Can Anyone Save HP?

Carleton S Fiorina's last stand at Hewlett-Packard took place, aptly
enough, at an airport hotel. For six years the jet-setting CEO had flown the
globe, smiling and perfectly coiffed even as she stepped off of red-eye flights.
Yet on a damp Sunday evening in Chicago, as much of the nation focused on the
Super Bowl, the 50-year-old Fiorina was embroiled in urgent talks with her board
at a conference room at the O'Hare Hyatt, says an HP insider. The next day,
February 7, she was fired. Thus ends the stormy reign of the highest-ranking
woman in Corporate America and one of the boldest gamblers in the tech world.

Not content to battle just one tech giant or two, she took on a whole stable
of them, from IBM and Dell to Sony and EMC. In the end, she failed. Outside of
its stellar printing business, the $80 bn HP she leaves behind is struggling in
everything from PCs to software. The proud Fiorina departs as a humbled ex-CEO,
but not a poor one: The board softened the blow with a $21 mn severance package.
The board, which named Chief Financial Officer Robert P Wayman, a 36-year
veteran, as interim CEO, is now searching for an exec ready and able to rescue
HP. The crucial question for the next leader: Should HP remain intact? For
months a number of Wall Street analysts have pushed for a breakup, arguing that
HP's pieces, from the dynamic printer division to the lagging computer
businesses, would be worth far more apart.

CELEBRITY CEO Fiorina keynotes a technology conference in 2004

Fiorina fiercely resisted the calls, and the board supported her. But
following the Feb. 9 announcement of her departure, investors bid up HP stock by
7%, to $21.53, in part because of the possibility of a change in course. The
forces for a breakup may grow by the time Fiorina's successor takes over. The
logic is straightforward: HP may simply be trying to do too much. The giant
lacks both the resources and management skills to compete with the best of the
best in nearly every industry in tech. And investors aren't likely to wait
patiently for a gradual turnaround.

Shock, then a party

The simplest choice would be to spin off the corporate computing businesses,
which are struggling against Dell and IBM, and force them to make the tough
choices necessary to survive as independent entities. Then a trimmed-down HP
could plow ahead as the world's leading printing and imaging company. No doubt
analysts inside the company and out will be slicing HP into countless
permutations over the coming months and feeding them into their computer models.

Now HP's board is on the hunt for a replacement. They're looking for a
CEO who can rescue HP, much the way Louis V Gerstner Jr lifted a troubled IBM
from the sick bay when he arrived in 1993. A leading candidate, say insiders, is
MCI CEO Michael A Capellas, who sold Compaq Computer Corp to Fiorina in a hotly
contested $19 bn merger three years ago and briefly served as her No 2.

Who's Next On the Hot Seal? HP is looking for a top-notch operations executive to succeed Fiorina as CEO. Here are some of the likely candidates: Michael Capellas MCI's CEO ran Compaq for three years before its merger with HP. Capellas, 50, knows HP well and excels at building morale and improving execution-just what's needed. He's tied up with the MCI turnaround attempt. But if it's acquired, he'll be available. Vyomesh "VJ" Joshi The 50-year-old executive vice-president of HP's huge imaging and printing division just had PCs added to his list of responsibilities. He has to be considered the top inside candidate because imaging and printing supplies three quarters of HP's profits. Edward Zander He has been CEO of Motorola for only 13 months, but already he has impressed analysts with his strategy and results. Would the former Sun Microsystems COO leave Moto so soon? Maybe. The 58 year-old kept his home in sunny California. John Joyce Formerly IBM's CFO, the 51-year-old now runs the company's $46 bn global services unit. He has a strong operations background-as controller for IBM's global operations and as head of its internal reengineering project in the mid-1990s.

Other possibilities include IBM's global-services chief, John Joyce, and
Edward J Zander, the former president of Sun Microsystems who is now CEO of
cell-phone giant Motorola. But even the most talented exec will face an uphill
battle trying to keep Fiorina's HP, with its sprawling array of products in
dozens of different markets, in one piece. One question is whether the board's
stated commitment to Fiorina's plan will hamper the headhunting effort. The
high-powered execs being considered may be loath to take on what has proven to
be such a difficult task, particularly if they can't set their own strategy.

While a miracle turnaround can never be ruled out, the more likely scenario
is an eventual breakup of HP. That would spell the end of an era. Ever since its
founding in a Palo Alto garage 66 years ago, HP has represented the triumph of a
special brand of entrepreneurialism that came to represent Silicon Valley. At
its heart it's an engineering-driven culture that values teamwork and rewards
ideas and inventions, not pedigrees. In truth, Fiorina was battling HP's
storied culture from the day she arrived. A dynamic sales exec from Lucent
Technologies, she was the first outsider to head the company. And she didn't
hesitate to take out her hacksaw. Immediately, she began to reel in HP's
80-plus autonomous business units into a more centralized, four-division giant.
She eventually laid off tens of thousands of workers.

