in 2011. “The CEO at the time and the head of strategy who led this deal are both gone—Léo Apotheker and Shane Robison,” Whitman said.

Robison declined to be interviewed for this article, but Apotheker pointed the blame squarely back at Lane and the rest of the board in an e-mail to Bloomberg News. “No single CEO is ever able to make a decision on a major acquisition in isolation, particularly at a company as large as HP—and certainly not without the full support of the chairman of the board,” he wrote.
 
 
“The narrative is worse than what is actually going on here,” Whitman says. Internally, she has preached frugality and humility. At one meeting with 150 or so top HP executives, she declared, “We are a Marriott company, not the Four Seasons.” When working late, Whitman orders in pizza or Chipotle (CMG). “This is not a fancy pants kind of company,” she says. To prove her point, Whitman removed executive vice presidents from their plush offices and placed them in cubicles.

Whitman has also tried to rally employees and outsiders around innovation. The company has already started to stem market share losses in PCs through a new line of tablets and elegant laptops with detachable screens. The services business, having been retooled, will grow again, and HP will make printing more attractive through a host of Web-based features on its products, according to Whitman.

HP may return to the smartphone business as well. “Ultimately, we have to do that,” Whitman says. “But we have to figure out how to do it without losing a boatload of money.”

She allows that HP can’t make any major acquisitions just now, while insisting that outsiders have overstated the limitations imposed by the company’s cash crunch. “To my predecessors’ credit, they assembled a very powerful set of assets,” Whitman says, ticking off a half-dozen acquisitions. It’s these storage, security, networking, and data analysis companies that HP will use to spice up its data center product lines, which now—at long last—also include a broad suite of cloud computing options. HP has started upgrading its own technology systems around cloud services from Salesforce.com (CRM) and Workday (WDAY) in a bid to save costs and modernize.

Perhaps the most difficult task may be dealing with the talent drain HP has suffered since 2010. Though unwanted exits have slowed under Whitman, at least 120 executives have departed in the last two years, many to rivals. HP has lost its former CTO, head of printers, research chief, head of corporate hardware, head of corporate sales, and chief investment officer. General Motors (GM) recruited away dozens of people from HP’s internal technology team.

On Jan. 4, the investment research division of UBS (UBS) issued a note that many people in the Valley had feared was coming. It led with a discussion of HP’s management, and how it needs to think about breaking up the company. What UBS said it “preferred” would be an “enterprise and PC/printer split” in which HP’s data center business became one company and its PC and printer businesses another. This note added to gossip that was already bubbling in the Valley about rivals and private equity firms sizing up for parts. Several high-ranking executives at Silicon Valley firms confirm that they’ve been analyzing HP’s bits and pieces.

Whitman says HP will remain stronger if kept whole. She portrays HP as the only company that can sell corporations technology stretching from the device through to the data center. The goal in the coming years will be to stitch all these products together through cloud software and convince customers that HP offers the best mix of good-looking, secure, smart computing systems. It’s a winning pitch. Execution, of course, is another matter. “We’ll see how it turns out,” Whitman says. “My view is that it will be one of the great comeback stories in American business.”

Vance_190
Vance is a technology writer for Bloomberg Businessweek in Palo Alto, Calif. He is the author of Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic Future (HarperCollins, May 2015). Follow him on Twitter @valleyhack.
Aaron_ricadela_75x75
Ricadela is a reporter for Bloomberg News and Bloomberg Businessweek in Frankfurt.

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