Mad Dog 21/21: HP Sauce

by Hesh Wiener

Carly's gone. Now it's time for Charlie. For if ever there was a person who could suffer a bad marriage, such as that of Hewlett-Packard and Compaq, lived out in the spotlight of merciless, spiteful, and uninformed public opinion, yet still carry on with life and business, it is Britain's Prince Charles. Critics of the Prince might well say he's not as smart as Carly, but we ask you this: Which one's long since out of the bad marriage? And this: Which one's still got the job?

There's no question that HP needs a strong and charismatic leader. It is one of the biggest technology companies in the world and, with the right management and a bit of luck, it could become the very largest. But the investing public, which, somewhat inconveniently, happens to own the company, has shown little enthusiasm for HP shares compared to the high hopes Wall Street commentators had for the firm's equities when Carly Fiorina was hired in 2000.

Optimists, and they were legion at the time, figured Carly would do for HP what Lou Gerstner did for IBM. But the comparison was inappropriate. HP was never in the kind of trouble IBM was in when Gerstner clambered aboard. Also, HP never has had the kind of pricing power in any segment, including printers, that IBM has at various times enjoyed (and to some extent still enjoys) in mainframes, mainframe software, proprietary midrange systems, middleware for proprietary architectures, and certain kinds of storage. HP is strong and clever, but it's never been able to shake off the rivals nipping at its extremities and occasionally lunging at its throat. And Carly's biggest move--the merger with Compaq--increased rather than decreased HP's participation in the most competitive parts of the computer business.

Carly Fiorina: Had she stayed, the company would have been known as Hubris-Packard?

Many observers feel that the difficult marriage of HP and Compaq is not merely the main reason Carly had to say goodbye but the only one that counted, much the way the public image of the Prince of Wales has been not merely shaped but in some ways defined by the history of his marriage to the late Diana. Only now, having planned a second marriage, is he beginning to emerge in the public mind as a person who has a future as well as a past.

The Wales' marriage was a classic three-ring ceremony. First, there was an engagement ring. Then came the wedding ring. Finally, there was the suffering.

The story of HP and Compaq seems to be pretty much the same. Carly became HP's big enchilada in 2000. Figures in HP's form 10-K, the annual report every public company files with the Securities and Exchange Commission, show that HP reported revenue for the fiscal year ending October 31, 2000, as $48.9 billion, yielding profit of $4 billion.

The following year, the honeymoon was over. The consolidated company had a full 12 months of bookkeeping to reckon with, and it reported big revenue: $73 billion. HP turned a profit of $2.9 billion. For the year ended last October 31, HP had even greater revenue to report, $79.7 billion, and profit of $4.2 billion, depending on how you figure inflation, about as much profit as it made in the year Carly got her big job.

Along the way, HP ended up with many more shares, so the tale of earnings per share is pretty unsettling. In fiscal 2000, HP reported fully diluted EPS of $1.73. The next year, Carly's first full year at the helm, EPS fell to $0.35. The following year, 2002, when HP and Compaq consummated their merger, EPS was negative $0.36. In 2003, EPS rebounded to $0.83 and it rose again in fiscal 2004, to $1.15, or about two-thirds the amount reported for fiscal 2000.

Charles and Camilla: The man formally known as Prince with his devoted Camilla

It's not surprising that HP shares have not been the darlings of Wall Street, nor the solace of widows and orphans who put their nest eggs in HP's palsied hands.

Now it turns out that HP had plenty of challenges before Carly was the boss. A Web site that is mainly about HP's history in electronic calculators has been one place sentimental fans of the company's former glory have expressed their dismay for years and years. It doesn't matter that pocket calculators were never the mainstay of HP. They were the example of HP's engineering prowess, creativity, and stunning quality standards that ended up in the hands of many more people than ever knowingly used an HP server (but not as many as eventually got to use an HP personal computer, or who unknowingly have been on Web sites powered by HP or Compaq engines). Carly didn't break the calculator business, but she didn't fix it, either.

An even more ominous kind of HP story has been cropping up in another segment, the market for inkjet printers, where HP is still a leader but may have to think about how it acts if it wants to enjoy a good reputation. The stories that threaten HP are about just how smart the company's ink cartridges seem to be. For instance, one tale that emerged last month is embodied in a lawsuit asserting that the chips in the refills have a better retirement plan than Social Security is going to give baby boomers. The suit alleges that the cartridges simply won't work after some sell-by date programmed into their smart but nasty brains. Another tale surrounds HP's practice of making it hard for rivals to offer ink refills for HP printers despite longstanding efforts by legislators in Europe to outlaw certain restrictive practices. Yet another example stems from region coding, the incorporation of origin data in cartridges so they cannot be used outside of designated areas.

Carly knew all this and more, and apparently felt HP could and should get away with an awful lot.

Diana: Vermeer knew this goddess as queen of the night, and maybe of headhunters, too

To be sure, HP is not alone in such practices, but it is particularly vulnerable to customer backlash right now. Dell, a company that seems to be doing better in the PC business than HP, and Lexmark, the printer maker that looks like it could become number one, have teamed up. While none of the big printer makers are above criticism, the Dell-Lexmark team could, through a combination of attractive products and considerate policies, unseat HP not only in the low end computer market but in the business market, too.

The business buyer who selects the expensive laser printers that eat lots of high margin consumables is likely to go home to a family that has an inkjet to print photos or just for all-around use. In the long run, it's pretty hard for a company like HP, making both home and corporate printers, to be cute in the home market and not undermine its relationship in the corporate segment.

HP's merger with Compaq is history, like the marriage of Charles and Diana, and the only sensible thing for HP is to do what the Prince has done: live with it and move on.

Even if the world economy goes the way of HP has of late, HP's board of directors might be able to get to England on economy tickets, where they will very quickly learn that the most of the ugly noises being made about Charlie come from newspapers written for people who can't seem to remember what a breast looks like and have to be reminded every day on page three of their newspapers.

If they are really sharp enough, and they probably aren't, they'll bring back the underrated Prince to run HP. But there's always Plan B: Give Camilla Parker-Bowles, the Prince's soon-to-be wife, the job. She's got the kind of persistence it's going to take to save Hewlett-Packard from itself and its competitors.