Printers The star of the company, printers account for 76% of the HP's operating profits and nearly all of the company's $64 bn stock market valuation. Some analysts have been pushing for a spin-off, insisting its value is buried under HP's other tepid businesses. Another scenario? The next CEO sticks with printers-and sells the computer divisions. PROSPECTS Great at least for a couple of years. But Dell is crashing into printers from below, threatening HP's margins. And HP will have to pour billions into R&D to stay in front of the pack. VALUE  $60 bn to $65 bn Corporate Computing HP leads in storage and runs a strong second in servers. But profits and margins lag. Its corporate hardware businesses notched abysmal 1% operating margins in 2004. Services would likely be faring better if HP had bought PricewaterhouseCoopers three years ago. But HP balked at the price of the deal, allowing IBM to make the acquisition. PROSPECTS HP will continue to be squeezed between Dell on the low end and IBM for the big corporate installations. HP desperately needs to bulk up its software business, a potentially profitable market. VALUE  $18 bn to $22 bn PCs Combining HP with Compaq created a giant-but not a profitable one. Dell is clobbering HP in PCs, with its lead stretching to 18.3% of the global market. That compares to a 15.7% stake for HP. It's margins hit a meager 0.9% in 2004, far below what the company projected when it merged with Compaq. PROSPECTS Poor, as long as Dell is in the market and customers are focused on traditional computing. But with its blend of consumer electronics and imaging, HP is well positioned for the digital home market. VALUE  $1 bn to $3 bn

Battling decades-old inertia, Fiorina began to centrally manage tasks such as
branding and advertising. Even her critics say that these steps were needed, and
that she fought some important battles to streamline HP's organization. She
was decisive, no doubt about that, and a gifted communicator. But even early in
her reign at HP, she began to demonstrate the weaknesses that would lead to her
fall. First, she fired or scared away execs in droves, including such prominent
figures as Antonio Perez, now president of Eastman Kodak, and Mary McDowell, now
a senior executive at Nokia. She also resisted changing course-a dangerous
trait in an industry in which the most successful leaders have been those who
don't fall in love with their strategies.

Throughout her tenure, say insiders, she continued to blame HP's woes on
the company's culture-not on severe management shortcomings, including her
own. "She didn't develop enough effective lieutenants," says Stephen
P Mader, vice-chairman of Christian & Timbers, the headhunting firm that
recruited Fiorina into HP. "Twice she passed up...opportunities to have a
chief operating officer. Looks like it bit her."

The Compaq merger was the defining moment in Fiorina's reign. By buying
Compaq, she created a giant with tremendous scale and all of the clout and
economies that come with it. But she did not fundamentally change HP's ability
to fend off Dell in the low end of computing or match IBM's sophistication in
the enterprise. So HP has come up short against both of them. Equally important,
the battle over the merger divided the once-collegial company into angry,
partisan factions. Insiders say the contentiousness of the dispute was a key
part of why Fiorina became so wedded to her plan for HP.

But Fiorina's soaring vision ran into a wall of opposition. Director and
scion Walter Hewlett rose up against it, and huge swaths of employees and
shareholders joined the cause. They feared that the deal would dilute HP's
lucrative printing and imaging business and an influx of hard-charging Compaq
execs would turn HP's hallowed culture upside down. The dispute spiraled into
a bitter proxy battle and wound up in the courts. Hewlett was pushed off the
board of the company his father founded.

While it's convenient for HP's leaders to blame poor execution for their
problems, what ails the company runs much deeper than replacing a few top
executives. In enterprise computing, HP has failed to improve its lot. While it
is still narrowly the market share lead in storage and in key server markets,
including Unix and PC servers, it's losing ground to EMC Corp in storage and
Dell and IBM in servers. In some cases, its technology just hasn't kept up. In
others, it has made bad bets.

In Dell's shadow

The biggest of those was forming a partnership with Intel Corp to co-develop
the Itanium processor as the brains for high-end servers. After half a decade of
trying, Itanium has gained little ground. Meanwhile, HP stopped developing its
own high-end processor, called PA-RISC. Now it's stuck slugging it out for
share in the market for commodity servers that run on Microsoft's Windows-where
Dell excels.

HP struggles just as much in software and services. Its tiny software unit
lost $125 mn last year on just $922 mn in sales. It's highly unusual not to
make money in enterprise software. In services it has a sizable but slow-growing
maintenance and repair business, yet it has squeezed profits in an attempt to
gain market share in managed services such as running corporations' IT
operations. Acting CEO Wayman said during the company's press conference on
February 9 that while the unit's revenues have been growing strongly, the
company has to focus more on profits now.

Even HP's gilded $24 bn printing business, viewed by many as the company's
savior, faces a rising number of challenges. Since Dell jumped into the market
in early 2003, it has quickly picked up market share in inkjet models, the low
end of the business. During the first three quarters of 2004, Dell accounted for
13% of inkjet sales in the US, according to IDC. While still a fraction of HP's
market share, it presents a troubling trend. A growing base of Dell printers
means it could eat into HP's lucrative business of selling ink refills to
existing customers.

HP is betting that it can stay ahead on printers by pouring resources into
its labs-and innovating constantly. In time the company expects
state-of-the-art printing technology to spread into new domains, with printers
even being harnessed to spray out billions of precision-engineered
semiconductors. Though HP spends more that $1 bn on printer R&D, analysts
question whether it can keep its edge.

