Backfire

Carly Fiorina’s High-Stakes Battle for the Soul of Hewlett-Packard

by Peter Burrows
John Wiley & Sons © 2003
296 pages

Focus Take-Aways
Leadership
• Carly Fiorina came to Hewlett-Packard to make changes.
Strategy
Sales & Marketing
• Hewlett-Packard had an entrenched culture that resisted change.
Corporate Finance
Human Resources
• Her early changes didn’t produce business improvements.
Technology
Production & Logistics • She proposed a huge merger with Compaq.
Small Business
Economics & Politics • No big computer merger had succeeded, and research shows few in any industry do.
Industries & Regions
Career Development • The cofounder’s son, Walter B. Hewlett, opposed her.
Personal Finance
Self Improvement
• He voted with the Board to approve the deal, then launched a proxy fight against it.
Ideas & Trends
• The battle was a fight “for the soul of the company” and a test of shareholder rights.

• CEO Carly Fiorina won — the company is irreversibly changed, its old values scrapped.

• Whether the merger will work, no one yet knows.

Rating (10 is best)

Overall Applicability Innovation Style

7 7 6 7

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 Relevance
What You Will Learn
In this Abstract, you will learn: 1) About the high-profile battle over the Hewlett-Packard
merger with Compaq, which pitted shareholder rights against CEO power and Carly Fiorina
against Walter B. Hewlett; and 2) Who Carly Fiorina is and what she is doing at HP.

Recommendation
Peter Burrows offers insights into high level business, where personality matters more
than economics, as he explores the mammoth HP-Compaq merger. Most mergers fail to
make money or to produce the promised “synergies” so, he asks, why — other than ego
— do CEOs pursue them? Though stylistically somewhat trite, this book successfully
explores the HP Board’s decision to approve the merger, with Walter B. Hewlett’s
vote in favor, and his subsequent lonely, ultimately quixotic battle against it. The most
contentious issues in contemporary business are all here: shareholder rights and value
vs. CEO power; employee-oriented cultures vs. “re-engineering;” corporate integrity
vs. sharp practice; and the interesting spectacle of a ruthless, hard-headed female CEO
pitted against a sensitive, cello-playing man. The author says Hewlett-Packard executives
were told not to speak with him after he quoted merger critics in Business Week, so there
is an inevitable Walter Hewlett bias. getAbstract.com found this to be a very good read,
even a must read, for corporate warriors.

Abstract
The Hewlett-Packard Culture
On August 31, 2001, Walter B. Hewlett drove to the offices of Hewlett-Packard (HP)
to attend a crucial board meeting. His father, who had died only seven months before,
had co-founded the company, a Silicon Valley legend. HP was known not only for its
“Like all great engineering excellence, but also for its focus on people. The HP culture was strong,
dramas, this one
was filled with rich however, Walter B. Hewlett had not entered the business. He was not a businessman.
characters and He ran the family’s charitable foundation and played the cello. But he had grown up
timeless themes.” surrounded by the company and its technologies, steeped in its culture. Hewlett felt
a responsibility to his father’s legacies: care for his employees and commitment to
innovation and product quality.
He was coming to the HP offices to consider a proposed merger in which HP would
spend $25 billion to acquire Compaq — paying about two-thirds of a share of HP stock
for every share of Compaq. Hewlett later claimed that he was against the merger from the
“Here was Walter first time he heard of it, a few months before this meeting, but that his protests at board
Hewlett, the meetings were ignored. Board members claim that they do not recall that he objected.
intensely private
son of one of the HP’s new CEO, the first one from outside the company, championed the merger. Carly
company’s co-
founders, coming
Fiorina joined HP in July 1999. Her compensation was more than $70 million. Shortly
out of the shadows after she arrived, she began to lay off employees. The company hadn’t been doing well
to defend his before her accession, but afterward, the stock was down 59%. It wasn’t entirely her fault;
father’s traditional
the general market collapse had affected almost all American technology companies.
values.”
But Fiorina hadn’t foreseen the collapse, hadn’t prepared and was creating upheaval in
HP’s culture. The firm had shut down an internal web site because of heavy criticism
posted about the new CEO.
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 After going through the merger details, the board was asked to approve the deal
unanimously. Hewlett protested. The board’s attorney told him the deal would go through
“His foe, Carly Fio- whether he supported it or not, so it would be better for shareholders if he voted with the
rina, was as dif- board. The attorney said he could oppose it later as a shareholder. So, Hewlett could vote
ferent from him — two ways, once as a board member representing all shareholders, and again as a major
and from that of
the old HP — as shareholder with distinctive interests. Hewlett voted with the board, but he later said he
she could be.” had felt pressured. He grew angry, and eventually led one of history’s most dramatic,
contentious proxy battles.
The battle was nasty. Hewlett alleged that Fiorina and HP behaved unethically to pressure
important stockholders to support the merger. He charged that Deutsche Bank only voted
with Fiorina because HP promised it more banking business if it did and threatened
to cancel contracts if it did not. He charged that HP withheld merger information that
might have caused shareholders to oppose it. Among the documents Hewlett’s attorneys
discovered were some that indicated that the merged entity could not deliver the results
Fiorina was promising Wall Street. Hewlett’s attorneys said that Fiorina and the merger
integration team offered:
“She was a mar-
keter in a company
of hard-core engi-
• Cost savings of $2 billion the first year.
neers.” • Cost savings of $2.5 billion annually after the first year.
• Only 4.9% reduction in HP sales, as HP and Compaq merged product lines.
• Only 12 cents of profit lost per dollar of sales lost.
• 12 - 13% increase in stock value in 2003, the year after the merger.
• Combined earnings of $1.65 per share.
By contrast, Hewlett and his advisers forecast that, “HP would lose many high-end,
lucrative, computer contracts.” They predicted a loss of 26 cents of profit for every
dollar in lost sales, and combined earnings of $1.30 a share, instead of the $1.37 HP
“In the 1960’s, could have earned without Compaq.
after more than 20
years of quietly
going about its
Fiorina Fights in the Big Leagues
business, HP Carly Fiorina was a tough antagonist. She was born Cara Carleton Sneed, the daughter
began to be recog- of a Texas preacher, a Methodist in cotton country. Her great-uncle had shot his wife’s
nized around the lover in the lobby of a Fort Worth hotel and had committed his wife to a sanitarium;
world as a great
company.” a jury refused to convict him. Her father had a congenital deformity, and was called
a “hunchback” by neighbors, but he had played football in high school and joined the
military. He became a law professor and eventually a judge in California. Carly was
a committed, disciplined student, who married a boy from a modest background. She
attended a non-descript business school in Washington. She rose quickly in her fi rst job,
at AT&T, earning a reputation as a sensitive manager and an astute corporate politician.

