Hewlett Packard was different from other Silicon Valley companies and always a leader. By the time I met Bill Hewlett and Dave Packard in the late 1970s they were nearing retirement but still active and I knew them, working occasionally for both men and for their respective foundations. Hewlett was the good cop and Packard was the bad cop, but both men had figured out through a steady process of evolution over four decades how to build and run a fantastic company. Those days are over. Though confirmed by this week’s HP decisions to change direction and ditch the PC business, let’s understand something: the HP I knew died many years ago.
The news of course is that HP plans to buy for $10 billion Autonomy, the UK business analytics company, while dropping the WebOS product line acquired only a year ago and eventually dumping the entire HP PC business. What this is intended to accomplish is to move HP firmly into the enterprise market, away from consumers, while shifting the company’s center of gravity in the direction of Europe. It’s the end of HP in all but name.
I am not saying, however, that HP CEO Leo Apotheker’s plan is wrong. He is playing to his (if not HP’s) strengths and doing the best he can with the cards he has been dealt. It will be a challenge, however, for HP to emerge from this transition a significantly stronger company.
The decline of HP began, I think, with the spinoff of Agilent Technologies in 1999. Lew Platt was running HP and he thought the company was too diversified and really needed to concentrate on computers, storage, and imaging. So everything else was spun-off into Agilent. And while this made sense at the time and even today, there were unintended consequences of that spinoff — the loss of HP’s corporate soul. You see Hewlett Packard was in 1999 an instrument company that made a hell of a lot of money from printers, not a printer company that also built instruments. Hewlett and Packard were instrument guys: had they still been on the job in 1999 they would have gone with Agilent. If Packard was still alive in 1999 I doubt that the spinoff would even have happened.
Lew Platt blew it in my view. And then of course he left the company in the hands of… Carly Fiorina?
I knew Lew Platt, too. When Platt left HP he ran the Kendall-Jackson wine business for a couple years and Jess Jackson, Lew’s new boss, was my neighbor at the time. It’s a small world. So I got to know Lew a little in his post-HP time and came to feel that the Agilent spinoff was Lew punting.
Let me explain. We’ve all heard how great it is that Google allows its employees to spend 10 percent of their time working on their own projects. Google didn’t invent that: HP did. And the way the process was instituted at HP was quite formal in that the 10 percent time was after lunch on Fridays. Imagine what it must have been like on Friday afternoons in Palo Alto with every engineer working on some wild-ass idea. And the other part of the system was that those engineers had access to what they called “lab stores” — anything needed to do the job, whether it was a microscope or a magnetron or a barrel of acetone could be taken without question on Friday afternoons from the HP warehouses. This enabled a flurry of innovation that produced some of HP’s greatest products including those printers.
But the Agilent spinoff unzipped HP, tearing one half of its creative culture from the other. Friday afternoon teams crossed product lines and many of those teams were decimated when the company was split along product lines.
So Carly Fiorina inherited a company with an identity crisis, which she rightly saw as a call to establish a new identity — an identity built around her, not around HP’s well established traditions. In this sense Carly and Leo, the present CEO, are remarkably similar. Carly’s plan was to grow the company which she did through the acquisition of first Compaq Computer and then Electronic Data Systems. HP grew enormously, but it didn’t improve.
When it announced plans to buy Compaq, HP was a nicely profitable and growing firm. Adding Compaq into their numbers HP became financially a mediocre company. Their profit margins and earnings per share were hurt. The return HP got from Compaq was not great. I wonder if there even was an ROI? Today the PC brands are worth a fraction of what they were a few years ago. When HP sells or spins off their PC operations it is unlikely they will even break even on their investment. Compaq was a costly mistake for HP that not even a ruthless hatchet man like Mark Hurd could turn around.
So dropping the PC business makes plenty of sense, but doing so won’t reverse enough for HP.
Who would want to buy the HP PC division? I suspect the best financial course of action for HP is to spin off the company, saddling it with a big debt to HP in the process.
Some analysts will of course compare HP’s new course with that of IBM a decade ago when the IBM PC division was sold to Lenovo. The IBM and Lenovo deal was good for both parties. Lenovo got a good business at a good time. It opened China to IBM. IBM built a research center and a support center there. Is there another Lenovo out there to buy HP’s PC group? Can HP get the same value IBM did? IBM’s timing was very good. HP may be too late.
IBM’s services business makes money. When HP bought EDS under Fiorina’s successor Mark Hurd that company was losing money. As good as the culture was at HP, the long past Ross Perot EDS culture was bad. Combining the two companies was like mixing oil and water, or more correctly hydrazine and nitric acid. Once again HP leadership ignored the importance of one corporate culture and forced change onto the company it could not understand or manage.
Software is a big part of IBM’s profits and it is growing rapidly. IBM and Oracle have been on buying sprees, picking up one software firm after another. HP has not. Software is only three percent of HP’s business. Are there any good buys out there for HP? Again it could be a matter of timing. HP is late getting started. The best deals may already be gone.
Consistent with this trend, when HP decided to enter the phone and tablet markets it waited too long and acted without thinking enough. Buying Palm was a quick solution for entering these new markets, where by then Apple and Google were the industry leaders. Microsoft had stepped up their efforts to become a major player in the market. With two major players and a third investing heavily to catch up, why would you bring a fourth (and very low market share) technology to market?
HP should have figured out — tablets, yes; phones, maybe; Android, absolutely. But they didn’t. They overreacted again. Instead of evolving and adapting to the market — instead of allowing Google to pay for much of their R&D — HP is going to throw away a $1.2 billion investment.
American firms have been laying-off their engineering staffs for years. In today’s world of MBA-managed companies, R&D is perceived as not being a good use of money. Apple is an exception and over the last several years they have been producing one great product after another. HP worried about keeping up with Apple so Apotheker — like Lew Platt back in 1999 — decided to punt. Apotheker decided to no longer compete with Cupertino. He said as much this week.
It’s highly symbolic, at least to me, that Apple’s new spaceship intergalactic HQ will be built atop what used to be one of HP’s most important labs.
But in the long run I think Apotheker’s new course won’t work, either. Squeezed between Apple and Oracle, HP may have no route back to greatness.
They’ve lost the way.