Annex Newsflash 2005-04                       February 10, 2005


Updated 2/17/05, 12:40PM MST (adds executive quotes, Foreign Office deal to  "HP Reports Record Revenues")

The Higher They Soar, the Harder They Fall: Slaying the "The Most Powerful Woman in America"

Carly's Fickle Fans 

How the Media Contributed to HP CEO's Demise

HP Reports Record Revenues, Flat Profits

PHOENIX, Feb 10 - Cowards love to kick people when they are down.  Remember some Iraqis defacing the downed Saddam statue in May 2003?  Or John Akers' detractors rejoicing after he fell from power? (see "Akers: A Nice Guy Who Lost His Compass," Jan 1993).

Carly critics are also suddenly a dime a dozen.  Yet a scant few days ago, only the brave dared speak out against the (arguably) "most powerful woman in America."  And only as "deep throats" at that - in shadows and whispers, not on the record (see "Computer CEO Approval Ratings," Feb 2005).

Three and a half years ago, my oh my... Wall Street just about laid on a ticker tape parade for the HP CEO.  Here's, for example, an excerpt from a Fortune magazine Nov 29, 2001 report The HP-Compaq Merger: Wall Street loves the deal:

The buzz around the Silicon Valley right now is that Hewlett Packard's proposed merger with Compaq is one of the few things propping up the dealmaking business (Annex Ed: In the post 9/11 era). Indeed, the battle to push through this pact has become a full-employment measure for Wall Street. [...] So next time you hear the oft-repeated line that nobody on Wall Street likes this deal, don't believe it. The community loves it--or at least the advisory fees it will bring in.

Many industry pundits, including some highly placed executives, continued to hail the virtues of the merger right up until the shareholders' vote in 2002.  Michael Capellas, the former Compaq CEO, who is now touted as a possible successor to Fiorina, was one of them (see "Compaq's CEO on why the Hewlett-Packard deal will work," Fortune, Mar 12, 2002).

And even some independent media editors thought two losers could make a winner, undaunted by the strategic problems the two companies faced.

A company's "weakness might even increase the chances of a deal," a senior New York business editor opined to this writer just yesterday.  "Ever since Burroughs bought Sperry to form Unisys, high-tech has loved mergers that follow the two-rock theory: One rock won't float, but lash two together, and maybe they will."

Well, they didn't in HP/Compaq's case.  And now that the two rocks have dragged down and drowned the lash holder, many of Carly's fickle fans are also casting stones at her.  The HP CEO has become fair game to the former admirers or "deep throat" critics, who are now shouting insults about her.  

"Wall Street was thrilled when she was hired, and even more pleased when she was fired," the New York Times writer Floyd Norris summed it up in the lead to his today's story "Chief Executive Shared in an Industry's Misfortune."

There are some exceptions.  Carol Loomis is one.   Who is Carol Loomis? (click here or on her photo, left, to read her bio).  She is the new "most powerful woman in America."  And she earned that distinction by slaying America's former "business queen" - Carly Fiorina, the now deposed HP CEO, before anyone else did it.  The seasoned Fortune magazine "editor-at-large" a.k.a. the "queenmaker" who helped install Carly to her throne, presciently dethroned Fortune's former idol in the Jan 25 cover story Why Carly's Big Bet Is Failing:

...This (HP/Compaq merger) was a big bet that didn't pay off, that didn't even come close to attaining what Fiorina and HP's board said was in store. At bottom, they made a huge error in asserting that the merger of two losing computer operations, HP's and Compaq's, would produce a financially fit computer business. The irrefutable evidence on how wrong they were is contained in the two companies' own merger proxy, which precisely laid out the healthy operating margins that the combined company expected to be earning in its 2003 fiscal year (HP's ends Oct. 31) on its computer operations. The margins weren't earned then, and in 2004 they weren't either—not by a long shot. Only the prodigious, money-coining strength of HP's star business, Imaging and Printing (better known as "printers"), has kept the company looking respectable...

We agree.  And not just now, in hindsight.  The day the merger was announced (Sep 4, 2001), we published an Annex Newsflash with the headline HP & Compaq: Two Losers Don't Make a Winner (Sep 4, 2001).  The highlighted tagline was also used as a quote by the Wall Street Journal and the New York Times the following day in their merger stories ("HP's Fiorina Takes on a Hefty Job" and "Wall St. Finds Fault With Computer Merger" ).

Great Ride

That having been said - that the merger was ill-fated for strategic reasons - Fiorina did make a heck of a run at it.  She took out $3.5 billion in costs, almost double the amount promised at the outset, and has been on track to keep reducing the HP spending on IT in the future, too (see the chart, right, and "HP: Delivering Value Horizontally," June 2004)

We also agree with Fortune's assertion that the HP star was and is its printing and imaging business.  But that should not be used against Fiorina.  First, because she installed Vyomesh Joshi in the top position there in 1999.  And everybody agrees that he has been doing a great job.  Second, because HP is using its printer unit as a "cash cow" while trying to transform itself into a services company, just as IBM did with its mainframe business in the early 1990s while changing into an IT services leader.  And everybody has lauded Big Blue for it.

