Published on January 22nd, 2010 | by Jonathan Gifford
Carly Fiorina and the HP Compaq merger
Carly Fiorina and the HP Compaq merger
In September 2001, Hewlett Packard’s gutsy new CEO, Carly Fiorina – ‘the most powerful woman in business,’ according to Fortune magazine in 1998 – announced the acquisition by Hewlett Packard of the major PC manufacturer, Compaq. This was the biggest merger that the IT industry had yet seen. Compaq was one of the founding members of the dotcom revolution – a brash ‘new economy’ business that had been founded in 1982 and that by 2001 had annual revenues of $42 billion. Hewlett Packard’s revenues in the same year were £49 billion but, apart from both being major players in the game, their culture could not have been more different. Hewlett Packard, founded in 1939, retained much of the business philosophy of its founders (see David Packard’s Long Shadow). The company had a very distinct corporate culture – but one that had perhaps ossified over time into a series of beliefs and practices that no longer suited the rapidly moving times.
‘What would you like the values of the new company to be?’
Fiorina’s team directly addressed the issues that the merging companies would inevitably face as a result of these clashing cultures. ‘Our explicit goal was to use the two strands of DNA to create a stronger, better company. The two companies had different habits, personalities and values. We pioneered something we called cultural due diligence. Financial or technical due diligence is common in a merger, but we believed we also needed to examine in detail how these two cultures differed. We conducted in-depth interviews with more than 100 executives and 2,000 employees from both companies, and we ran 138 focus groups in 22 countries. We asked two basic questions: “What is it really like to work around here?’ ‘What would you like the values of the new company to be?”’
The merger was declared, by Fiorina and others, to be a success. The process was completed a year ahead of schedule and delivered $3.5 billion of savings –a cool one billion dollars better than the forecast $2.5 billion cost synergies.
So how is it that, when Fiorina was summarily sacked as CEO and Chairman of the board of directors by those same directors, it is generally assumed that this was because of the merger? What had gone wrong? Why is Fiorina, in her book Tough Choices, so adamant that everything was going swimmingly and that she was mystified by the board’s behaviour?
When CNN reported Fiorina’s sacking at the time (February 10th 2005) they reported this:
“Shares of HP jumped 6.9 percent in heavy trading on the New York Stock Exchange Wednesday on the news. But at one point, the stock was up as much as 10.5 percent.
‘The stock is up a bit on the fact that nobody liked Carly’s leadership all that much,’ said Robert Cihra, an analyst with Fulcrum Global Partners. ‘The Street had lost all faith in her and the market’s hope is that anyone will be better.’”
It’s not exactly a glowing testimonial to Fiorina’s stewardship. When she joined HP in 1999, stock stood at $52; when she was dismissed by the board five years later, it stood at $21. Fiorina, not surprisingly, came in for a lot of stick. The cruellest epithet must be the one given to Fiorina by Infoworld, who dubbed her an ‘anti-Steve Jobs’ (everything that Steve Jobs touches seems to turn to gold . . . you get the picture).
‘The dumbest deal of the decade’
The market never liked the idea of the merger. HP was market leader in the high-margin printer business. Compaq was facing stiff competition in the PC market from companies like the low-cost, direct-marketing manufacturer, Dell. PCs were becoming a low-margin commodity.
Fortune magazine said this in February 2005: “The 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.”
Michael Dell, of Dell Computers’ called it ‘the dumbest deal of the decade.’
The general consensus was that bringing together two not very successful computer manufacturers companies didn’t make one successful computer manufacturer that could challenge, for example, Dell, and that the two companies merged assets still did not allow it to compete with, for example, the systems and solutions giant, IBM. The merged company was neither flesh nor fowl, just bigger.
Two days after the announcement of the merger (in which HP bought Compaq for $24 billion in stock) HP shares had fallen by 21.5% and Compaq share had fallen by 15.7%. The two companies had just managed to lose $13 billion in market capitalisation.
On the other hand, in 2006 the newly-merged company had revenues of $87 billion and profits of $2.4 billion (2.8%). In 2007 it had revenues of $92 billion and profits of $6.2 billion (10.5%). There may have been worse ‘failures’.
Disbanding the Integration Team too early?
More recent analysis concludes that the merger should be seen as a long-term success, but poor old Fiorina isn’t given the main credit: it goes to her successor as CEO, Mark Hurd. What Fiorina is praised for is her thorough management of the process of integrating the two companies. However, she is deemed to have declared ‘victory’ too soon and to have disbanded too early the integration team that she had herself created, and which did such sterling, practical work in smoothing or avoiding the core issues involved on the process of bringing the two companies together.
