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H-P Ousts Fiorina

Nat Worden

Carly Fiorina was ousted Wednesday as chairman and chief executive of Hewlett-Packard(HPQ), ending a stormy six-year tenure that was marred by the heretofore unsuccessful acquisition of Compaq Computer.

The shares rose $1.39, or 6.9%, to $21.53 Wednesday. They went as high as $22.26 earlier.

"While I regret the board and I have differences about how to execute H-P's strategy, I respect their decision," said Fiorina, one of the highest-profile female executives in the world.

Robert P. Wayman, the company's chief financial officer, was named chief executive on an interim basis. Patricia C. Dunn, a director, was named nonexecutive chairman.

"We thank Carly for her significant leadership over the past six years as we look forward to accelerating execution of the company's strategy," Dunn said. The company will begin looking for a permanent replacement immediately.

Fiorina's ouster comes about a month after the Hewlett-Packard board indicated it planned a modified role for the CEO in which some of her day-to-day duties would be transferred to other executives. Many believed the move would spare Fiorina the ax. H-P also recently announced it would combine its hugely profitable printer business with the less-successful personal computer division.

It was that division the former Lucent(LU) executive hoped to salvage with the May 2002 acquisition of Compaq, a $24 billion all-stock deal that doubled H-P's revenue and eventually lifted the company's profitability. H-P earned $3.5 billion on revenue of $80 billion in fiscal 2004 and said in its release Wednesday that it expects to match Wall Street estimates for the first quarter.

But while Fiorina's marketing savvy helped push the Compaq deal through with institutional shareholders, critics charged she lacked the operational talent needed to pull off the integration of the two computer pioneers. H-P's stock ended May 2002 at just over $18 and closed Tuesday at $20.14.

CIBC World Markets analyst Ali Irani said that in the short term, the ouster removes the "Carly discount" from the stock.

"She's been a controversial figure, and many investors have felt that she has not set forth with sufficient credibility a path for a sustainable trajectory for the company," Irani said. "The long-term implications of this move depend entirely on who the new replacement CEO will be."

Wednesday's news undoubtedly will empower voices that have called for the separation of Hewlett-Packard's printing business from the personal computer division, a strategy that got a boost in December when IBM(IBM) sold its PC division to China's Lenovo Group. Advocates say Hewlett-Packard's printer business, which by some estimates commands 40% of its market, could trade for more than $20 a share on its own.

Based on the current Thomson First Call consensus, H-P shares currently fetch about 13.3 times estimated 2005 earnings. By contrast, Lexmark(LXK), a pure-play printer and supplies business, trades for 18.6 times the 2005 Wall Street consensus.

Still, separating the printer and PC businesses will be difficult just months after the decision to combine them. One analyst said the tenor of Fiorina's dismissal suggests a spinoff isn't in the cards.

"Our understanding is that Carly Fiorina stepping down as CEO comes from an operational and performance difference with H-P's board rather than a strategic one," wrote Goldman Sachs analyst Laura Conigliaro. "The implication seems to be that this would not result in a move to either split up or merge the company."

(Conigliaro doesn't own shares in H-P, but Goldman does have an investment-banking relationship with the company.)

Rod Bare, an analyst at Morningstar, said the board's hands are probably tied.

"They've already looked at splitting up the company, and they've probably decided they're unable to," Bare said. "It would be impossible to, perhaps. They're so intertwined. It would be so incredibly painful that they're probably stuck with the mix that they have."

While a lightning rod for controversy, Fiorina was not without success at H-P. The company got positive headlines when it released its version of the Apple(AAPL) iPod and outlined an innovative storage strategy aimed at stemming inroads from Dell(DELL) and EMC(EMC). Fiorina's critics were largely quieted in early 2004 when the company reported a string of earnings beats.

But the good news came to an abrupt end in mid-August when the company warned that both third- and fourth-quarter earnings would badly miss estimates because of execution issues in its server and storage division.

The stock fell 17% on Aug. 12.

In a conference call, Wayman said the August blowup is the kind of earnings volatility H-P needed to cure.

"What we really have to drive for is a coordinated set of resources that can compete each and every day and not have the kind of disappointment that we had last year," he said.

Still, others say getting smooth earnings from H-P's disparate portfolio will be prohibitively hard.

"The problem here is the economics of the whole tech sector," said Morningstar's Bare. "It's moving into maturity. It's not a growth industry, so they're doing the best with what they have. Sometimes the economics of an industry can just steamroll right over you."