The best explanation of the real reason for Fiorina's demise perhaps surprisingly did not come from a business or media executive.  It came from an academic.  

"This was someone who was planning for the year beyond tomorrow and was not immersed in the here and now," said Jeffrey A. Sonnenfeld, associate dean at the Yale School of Management," according to a New York Times, Feb 10 story.  

The HP directors wanted a hands-on CEO who wasn't afraid to get his/her hands greasy.  And unlike many other docile corporate boards, HP's moved swiftly and proactively.  

Was it a case of self-preservation?  Perhaps.  Tentative court settlements disclosed that 10 former directors of WorldCom Inc. (now called MCI Inc.), and another 10 from Enron Corp., agreed to fork over a total of $31 million from their own wallets to settle lawsuits, the Wall Street Journal reported on Jan 13.  So some good may be finally coming out of the WorldCom or Enron "megafailures."

"In the end, her superstar status was also her undoing," concluded John Markoff in another Feb 10 New York Times story. "The board concluded that she was spending too much time on the road, neglecting the nuts-and-bolts execution of her own strategic ideas."

Fair enough.  But there is more to it.  All these Fiorina faults that are now surfacing in the media would not have been enough to depose the "most powerful woman in America" had the HP stock not been in the doldrums.  

In the fall of last year, we reiterated our warning to Fiorina when HP accelerated its stock buyback program without any discernible benefits to its stock price:

Stock Buybacks

The same cannot be said of stock buybacks, a practice that both HP and IBM have embraced in the last several years.  To us, that’s a lose-lose proposition, in the long run.  Yet, HP has just ratcheted up its stock buyback program.  The company spent $2.2 billion on its own share repurchases in the fourth quarter alone.  For the full year, HP bought back $3.3 billion-worth of its stock. [...]

Wall Street pocketed HP’s $3.3 billion in FY2004, and didn’t even say “thank you.”  It’s a small consolation to HP that IBM has squandered over $57 billion of its money since 1995 in exactly the same way.

(An excerpt from "HP Hits Home Run," Nov 2004)

Fiorina did nothing to stop this wasteful practice.  And the HP stock did nothing to help her case.  So now they have both become new statistics for the next chapter of our “Beware Your CFO!” series.  

Meanwhile, even the stock buyback critics, who have been largely on mute for the last nine years of our denunciation of that practice, are now crawling out of the woodwork.  Today's New York Times said, for example:

"Over all, from the time Ms. Fiorina was hired until the end of last October, Hewlett-Packard repurchased 443 million shares for $13.2 billion... That is money that shareholders who stayed with the company might wish it had not channeled to those who got out."


Shareholders of IBM, Microsoft, Sun, Dell and many other IT industry leaders whose boards have been squandering money on share repurchases, should also take this Times observation to heart.  Stock buybacks have been invented by and for the benefit of Wall Street, not Main Street.  And even when some CEOs engage in this form of bribery, Wall Street can turn on them, as it happened to Fiorina.

With fickle fans like that, the CEOs should wish for some open-faced foes.  We suspect the former "most powerful woman in America" does, however belatedly.

HP Reports Record Revenues, Flat Profits

HP Services Excels in Quarter with Record Revenues, New British Foreign Office Deal 

PHOENIX, Feb 16 - Carly Fiorina must be chuckling right about now.  And not just because of her $21 million severance pay.  Instead of comeuppance, she is enjoying sweet vindication only days after being fired by the Hewlett-Packard board.  Her former employer has just set a new revenue record in the last quarter under her leadership.  

HP reported after the markets closed today that its revenues in the first quarter of fiscal 2005 year were $21.5 billion, up 10% since a year ago, while the operating and net profits were essentially flat.  Its stock rose over three points in response to the news.

HP Services led the revenue surge with a 20% jump since the first quarter of fiscal 2004 to also a record $3.8 billion (see the chart).  Its Managed Services unit's revenue grew by 44%.  This has been the eighth consecutive quarter of double digit growth for this HP unit.   

Furthermore, HP Services announced earlier today that Britain's Foreign & Commonwealth Office had awarded HP a seven-year $340 million-deal to run its IT operations.  It's the biggest contract the British diplomats have ever signed.  

And Fiorina was the one who launched HP Services on its strategic growth mission in 2000, and had put Ann Livermore in charge of both HP Services and the enterprise server units.