She ended her marriage after 10 years, telling her husband, “After my business training,
I’ve come to the conclusion that there are certain things I need. You have to make up
your mind and act on what you believe is right. You just have to do it. That’s why I’m
“Fiorina was a nat- doing this.” She said she’d never see him again, and she didn’t. She had set her course for
ural at dealing with
the press, says success in business.
Calvin Sims, who
was covering the It’s hard to see how she’d fit in at HP, a company that could trace its roots to 1934, when
story for The New two friends, Bill Hewlett and Dave Packard, went on a camping trip and cemented a
York Times.”
relationship more enduring than Carly Fiorina’s first marriage. They became lifelong
friends and business partners, starting a business in a garage, designing products ranging
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 from air conditioner parts to toilet flushers. Collaboration and teamwork marked the
company from the beginning. HP was one of the first firms to adopt a flat, relatively
“Many of the skills egalitarian management structure, share profits, help pay for employee education and
Fiorina developed generally break the management mold to reshape it more humanely. Every employee was
while launching on a first name basis with the two co-founders, who were demanding but fair and loyal.
Lucent would help
her win the proxy
fight with Walter Building HP’s Business
Hewlett, but none HP had years of great success. One of its most successful products was a handheld
more than her role calculator, an idea that occurred to Bill Hewlett in 1971. The company’s entry into the
in the road show to
woo investors.” computer business was rocky — the co-founders initially disagreed about whether HP
should be in the business at all. In 1972, they shipped their first computer products and
shortly had to recall them for quality reasons. But by 1980, HP derived more than half of
its revenues from computers. In the early 1980s, it began to sell printers, a phenomenally
successful line for the company. HP struggled to maintain a small-company feeling, but
inevitably growth took a toll on its culture. HP was, like Rome of the triumvirate, divided
into three divisions that became factions: computers, which were very capital intensive
and often lost money; small instruments; and printers, which were a cash cow. Dick
Hackborn, the printer division head, ran his business quasi-independently, but freely
“Certainly, HP’s offered advice on running other divisions. Yet, when HP’s co-founders tried to make
success with
integration plan- him CEO in 1992, he refused. He quit shortly thereafter, but agreed to serve on the
ning in doing the board. HP promoted Lew Platt, an engineer who was deeply loyal to the HP way. He
Compaq merger was a widower with young children, and HP’s culture guaranteed that his work never
suggests that Fio-
rina learned a
demanded that he sacrifice his family. Platt was a guardian of that culture. Others began
great deal from the to deride this commitment, and to ask how much employee-coddling HP could afford in
PCC debacle.” an increasingly competitive, demanding business environment.