The management ouster at HP gives the company a chance to rebuild trust with
investors. During Fiorina's 21 quarters atop HP, the company missed profit
expectations eight times. Sure, that's better than the 21 quarters before
Fiorina arrived. But it's also more than double the combined misses of IBM and
Dell over the same period. Indeed, in 2004, HP's stock plunged 8%,
underperforming virtually every one of its competitors.

The good news for HP? Even if the board clings to Fiorina's vision, the
next CEO is sure to have a bold mandate for change within the divisions. That's
sorely needed. Take the PC business. Before the merger, Compaq was making
significant strides following Dell's efficient model of direct sales to
customers. Yet when the companies merged, this initiative never won broad
support. Why? HP couldn't aggressively push PCs and bypass retailers, when it
needed their help to sell printers. The result: HP has stuck to the old industry
model as it battles super-efficient Dell. HP's market share is eroding in PCs,
and the division struggles to eke out a profit.

If the new CEO hangs on to the $24.6 bn PC business, the boss is likely to
move quickly toward the Dell model-even at the risk of angering retailers.
Should the direct-sales model sputter, the choices grow starker. More bold moves
are needed in HP's enterprise business. Insiders say that some board members
were upset that Fiorina didn't more aggressively pursue Veritas Software Corp,
a profitable maker of storage software that was acquired by Symantec Corp in
December. The bottom line is that HP lost money in software last year, despite
it being one of the most profitable markets for most corporate computing rivals.

As HP embarks on a difficult transition, execs will be working hard to put
forth an image of calm and stability. The company's business depends on it.
Indeed, competitors from IBM to Dell to Sun will be highlighting HP's
management turmoil as they compete on large corporate-computing deals. Even with
longtime HP veterans, from Wayman to printers chief Vyomesh Joshi, sticking
around, this promises to be a difficult task. While execs press forward with
gritted teeth, the drama at HP seems to come full circle. Six years ago, it was
at another airport hotel in Chicago that directors hired Fiorina. But things
aren't going back to where they started. Not a chance. She may be gone, but HP
now carries the indelible stamp of Carly Fiorina.

By Ben Elgin with Steve Hamm and Spencer Ante in New York and
Robert D. Hof, Cliff Edwards, and Peter Burrows in San Mateo in New York in BusinessWeek. Copyright 2005 by The McGrraw-Hill Companies, Inc

The Inside Story Of Carly's Ouster

By the end of 2004, the pressure in Hewlett- Packard's corner office was
almost unbearable. With chief executive Fiorina's efforts to fix the 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, according to industry sources. It was a decision she didn't
get a chance to make. On the evening of Sunday, February 6, HP's board
hunkered down with Fiorina in an emergency meeting. The directors stewed over
their star CEO's failure to execute her ambitious plan. In addition, directors
were concerned about the "board's inability to work constructively with ,"
according to an HP insider. The next day, they asked Fiorina to step down. And
on Wednesday, February 9, at

5 am Pacific time, HP stunned the world, announcing Fiorina's dismissal.

Despite the 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 merger with Compaq Computer in
2002. And the immediate integration of the two companies bested expectations.
But by late 2003, investors began shifting their focus from the Compaq deal to
HP's ebbing position against IBM and Dell. They bored in on the ragged
financial performance that led to the swooning stock price. 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.
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.

Some directors were chagrined that Fiorina didn't move more quickly to
strengthen HP's position against Dell and IBM. 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 gobbled up the
profitable software company-leaving some HP directors unhappy.

Days of Promise Days of Pain In five and a half turbulent years, Fiorina took a Silicon Valley legend on a wild and high-profile ride as she made her name as the most powerful woman executive in America 1999 July 17, 1999 Carly Fiorina takes over as CEO of Hewlett Packard, the first outsider to run the Silicon Valley icon. Sept 3, 2001 Fiorina and Compaq CEO Mike Capellas announce a controversial merger, spawning bitter opposition from board member Walter Hewlett. 2001 May 3, 2002 After a narrow proxy victory, HP's merger with Compaq closes. March, 2003 Dell enters the printer market, threatening HP's cash cow. December, 2003 Dell pulls ahead of HP in overall PC shipments during 2003. 2002 August 12, 2004 HP badly misses third-quarter expectations, raising questions about Fiorina's ability to execute December, 2004 Fiorina seeks advice from several CEOs on how to make a "graceful exit" from HP. 2003 January 12-15, 2005 HP's board holds an offsite meeting in San Francisco. Increasingly frustrated, the directors move to shift operating responsibilities from Fiorina to key lieutenants. They also bring former director Tom Perkins back to the board. 2005 February 7, 2005 At a meeting in a Chicago area hotel, HP's board asks Fiorina to step down. She agrees. February 9, 2005 At 5 a.m. local time, interim CEO Bob Wayman sends an e-mail to employees informing them of the management change. Data: Bloomberg Financial Markets

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 ensuing board
meeting 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. It was a heavy blow to
Fiorina's credibility as the company's leader. Just weeks later, she was
out.

By Ben Elgin in San Mateo, Calif.