The HPS operating margins declined from 8.2% a year ago to 7.4%.  But at the current level, they are still right up there with the global IT services industry leaders.  We figure that IBM Global Service's operating margins are about the same; CSC's are a little lower than HPS' (6.5%), Accenture's are the highest in the industry at 14%; while EDS continues to have operating losses, and thus negative margins.  Without the $26 million work force reduction charge, however, the HPS operating margins would have been 8%, only slightly down from the 8.2% in the first quarter of 2004.

As for HP servers, they were another reason why Fiorina should be smiling tonight as Livermore took a bow for their double digit increase in the latest quarter in the this evening's teleconference with analysts.  The HP servers' revenue surged by 19% to $2.3 billion, "driven by the strength in our ProLiant server business," said Livermore during the teleconference with analysts (see the HP charts; the red highlights are ours).

"We closed the calendar year 2004 with the highest share position in more than three years," she added.  Livermore also pointed out that this marked "three consecutive quarters of market share gains against Dell in the U.S."

This HP server spurt suggests that the "IBM Server Renaissance" may be actually a wider industry trend.

Finally, HP's PC unit, over which Fiorina was raked over the coals in the media, was a stellar performer in her last quarter on record.  "We had a record quarter in both the top and bottom lines," said Vyomesh Joshi who has been heading up both the PC and printer units since mid-January.  

The PC revenues surged in double digits (up 11%) to $6.9 billion, with the most profitable commercial clients, which includes workstations, growing at the same 11% rate.  As a result, the PC unit's operating profit in the quarter soared by 71% to $147 million.  Duane Zitzner, who had left the business even before Fiorina's ouster, and whose leadership the latest results reflect, should also have reasons to smile.

Last but not least, the HP "cash cow," its Printing and Imaging unit, over which Fiorina was also criticized in the media last week (because that's supposedly the legacy business; as if its money is somehow tainted!?), had another decent quarter with excellent profit margins.  Revenues were up 3% to $6.1 billion, with operating margins of 15.4% - by far the best of any HP unit, and higher than most of its major competitors'.

In short, by dumping Fiorina so publicly and unceremoniously, the HP board may be fixing something that's not broken.  Either way, the new CEO will now have a higher jump off point to which to compare his/her record.

Happy bargain hunting!

Bob Djurdjevic

For additional Annex Research reports, check out... 

2005 IT:  Carly's Fickle Fans (Feb 2005); CSC: Gearing Down on Purpose (Feb 2005);  EDS: Grossly Overpriced Stock (Feb 2005);  IBM Historical Update: 2004 Shot in the Arm (Feb 2005); New HeadTurners Series #1 (Feb 2005); IBM: A Crescendo Finale! (Jan 2005); Accenture: Strong Finish, Better Start (Jan 2005); Annex Coverage 2004: IT Services Dominate (Jan 2005)

2004 IT: EDS: The Titanium Stock (and other Wall Street tales) (Dec 2004); IBM PC: Good Riddance (Dec 2004); Fujitsu: Recovery Continues (Nov 2004);  IBM Server Renaissance (Nov 2004);  HP Hits Home Run (Nov 2004); Capgemini: Revenue, Stock Soars (Nov 2004); EDS: Jordan's Swan Song? (Nov 2004);  To Russia with Love and $ (Oct 2004); IBM: Slow Quarter No Longer (Oct 2004); Accenture: Revenues, Profits Up, Stock Down (Oct 2004); Capgemini: A Takeover Target? (Oct 2004); Sellout of America (Oct 2004); Spy Wars (Sep 2004); Outsourcing Boomerang (Sep 2004); EDS to Cut Up to 20,000 More Jobs (Sep 2004); Capgemini Stock Plummets on Unexpected Loss (Sep 2004); HP Savaged by Wall Street (Aug 2004); Moody's Lowers the Boon on EDS (July 2004); HP: Delivering Value Horizontally (June 2004); Accenture: Revving Up a Notch (June 2004); Beware Your CFO! (May 2004)IBM: Changing of the Guard (May 2004); Capgemini: Texas-size Home Run (May 2004); Following the Money (May 2004);  EDS: On a Wink and a Prayer (Apr 2004); HPS Wins by a Nose! (Octathlon 2004); Accenture: Burning the Track (Mar 2004);  IGS: "Crown Jewel" Restored? (Mar 2004); HP: Still No Cigar (Feb 2004); Cap Gemini: Another, Smaller Loss (Feb 2004); CSC: Good Quarter Gets Boos (Feb 2004); EDS: "Hot Air Jordan" Flaunts Flop as Feat (Feb 2004); IT Industry: Whither Goeth It? (Jan 2004); Cronyism Is Alive and Well at EDS" (Jan 2004)

Or just click on and use "financial engineering" or similar  keywords.

Volume XXI, Annex Newsflash 2005-04
February 10, 2005

Bob Djurdjevic, Editor
(c) Copyright 2005 by Annex Research, Inc. All rights reserved.

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