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 user 2005-01-26 at 10:54:00 am Views: 63
  • #9898

    Carly Fiorina Fails At Hewlett-Packard After Betting Badly

    Many knew it at the time, but now everyone should: Walter Hewlett was right.

    In 1999, Carly Fiorina joined Hewlett-Packard Co. as chief executive and vowed to make the fading Silicon Valley icon a more-nimble New Economy player. She took the wrong strategy and failed, at least so far.

    Now the H-P board is chipping away at her responsibilities, as first reported in The Wall Street Journal1 on Monday. But while the company has taken that baby step forward, it took two large strides backward a couple of weeks ago when it threw its crown jewel into its backyard compost pile, combining its profitable printer business with its struggling personal-computer unit.

    What should HP do? Please send comments and questions to longandshort@wsj.com3. The centerpiece of Ms. Fiorina’s tenure has been her controversial takeover of Compaq, which H-P continues to defend as a smart plan for improving its competitive edge with cost efficiencies. That Get-Big strategy to compete with International Business Machines hasn’t been a panacea for the complex and myriad problems H-P faced — the drubbing its PC unit was taking from Dell, its faltering ability to compete with IBM in servicing big corporate clients, its lack of any big new consumer gadgets. Mr. Hewlett and many others argued at the time that H-P was diluting its printing business to double down on a chancy bet that it could beat Dell and IBM in businesses they dominated.

    Yet, Ms. Fiorina threw herself into convincing Wall Street of the merits of the merger, employing her considerable salesmanship skills, and got the deal through, barely. But largely because of the effectiveness of the opposition, investors never fully bought into the merger, and H-P’s stock suffered, losing about 15% since the deal was announced in September 2001, underperforming peers and the market.

    The dubious victory bought time to cut costs and revive business units. Yet the cost savings never resulted in raising profit margins near the company’s original postmerger targets, especially in its ailing PC business. As the current Fortune magazine suggests, H-P could face a significant write-down of its goodwill, the bookkeeping measure of a company’s intangible value. That’s the hallmark of a failed deal. H-P says such a write-down is unlikely.

    Since the merger, H-P has lost market share and failed to revive its profit margins. It relinquished the No. 1 position in market share of personal computers last year to Dell. The Compaq merger hasn’t helped in other areas either. In the 12 months ended in September, IBM and Dell gained share in network servers, while H-P fell to 26.6%, from 28.7%, Morgan Stanley says. H-P’s operating margins in business services have fallen for two years.

    H-P argues that it has improved profitability in printing to peak levels, an improvement it credits to the merger. H-P points out that its PC-segment growth outpaced Dell’s in three of the past four quarters and that its businesses-services operation has recently been growing more quickly and been more profitable than IBM’s. H-P says that market-share losses have been less than might have been expected, given the distractions of a large merger.

    IBM had the courage recently to exit the bleak PC business. By contrast, H-P continues to hold fast, though it has put on a brave face by contending it now values profitability over market share. Morgan Stanley, which is neutral on the stock, forecasts little improvement this year over H-P’s meager 1% operating margin in that segment last year.

    Ms. Fiorina has had more than 2½ years since completing the merger in May 2002 to make it work. But H-P is still stuck in between high-end services provider IBM and master of the PC-as-commodity market Dell.

    “I’m not sure anyone could have pulled this off,” says Merrill Lynch analyst Steve Milunovich. “I wouldn’t give her a high grade, but I wouldn’t call her a disaster.”

    Alas, few CEOs envision epitaphs reading, “Not Disastrous.”

    The solution inexorably leads to breaking up the company to unlock value in its cheap stock. H-P disagrees, saying that breaking up the company might soothe Wall Street in the short term but that the company will prove to be more valuable together over a longer period.

    The printer business should earn $1.09 a share in 2005 and deserves, Morgan Stanley argues, a P/E multiple comparable to the S&P 500′s 18, a bit below rival Lexmark. Taking into account H-P’s $2 a share in spare cash, that gets the value to about $20 a share.

    H-P’s stock closed yesterday at $19.66 on the New York Stock Exchange. In other words, the market continues to ascribe no value to the rest of H-P’s business. Split off, however, Morgan Stanley argues (as it has for some time) that the other parts could be worth about $10 a share. H-P’s action two weeks ago to combine the two lines moves in the opposite direction.

    With Ms. Fiorina at the helm of the conglomerate she created, its stock will be lucky to continue stagnating. H-P continually faces competitive threats to its printing business. To Ms. Fiorina’s credit, H-P has staved them off better than many expected. But even focused companies struggle to retain the midteen operating margins that unit enjoys. The longer H-P resists change, the more vulnerable the printer unit becomes.