Hewlett-Packard CEO faces major challenge after merger
Bloomberg News Service
Palo Alto, Calif. — Hewlett-Packard Co. chief executive Carly Fiorina, grappling with plunging profits and a shrinking share price, must now convince investors that she can cure what ails two companies.
Hewlett-Packard, the second-biggest manufacturer of computers, said last week that it would buy rival Compaq Computer Corp. for $25 billion in stock, creating a company with sales approaching that of industry leader International Business Machines Corp. and a bigger slice of the personal computer and services businesses.
Fiorina, 46, already is under fire from some investors, who say they doubt she knows how to reverse falling demand for Hewlett-Packard products ranging from printers to servers. With a Compaq purchase, she will inherit a company that tried to reorganize three times in the past two years while losing its lead in the global PC and U.S. server markets to Dell Computer Corp.
"She talks a big game, but she's been at Hewlett almost two years, and she hasn't shown us anything to prove that she can pull it off," says Bruce Garelick, an analyst with Loomis Sayles & Co., which owned 362,000
Hewlett-Packard shares and 1.95 million Compaq shares as of June 30.
Hewlett-Packard's shares have fallen 26 percent this year, compared with a 14 percent decline in the Standard & Poor's 500 index and an 18 percent rise for IBM. Compaq's shares have slid 18 percent and the Houston-based company reported a $279 million second-quarter loss.
Hewlett-Packard shares fell as much as 19 percent Tuesday, the day of the announcement, the biggest drop since 1987, on investor doubts that the acquisition will help earnings.
"You're taking two companies that were underperforming and putting them together," said Steven Salopek, a money manager at Banc One Investment Advisors, which owns shares of both companies. "What you'll end up with is a very large underperforming company."
Fiorina is betting the combined company can tap into the market for computer services while gaining greater control over the market for PCs and servers, the powerful computers that run Web sites and corporate networks.
"This is a decisive move that accelerates our strategy and positions us to win" she said in statement last week. She declined to be interviewed for this article.
If she's right, the acquisition would cap her effort to revamp Hewlett-Packard and prepare it for an industry rebound that some analysts and investors say may come by mid-2002.
"Hewlett-Packard is basically doubling its bet," said David Katz, chief investment officer for Matrix Asset Advisors Inc., which owns 959,000 Compaq shares and 444,000 shares of Hewlett- Packard. "We like that."
Investors didn't like Fiorina's other attempt to make a large acquisition and all but blocked Hewlett-Packard's talks to buy the consulting arm of PricewaterhouseCoopers LLC for as much as $18 billion to expand in computer services. Hewlett-Packard's shares tumbled by a third last November as investors blanched at the price and expressed doubts that the consulting firm culture would mesh with that of a computer company.
Buying Compaq may accomplish what Fiorina set out to do with the PricewaterhouseCoopers offer, some analysts said.
"It gives them the service piece, which is something HP desperately wanted," said Dan Niles, a Lehman Brothers analyst who rates Hewlett-Packard "market perform" and Compaq a "buy."
Compaq gained a services business as part of its 1998 purchase of Digital Equipment Corp. for a $9.8 billion. Compaq struggled to integrate Digital and never emerged with a potent services business.
"It certainly was really disruptive the first year or two," Garelick said. "It's hard to declare DEC a total success."
Compaq chief executive Michael Capellas, who took over the top job there three days after Fiorina was appointed at Hewlett-Packard in July 1999, has restructured Compaq three times since then. The latest, announced in June, placed renewed emphasis on the services strategy it failed to exploit after buying Digital. Services made up about 19 percent of Compaq's $17.7 billion in sales for the first half of this year.
Fiorina's greatest challenge may be to prevent history from repeating itself.
"I would put it in the same category as Compaq's DEC acquisition," said Ashok Kumar, a USBancorp Piper Jaffray analyst who rates Compaq a "buy." "This will probably not go down as a good acquisition."
Things weren't always so bleak for Fiorina. When she arrived from Lucent Technologies Inc. in July 1999, analysts lauded her for reviving sales, realigning divisions and completing the spinoff of Hewlett-Packard's testing-equipment unit.
After she came aboard, the Palo Alto, Calif.-based company beat earnings projections in four straight quarters until November 2000, when Hewlett-Packard reported a 10-cent-a-share miss. Fiorina has had to cut targets in midway through each of the three periods since then.
She isn't alone in telling investors to expect lower earnings, and during the past year droves of computer and computer-related businesses from Sun Microsystems Inc. to Intel Corp. have said earnings may fall short of forecasts.
Some investors say Fiorina was too slow to recognize the extent of the spending slowdown on PCs and servers and didn't pare expenses fast enough earlier this year.
"Hewlett and Carly really have not shown any ability to cut costs," Garelick said. "They have been the laggard among computer hardware makers."