In 1997, the company started to falter, falling short of its performance targets “for
nine straight quarters.” Tough-minded, up and coming executives demanded harsh,
streamlining measures to discipline the HP culture and make it more responsive to the
market, more like its competitors. When Platt resisted, a promising young executive
left to take a CEO job elsewhere. Hackborn mulled quitting the board. Eventually, Platt
threw in the towel.
“Having washed
Fiorina Takes on HP
her hands of PCC,
Fiorina was on to Meanwhile, Carly Fiorina had been climbing steadily through the ranks at AT&T. She
bigger and better married an AT&T employee who eventually retired “to commit himself to his two
things.” daughters and his wife’s career.” She took demanding, high profile assignments and
eventually became president of the consumer products division of the AT&T spin-off that
became Lucent Technologies. She presided over a disastrous joint venture with Philips
(Phillips Consumer Communication), but managed to avoid taking blame for the failure.
In 1998, she hit the cover of Fortune magazine as “America’s most powerful female
executive.” In July 1999, she left Lucent to take the top job at HP.

She entered HP at the center of a media love-fest — the press couldn’t resist the story of
“’She’s very good
this charismatic, powerful woman executive at the top of Silicon Valley’s cornerstone
at being a cha- company. She reveled in the publicity, and she made a good fi rst impression on people
meleon,’ says one at HP. But she showed a ruthless side, too — telling managers that if they didn’t
former employee.” make their numbers, she’d find someone else who could. She criticized conformity to
the old culture, but drafted a set of trite “Rules of the Garage” and appeared in ads
that paid lip service to the founders’ spirit. She seemed remote from the employees,
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 demanding layoffs and sacrifices from them even as she invested in luxurious corporate
jets, something that the founders had never done. Reporters who asked tough questions
could be barred from interviewing her again — this happened to the late Tom Quinlan
“If she was tiring of the San Jose Mercury News.
of Lucent, some in
Lucent were tiring Outsiders seemed to think more highly of her than insiders. She launched a wave of
of her, too.”
buyouts, and then a wave of layoffs. She began to shop for big acquisitions. She proposed
buying a management consultancy (PricewaterhouseCoopers Consulting) for $18 billion,
but retreated when Wall Street turned thumbs down on the idea. IBM later bought the
same consultancy for $3.5 billion. She seemed less than averse to questionable business
practices, such as channel stuffing (when a company offers an incentive to retailers
to buy extra product this quarter in order to make this quarter’s sales goal numbers).
The tactic is deceptive; essentially the company is creating problems for itself, since
the retailers will probably simply order less next quarter, or demand similar incentives.
Notwithstanding, HP missed its numbers, and investors thought poorly of Carly. She
kept pushing growth, didn’t notice a tech slump coming and seemed to be on thin ice.
Then she announced the big merger with Compaq. The merger looked very good for
Compaq’s shareholders, arguably less good for HP’s, especially given the long history of
“While she had failed mergers in the computer industry and others. HP and Compaq planned the merger
prospered during in detail, an obvious but often overlooked step in mergers. Despite Walter Hewlett’s
the boom, she had objections, the board (dominated by Fiorina and her allies) pushed the merger forward.
never remained in
a job long enough When the merger was announced, HP’s stock fell by 18%. Walter Hewlett launched a
to prove she could vitriolic proxy fight that ended in a courtroom showdown in Wilmington, DE. Fiorina
build a business won the battle. Winning the war will mean making the merged entity deliver on its
for the long haul.”
promises, and it is too soon to tell whether she will be able to accomplish that. But for
the time being, she is riding high. She won the biggest fight she had ever taken on, and
established herself clearly as the person in control of HP and one of the most important
executives of her era. She matured as a manager.
Walter Hewlett will probably be remembered as a quixotic fighter for investor rights. He
was an unlikely candidate to tilt against the dragons of the boardroom. He should have
objected more clearly and forcefully earlier in the process, and he ended up ridiculed
by the company. He damaged his own case by voting with the board at first, and then
fighting a proxy battle. He was probably somewhat naïve, but many experts in corporate
governance credit him with courage for his course of action.

Clearly, the old HP Way is not the only way to run HP.

About The Author

Peter Burrows is a journalist covering technology for Business Week and department
editor of Business Week’s computer coverage.

Buzz-Words
HP Way / Investor rights / Proxy fight / Rules of the Garage / Silicon Valley / Transformational

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