The Inside Story of Carly's Ouster


By Ben Elgin By the end of 2004, the pressure in Hewlett-Packard's corner office

was almost unbearable. With Chief Executive Carleton S. Fiorina's

efforts to fix the $80 billion computing colossus stalled and tensions

building with the board, one of high tech's most powerful executives

began mulling an exit plan, BusinessWeek has learned.

Around the holidays, Fiorina held separate meetings with at least four

high-profile chief executives to glean advice on making a "graceful

exit" from HP (HPQ), according to industry sources.

These industry luminaries, approached by Fiorina at yearend business

conferences, included Cisco (CSCO) Chief Executive

John T. Chambers and Intel (INTC) President Paul

S. Otellini. During the conversations, Fiorina told the CEOs she was

feeling some pressure from HP's board and inquired about face-saving

ways to leave the company should she decide it was in the best

interest of shareholders, according to the sources. Chambers and Otellini didn't return requests for comment. A spokeswoman for Fiorina says it is "complete and utter fiction" that she talked to Chambers and Otellini about leaving and adds that Fiorina never contemplated leaving HP.

OVER AND OUT. It was a decision she didn't get a chance to make. On the evening of Sunday, Feb. 6, HP's board hunkered down with Fiorina in an emergency meeting held at Chicago's O'Hare Hyatt Hotel. As a light rain drizzled outside, the directors stewed over their star CEO's failure to execute

her ambitious plan for the company. In addition, directors were

concerned about the "board's inability to work constructively with

[Fiorina]," according to an HP insider. The next day, they asked

Fiorina to step down. And on Wednesday, Feb. 9, at 5 a.m. Pacific

time, HP stunned the world, announcing Fiorina's dismissal, ending her

five-and-a-half year stint atop one of the legends of Silicon Valley.

Despite the surprise announcement, the board's concerns about its

chief had been mounting for nearly a year. Sure, she had dazzled

directors and many investors with her passionate work in pushing

through the controversial merger with Compaq Computer in 2002. And the

immediate integration of the two companies bested expectations,

silencing even her fiercest critics. But by late 2003, investors began

shifting their focus from the Compaq deal to HP's ebbing position

against key competitors IBM and Dell. They bored in on the ragged

financial performance that led to the swooning stock price.

"[Fiorina's] good with marketing. She's a good speaker for the

company," says a former HP executive. "But this is a company that

doesn't need a statesman. It needs a hands-on operations person."

GROWING DOUBTS. The tide really began turning against Fiorina following HP's massive

profit shortfall in the third quarter of last year. That marked HP's

second miss in five quarters and further damaged the company's

credibility on Wall Street -- a major issue, since HP's stock has long

traded at multiples well below those of its competitors. Although

Fiorina fired three top sales executives for the miss, the board's

doubts about its CEO grew. At the same time, the board's proddings of

Fiorina to bolster HP's operations talent went largely unheeded.

As HP struggled to nail down its operations, some directors were

chagrined that Fiorina didn't move more quickly to strengthen HP's

position against Dell and IBM. For instance, although HP has gradually

built up its direct-sales efforts to better compete with

ultra-efficient Dell, some directors felt the company wasn't moving

fast enough, according to the HP insider.

In addition, HP balked at a major acquisition to bolster its

money-losing software business. In 2004, HP had considered acquiring

Veritas Software but didn't move quickly enough, according to current

and former HP execs. In December, Symantec (SYMC) gobbled up the profitable software company -- leaving some HP directors unhappy. "Things needed to make us more competitive in certain segments weren't being done," says the insider.

HEAVY BLOW. By November of 2004, HP's directors began holding periodic conference

calls -- without Fiorina -- to discuss their CEO's performance. And by the time of the board's January meeting in San Francisco, it enlisted

three directors to meet with Fiorina to discuss its concerns with her

performance. The trio produced a document indicating their concerns

represented the consensus of the entire board.

The ensuing board meeting, which was supposed to be an annual strategy

review, became focused on the performance of Fiorina and HP. And

during the meeting, directors pushed forward a plan to distribute some

of Fiorina's operating responsibilities to her key lieutenants.

Sources familiar with the reorganization plans say they're on hold

because of the management shakeup.

It was a heavy blow to Fiorina's credibility as the company's leader.

Just weeks later, she was out. It had become increasingly clear that

HP's need for a nuts-and-bolts operations whiz far outweighed the

benefits of a high-profile CEO. Elgin is a correspondent in BusinessWeek's Silicon Valley bureau


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