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Wilted Fiorina

9 February 2005 By Rob Cox

Walter Hewlett got it right. The son of Hewlett-Packard’s co-founder fought the printer manufacturer’s $24bn merger with PC-maker Compaq three years ago. His opposition was visceral and personal. The board, chaired by Carly Fiorina, ousted him. Hewlett sold all the stock he and his family had amassed.

Now that same board has jettisoned Fiorina. One might say she was hoist by her own petard. The merger she championed came a cropper. Its promised operating benefits did not materialise. The stock languished. Value was destroyed.

Fiorina’s legacy is now the dilution of HP’s highly-profitable and market-leading printing business with a commodity PC operation. It’s not just that operating margins have fallen over five years to some 6%. They are tragically wide of the benchmarks Fiorina offered in pitching the Compaq deal.

A recent study by Fortune compared promises from the deal’s proxy statement to the firm’s most recent results in three of its businesses. The findings? Operating margins in enterprise systems were supposed to be at 9.2% by 2003, yet closed last year at 1.1%. PCs were supposed to be at 3% in 2003, yet ended last year at 0.9%. Services were at 9.2% compared to expectations of 13.7%.

One might argue the computer industry got tougher than anyone foresaw in 2001 when the deal was first proposed. But the divergent fortunes of some HP competitors, such as printer-maker Lexmark, neutralise this argument. Other rivals have shown a better way to roll with the punches – to wit IBM’s planned sale of its PC arm.

Without Fiorina to defend HP’s tech-conglomeration, the board is free to give full consideration to more radical options such as a break-up. This would force it to reckon with the $14.5bn of goodwill it ascribes to Compaq’s assets. It might even deliver value: Merrill Lynch estimates the printer business plus HP’s cash is equal to today’s stock price. The board mistakenly backed Fiorina on Compaq. It must now make full amends.


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