Robert Burgelman, Professor of Management at Stamford Graduate School of Business says, “the integration planning process was so successful that on the day the merger was approved, the new company was ready to go. And because of this rigorous pre-clearance integration planning, many issues and problems that typically hinder the effectiveness of large acquisitions were resolved much more easily than most sceptics had expected. The short-term goal of cutting $2.5 billion from operations was exceeded by more than $1 billion.”
Burgelman argues that Fiorina disbanded the once fifteen-hundred-strong integration team too early and – most importantly – failed to get managers of the newly merged company to understand the strategic benefits of what they had set out to do. They achieved the operational efficiencies, but they failed to generate a real vision of what the new company stood for, As a result, managers failed, at first, to exploit the real strategic potential benefits of the new operation – something that Fiorina’s successor, Mark Hurd, proved able to do.
So analysts now say that, essentially, Fiorina was right in principle, but wrong in practice.
The HP/Compaq merger: whose idea?
I still have a nagging doubt about this. It stems from Fiorina’s failure, at least in her own writing, to acknowledge that the HP/Compaq merger was even her own idea. Her very first mention of the merger in her book, Tough Choices, is this: “Towards the end of 2000, Jay Keyworth came to see me.”
Jay Keyworth was a member of the board of directors of HP. According to Fiorina, what Keyworth then said (apparently out of the blue) was this: “Dick Heyworth (another HP board member) and I have been talking, and we agree we should buy Compaq.”
Oh! So it wasn’t Carly’s idea after all? Well – maybe: “I had been watching Compaq for a year,” she says.
OK. So she had been ‘watching’ Compaq, but didn’t tell anybody on the board about it. Well, you don’t do you?
Carly is very cautious.
“Of course, any acquisition, particularly one of such magnitude, can’t be undertaken so cavalierly. There was the small matter of the rest of the board’s involvement. There was the matter of determining whether such a move made any strategic sense at all.”
That’s very true.
The way Carly tells it, acquiring Compaq had occurred to her, but it was board members who first floated the idea and the board who finally ratified it. “I was clear from the outset: I would not talk the board into a particular course of action.” She hired McKinsey & Company to analyse the possible benefits of the merger from every conceivable angle.
OK – I give in. The board of HP, without any undue influence from Fiorina, and advised by a leading consultancy, take a consensus decision to merge with Compaq. I guess – pure speculation on my part – that Fiorina wants to tell the world that the Compaq merger was not some maverick idea of hers, driven through against the board’s resistance; quite the reverse. And in this light, if the board did fire Fiorina because of the Compaq merger, then that was jolly unfair of them because in fact it was their own silly fault.
And there’s the rub. The HP/Compaq merger was the biggest merger that the IT industry had ever seen. It was a huge undertaking – rather effectively implemented by Carly Fiorina. But if the CEO and chairman of the board (Carly Fiorina – remember?) doesn’t own the idea of such a momentous merger, then who on earth does? If Carly can’t stand up, even now, and say – ‘I decided to do it; I think it was the right decision and I believe that time will prove me right’ – then who is in charge here? And, more importantly, who was really in charge at the time? Did she really own this massive project while it was happening? Did she believe that she did own it at the time but is now keen to pass the buck? And if the latter, how wet is that??
‘Our strategy is sound and our greater issue is execution’
There remains, for me, the nagging doubt that Fiorina was happy to own the idea of the merger, but never really stood up to be counted about the long-haul strategic implementation. If she had done, and if she had continued to champion the merger with the management team and with the board, then maybe she would have kept her job. As it is, she obviously lost the confidence of the people who mattered most to her continued career – the board. We don’t know why, because the board have never given a full explanation and Fiorina isn’t telling. “I was mystified by the board’s recent behaviour,” she says, shortly before the meeting at which she is summarily sacked. At this meeting, she reads out a prepared statement, which includes the following: “The board has made and reconfirmed the most fundamental aspects of our strategy . . . My personal belief is that our strategy is sound and our greater issue is execution . . .”
So the board of HP made (and has just reconfirmed) the strategy? Strategy by consensus? Isn’t that what Fiorina thought was fundamentally wrong with the culture of HP? (See Carly Fiorina’s change programme at HP and Changing a heritage culture.) And Fiorina seems to eb saying, ‘Well, we all agreed the strategy, its just that the execution has gone a bit wrong.’ Whose fault might that be?
A leader can’t afford not to stand up and be counted about the biggest business decision of their career. Saying, ‘The board decided to do it, they set the strategy’ really doesn’t wash.
And not knowing what the board of which you happen to be chairperson is doing behind your back (planning to sack you) isn’t just foolish – it’s suicidal.
 Carly Fiorina, Tough Choices, Nicholas Brealey, London, 2006, p 264 – 265
 Compaq-HP Merger was Right After All According to Stanford Business School; http://findarticles.com/p/articles/mi_m0EIN/is_2007_July_16/ai_n19361794/ retrieved 10/11/009
 Carly Fiorina, op cit, p 228-230
 Ibid, p 294