The Strategy Pathfinder: Extra Live Cases
The Strategy Pathfinder: Extra Live Case - Chapter 2:8
“Fiorina’s folly”
Duncan Angwin
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In 1998, Ms. Carly Fiorina was named “The most powerful woman in American business” by Fortune Magazine following the spin-off of Lucent Technologies from AT&T, her philosophy of “reinvention” and image as pioneer of a communications revolution, and sparkling marketing performances. In July 1999, she was appointed CEO at Hewlett Packard (HP) to reverse its decline and inject new dynamism. She was the first woman to become CEO in one of the 30 companies in the Dow Jones Industrial Average, and also the first outsider and first non-engineer to run HP. Even her strongest critics, though, applauded her bringing an important marketing approach to an engineering-led high-technology firm. The slogan “HP Invent” was symbolic of HP’s reinvention.
As part of reinventing HP, Ms. Fiorina shook the technology world in September 2001 by announcing a bid for Compaq Computer worth $19bn. The intended merger was part of her quest to reinvent HP, which was in clear need of a new strategic direction. While strong in the Unix server market, HP lacked scale in less expensive “industry standard” servers built around the Intel chip. Its personal computing business was struggling to make money in the face of fierce competition from Dell, the market leader. Through acquiring Compaq, these issues could be addressed. Compaq’s industry standard server business was strong and would improve HP’s position in the fast-growing server segment. By combining the PC businesses, there would be sufficient scale to give Dell a run for its money.
Analysts were quick to point out, however, that the Compaq acquisition was a huge investment in businesses that were low margin. Would it not be better to gradually withdraw from PCs, as IBM had done, and invest in higher margin areas such as software? Indeed, it was clear that, despite HP’s scale in PCs, Dell’s low-cost model was beating them as they chalked up losses through aggressive price competition while losing market share. For these reasons, the analysts dubbed the HP/Compaq merger as “Fiorina’s folly.”
In November 2001, a bitter war broke out between Ms. Fiorina and the heirs of HP’s founders, incensed at the idea of the merger. Led by Walter Hewlett, a Board member and son of Bill Hewlett, they waged a proxy battle for control of the company. Walter Hewlett also took Ms. Fiorina to court, accusing her of improper conduct during the campaign to win shareholder support. These allegations were subsequently dismissed. Ultimately Ms. Fiorina won by the narrowest of margins, with 51.4% in favor against 48.6%.
Some of the objectives of the merger were successful, with cost savings of $2.5bn per year achieved. However, Michael Capellas, the Compaq boss who had been named President of HP, left soon after the deal having been deprived of any influential role at the company. The executives directly responsible for the biggest success of the deal, the integration of HP and Compaq, were let go.
Profits stayed flat despite a doubling in sales ($42.4bn in 1999 to $79.9bn in 2004). Performance was erratic, with expectations being missed twice in the past 2 years. The higher margin businesses, although growing, were doing so from a low base. The analysts generally agreed that the merger was really just putting together two business models that were inferior to Dell’s. Instead of Ms. Fiorina’s four-word summary “high tech low cost,” HP appeared to remain high cost with declining margins on its technology.
Ms. Fiorina’s supporters on the Board included Dick Hackborn, HP’s elder statesman, director and executive responsible for creating the company’s hugely successful printing business. Hackborn had close personal ties with the company’s management and founding families and had been instrumental in the departure of the previous Chief Executive, Lew Platt, who had been pushed aside to make room for Ms. Fiorina. It was Hackborn’s sounding out of opinions that cemented the Board’s decision in 1999 to find new leadership. Other staunch supporters included Larry Babbio, Vice-Chairman of Verizon, Sam Ginn, who had led the search committee when Fiorina was hired, and Phil Condit, the former Boeing chairman. Both Ginn and Condit steered the Board’s Nominating and Governance Committee, a key inner group with influence over the composition and workings of the Board.
However, the balance of power in the Board changed. Patricia Dunn, Vice-Chairman of Barclays Global Investors, was said to be against Ms. Fiorina. Sandy Litvack, a former general counsel of Walt Disney, who had publicly supported embattled CEOs, left unexpectedly, Sam Ginn and Phil Condit had left a year ago, and Tom Perkins, an eminent venture capitalist, rejoined the Board a year after retiring, allegedly for age reasons.
Dick Hackborn was aware from soundings of the senior management team that the Board was becoming increasingly concerned about HP’s mishaps. Close observers believe he played a key role in the behind the scenes maneuvering that led to Ms. Fiorina’s removal in February 2005.