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 user 2005-02-18 at 11:06:00 am Views: 109
  • #10353

    Choosing a New Chief and Pondering a Switch in Focus


    Feb.05 –No matter who succeeds Carleton S. Fiorina as chief executive at
    Hewlett-Packard,the challenge will be the Same: to shift the company’s center
    of gravity to businesses with more ample profits.

    One swift step in that direction -and a step
    Hewlett-Packard has considered, according to an industry executive close to the
    company – would be to buy Eastman Kodak or Xerox to complement and expand
    Hewlett-Packard’s most profitable division, the printer, ink and imaging

    Currently, the company’s printing and imaging division
    contributes nearly 75 percent of its profits, but represents only 30 percent of
    its $81 billion in yearly revenues. The rest of the company, particularly its
    personal computer and corporate computer businesses, are clearly not carrying
    their weight.

    For the long term, industry analysts say, Hewlett-Packard
    has three options – break up the company, improve the efficiency of its current
    businesses, or make a sizable acquisition to add to its profitable units like
    services or printing.

    Hewlett-Packard has closely studied potential deals on that
    front, including Eastman Kodak and Xerox, an industry executive said. The stock
    market value of Kodak is $9.8 billion; Xerox’s value is $14.2 billion.

    Hewlett-Packard has the cash to make such a big move. It
    has more than $14 billion in foreign profits that qualify for a one-time tax
    break passed by Congress last fall, if it brings the money back to the United
    States for investment. In an interview yesterday, Robert P. Wayman,
    Hewlett-Packard’s chief financial officer and interim chief executive, said he
    had not “looked at either of those companies recently.”

    Hewlett-Packard has insisted that the ouster of Ms. Fiorina
    on Wednesday is not a sign that the company has lost faith in the course she
    set. Ms. Fiorina championed the controversial purchase of Compaq Computer in
    2002, a move that greatly increased Hewlett-Packard’s dependence on the
    cutthroat PC business and the market for the larger computers that run corporate
    data centers.

    “Our strategy is totally unchanged,” Mr. Wayman said.

    Patricia C. Dunn, a director who is temporarily stepping in
    as Hewlett-Packard’s chairman, repeatedly said in a conference call on Wednesday
    that the board would search for a new chief executive with “hands-on” skills.
    What the company needed, Ms. Dunn suggested, was a seasoned leader to move the
    company more quickly and smoothly on its current path.

    When a new chief executive comes aboard, the assumption
    will be that that person supports the current strategy, Mr. Wayman said. “That
    said, you don’t hire a chief executive officer to be totally operational,” he
    said. “And strategy needs to be reviewed from time to time.”

    Laura Conigliaro, an analyst at Goldman Sachs &
    Company, said that Hewlett-Packard’s shareholders would do best if the company
    were split into separate companies. She estimates that the break-up value of
    Hewlett-Packard at $27 to $28 a share, with the printing business alone worth
    about $20 a share. Hewlett-Packard shares closed yesterday at $21.48 a share,
    off 5 cents, after rising 7 percent Wednesday on the news of Ms. Fiorina’s

    The logical split, Ms. Conigliaro said, would be to have
    the printing and imaging division become a separate company, run by Vyomesh
    Joshi, the executive vice president who now manages that division. A second
    company, Ms. Conigliaro said, would likely be the corporate computing divisions
    including server computers, storage, services and software, led by Ann M.
    Livermore, an executive vice president who currently oversees those

    “But in a breakup,” Ms. Conigliaro said, “the PC business
    would become an orphan,” a prime candidate to be sold to another company just as
    I.B.M. last December agreed to sell its PC business to Lenovo of China.

    Even if there are any strategic changes at Hewlett-Packard,
    they will most likely not come for several months, after a new chief executive
    is named. Outside and inside candidates will be considered, but the outside
    search has not yet begun. Mr. Joshi and Ms. Livermore are considered the leading

    So for the foreseeable future, Hewlett-Packard will focus
    on improving the performance of its existing businesses. To do that, analysts
    say, will require ruthless cost-cutting and quick moves into new markets where
    profit margins are higher.

    A leading candidate for expense reduction, analysts say, is
    Hewlett-Packard’s corporate computer unit. The business has gross margins –
    revenues minus the cost of goods sold – of 35 percent to 40 percent, A. M.
    Sacconaghi, an analyst at Sanford C. Bernstein & Company, estimated. But in
    the fiscal year ended last October, that division had operating profits of $173
    million on sales of $15.2 billion, as marketing, staff and other expenses ate
    into profits.

    Hewlett-Packard still sells proprietary systems, each with
    its own kind of microprocessor engine and specialized software. Yet
    increasingly, corporate customers are switching to lower-cost machines powered
    by Intel processors and running Linux, a free operating system, or Windows from
    Microsoft. The profit margins on the new machines, using the low-cost technology
    of the PC world, are far lower than on proprietary systems.

    The corporate computer business, Mr. Sacconaghi said, is
    “an extremely difficult market, and Hewlett has to get maniacal about

    The imaging and printing division, however, offers better
    opportunities for expanding into new and adjacent markets where profit margins
    are higher.

    Hewlett-Packard’s market share in the conventional ink-jet
    and laser printer markets is more than 40 percent. But Hewlett-Packard, analysts
    note, is just beginning to make inroads in the market for big multifunction
    printers, copiers and scanners, linked by networks in corporations.

    The market for such machines, currently costing $10,000 or
    more, has so far been led by the traditional copier makers like Xerox, Ricoh,
    Minolta and Canon. Hewlett-Packard is trying to break in with lower-priced
    machines, in the $2,000 to $3,000 range.

    “H.P. is really good at networking and printing, so it’s an
    obvious area for growth,” Mr. Sacconaghi said.

    Digital photos represent a huge potential market for
    Hewlett-Packard. Digital cameras now outsell conventional film cameras, and
    Hewlett-Packard is in that market. More important, Hewlett-Packard is trying to
    get as many digital photos printed on its printers as possible.

    But consumers are also printing digital photos at in-store
    kiosks and online printing services, like Kodak’s Ofoto. One reason a Kodak
    purchase might be tempting to Hewlett-Packard, analysts say, is that Kodak has a
    strong presence in both online and kiosk printing – the alternatives to
    Hewlett-Packard’s home printers for digital photo printing.

    A hybrid strategy would be to keep the company together but
    focus it entirely on the imaging business, broadly defined, said Mark R.
    Anderson, publisher of the Strategic News Service, a technology newsletter.
    Cutting-edge microprocessors are now designed for rendering images in computer
    games, a form of imaging. Supercomputers that do simulations of gene-folding and
    weather patterns, he added, were tackling large-scale imaging problems.
    Fast-growing markets like medical imaging would be opportunities, he said, and
    so would home media computers for entertainment.

    “I would focus on all the businesses through the prism of
    serving the imaging mission, and get rid of lower-margin parts of some of the
    businesses,” Mr. Anderson said.

    The abrupt exit of Ms.Fiorina might suggest turmoil at
    Hewlett-Packard, but so far the company’s corporate customers do not seem
    distressed. “We’re telling clients that the risk of having H.P. as a supplier is
    no more than it was two days ago,” said Carl Claunch, an analyst at Gartner

    Ms. Fiorina’s departure has revived a long-running debate
    about Hewlett-Packard’s future, one that is still unresolved