Big profits can do wonders for an executive's reputation.
Last year, after HP chief executive Carly Fiorina was unceremoniously dumped by the company's board of directors, many analysts and employees considered the move to be a statement about HP's controversial acquisition of Compaq in 2002. At the time, HP was still struggling to integrate its vast array of businesses, and several organisational upheavals had failed to pay off the way Fiorina had envisioned. Wall Street was even calling for a break-up of the company as the only way to salvage the situation.
But HP's board held fast to the line that it was confident in the strategy Fiorina had chosen with Compaq. The decision to remove Fiorina was prompted by the poor execution of that strategy, not the notion that adding Compaq's hefty PC and server market share to HP's high-end servers and printers could make the company a global hardware powerhouse, board members said in several statements.
More than a year later, after the aggressive cost-cutting tactics of new chief executive Mark Hurd, HP is a Wall Street darling once again, without exiting any businesses or dramatically changing its strategy. HP's remaining employees and shareholders have reason to cheer, but Silicon Valley has to ask itself a painful question: even if she wasn't the best person for the job, was Fiorina right?
The stated goals of HP's Compaq acquisition were to attain 8 to 10 percent operating margins, hold industry-leading market share in several categories, and achieve the cost savings that come along with size and scale that neither company could hope to achieve separately. So far in 2006, HP has come pretty close to those goals.
Last quarter, one of its most successful since the merger, HP's operating margin was 6.9 percent. The company is a market leader in printers and low-end servers, but trails Dell in PCs and IBM in services. And with $4.5bn in net profits through the first nine months of its fiscal year, HP is on track to record more profit in 2006 than it did in the last two years combined.
An HP representative declined to comment for this article.
So what accounts for HP's current success? Clearly, Hurd's decision to lay off 15,000 employees has cut costs. HP's revenue grew only 5 percent in its fiscal third quarter compared to last year, but its profit jumped from only $100m in last year's third-quarter to $1.4bn this year.
Without Compaq's PCs and low-end servers, some analysts say it's hard to imagine where HP would be today. The company's printer division remains the engine for most of its profits, accounting for $884m of the company's $1.4bn in profits during the most recent quarter. However, high-end server growth has stalled as customers switch to cheaper, low-end servers based on Intel and AMD's x86 chips. That trend has been going on for a while, with even long-time, high-end server-maker Sun taking the plunge into the low-cost server market.
HP also has more negotiating heft than it did before the merger. Back in 2001, HP and the former Compaq were at the mercy of their major suppliers, Microsoft and Intel, said Jonathan Eunice, an analyst with Illuminata. Microsoft and Intel knew they could play the two companies off one another when it came to introducing new technology or hammering out contracts, he said.
The combined organisation now has the size to negotiate agreements with alternative suppliers, such as AMD, without seriously affecting HP's relationships with its primary suppliers, Eunice said. It was hard to get to that point, but "sometimes you need to do ugly things", he said. "They're using their economic power to good effect."
One of the most cited objections to the acquisition was that HP would be subject to the "squeeze", unable to compete with IBM's breadth at the high end and Dell's nimble cost structure at the low end. IBM remains a formidable competitor, for the most lucrative corporate accounts with a software and services portfolio that overshadows everyone in technology, and a comfortable position…
