Why HP Can’t Cut Its Way to Growth

Aug 12th, 2010 | By businessnews | Category: Business


With Mark Hurd out, cost-cutter Lesjak must keep HP focused

By
Connie Guglielmo

Cathie Lesjak kept a low profile during her 24 years at Hewlett-Packard (HPQ). Other than speaking at a few investor events each year, Lesjak, who took over as chief financial officer of the world’s largest PC maker in 2007, usually yielded the floor to CEO Mark Hurd and the other executives running HP’s businesses.

That all changed on Aug. 6 when Hurd, who HP said violated the company’s business conduct standards, resigned after an investigation into a sexual harassment claim unearthed expense report irregularities. HP quickly named Lesjak as interim CEO. She participated in an impromptu conference call with financial analysts, talking up her confidence in HP and sharing her “irrefutable” belief that HP will stay focused while the board searches for a new chief. Then, Lesjak made it clear that she doesn’t want the top job.

If Hurd made his name as the king of cost cutting, expanding HP’s earnings by hacking jobs and shutting offices in a quest to wring profit from every corner of the sprawling company, then Lesjak was his queen. During the earnings calls held each quarter after Hurd promoted her from treasurer to CFO, Lesjak, 51, advocated a lean, mean operational strategy. That belt-tightening paid off: Profit tripled from fiscal 2005 to 2009, far more than HP’s 32 percent sales rise.

Nevertheless, Wall Street analysts and some investors have been grumbling for months that cutting costs—no matter how adroitly—isn’t enough for the tech giant. HP now needs a CEO with a strong technology background who can craft a strategy to fuel internal growth, according to Louis Miscioscia, an analyst with Collins Stewart in Boston. “I’m not implying a Steve Jobs kind of visionary,” says Miscioscia, referring to Apple’s (AAPL) CEO. “But they need someone who understands where the IT industry is going.”

Acquisition Spree

Three years ago the Palo Alto (Calif.) company surpassed IBM (IBM) to become the world’s No. 1 supplier of information technology, including PCs, printers, computers servers, and software. This year analysts are projecting HP will rake in about $125 billion in sales, up from $115 billion in 2009.

Hurd leaned heavily on acquisitions to help propel growth, with his biggest bet the 2008 takeover of computer services powerhouse EDS for $13.2 billion. That deal gave HP the No. 2 spot behind IBM. The spending spree continued this year. In April, Hurd paid $2.7 billion for networking-gear maker 3Com to expand into a market dominated by Cisco Systems (CSCO). In July, HP completed its $1.2 billion buyout of smartphone maker Palm, reviving its own lackluster mobile-phone business and adding technology it plans to use to build tablet computers and challenge Apple’s iPad.

Even so, Hurd, with help from Lesjak, reaped more benefit from slicing and dicing than expanding sales. Now some on Wall Street say that strategy has run its course. “They have cut costs from existing businesses and companies they acquired, growing the bottom line faster than they’ve grown the top line,” says Michael Binger, a portfolio manager at Thrivent Investment Management, which has about $70 billion in assets, including HP’s shares. “At this point, they need to hire someone who has their eye on growth.”

CEO Search

The board set up a search committee to find Hurd’s replacement “as fast as possible” and will look at both internal and external candidates, Internet browser pioneer Marc Andreessen, who became an HP director in September, told analysts last week.

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