Deal gives Fiorina room to breathe

HP's struggling CEO was short on results

September 05, 2001|By Paul Adams | Paul Adams,SUN STAFF

Expectations were high when Hewlett-Packard Co. hired Carleton S. "Carly" Fiorina in July 1999 to be its chief executive officer, making her one of only four women running Fortune 500 companies and the first to head a Dow 30 company.

The former Lucent Technologies Inc. executive and one-time philosophy major was brought in to prepare the highly bureaucratic high-tech giant to do battle in the fast-moving Internet economy.

The 46-year-old's timing couldn't have been worse. Fiorina took over just as the economy was beginning to slow and businesses were scaling back on technology spending.

Despite two rounds of layoffs and a clumsily executed reorganization, Hewlett-Packard has repeatedly lowered its earnings projections, damaging Fiorina's credibility on Wall Street and prompting many stock analysts to speculate about a possible change in the executive suite.

But industry observers said yesterday's announcement that Hewlett-Packard will buy Compaq Computer Corp. for about $20.3 billion may have bought Fiorina something she was quickly running out of time.

"I do think this is positive for Carly," said Dominick R. Fumai, an analyst with BNP Paribas. "You've got to give her several quarters after the merger is completed to judge how well she is doing, so it gets her off the hook in that respect."

Estimates range from one year to 18 months. If Hewlett-Packard's outlook hasn't improved by then, analysts said, Fiorina will almost certainly join the ranks of former Silicon Valley executives who have faded into obscurity after high-profile failures.

"She's betting it all on making this work," said Robert Enderle, an analyst with Giga Information Group, a Cambridge, Mass.-based technology consulting firm. "If this doesn't work out, I think her chances of being in a company this size again would be slim to none. That's the problem when you blow a job like this - you're pretty much done. You'll be permanently retired."

Some of the biggest names in the high-tech industry have never recovered after being fired. Among the more notable ones are James L. Barksdale, former CEO of Netscape Communications Corp.; John Akers, who headed IBM Corp.; and Eckhard Pheiffer, who once led Compaq.

But even the skeptical say Fiorina, a rising star who managed Lucent's spinoff from AT&T Corp. in 1996, can't be held accountable for all of Hewlett-Packard's recent woes. The company was slow to respond to a changing marketplace in the late 1990s, remaining mired in the low-margin personal computer business while rivals International Business Machines Corp. and Sun Microsystems Inc. branched out into high-end computer services and other businesses.

The depth and duration of the recent economic slowdown added to the problem, catching many industry leaders by surprise.

"When she came in, she inherited a business that was very bureaucratic," said Mark Corcoran, an analyst with D.A. Davidson & Co., which recently dropped its coverage of Hewlett-Packard. "She took out a lot of red tape and bureaucracy and that was a very good thing that she did. Unfortunately, the timing was terrible."

Despite the slumping economy, Fiorina stuck to the company's earnings projections early in her tenure and launched an image-building ad campaign featuring her as the company's spokeswoman. That decision didn't sit well with some analysts, who were eager to see less visionary talk and more results.

"She was chairman for a few months and all of the sudden she's running a national ad campaign built around herself," said David Katz, an analyst with Matrix Asset Advisors Inc., which owns 444,000 shares of Hewlett-Packard and 959,000 shares of Compaq. "You never want to see that. You want to see an understated CEO getting the job done."

Fiorina's credibility took a beating as Hewlett-Packard began missing earnings forecasts last year, a trend that has continued in recent quarters.

In April, the company announced that it would trim 3,000 management jobs. In July, the company again downgraded its earnings forecast and announced another 6,000 layoffs.

"Our early read was that she had overpromised and underdelivered," Katz said.

Hewlett-Packard's credibility may get a boost with the arrival of Michael Capellas as president. The Compaq chief executive has a strong engineering and operations background that analysts said may prove a perfect complement to Fiorina's background in sales and marketing.

"She does not look or act like or speak like an engineer," Corcoran said.

"She is the big-picture visionary, and he is the operations guy. Having him as No. 2 shores up her long-term future."

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