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October 15, 2010

The $10bn man: The strange saga of Mark Hurd, HP and Oracle

HP’s market cap lost $10bn when CEO Mark Hurd left. Steve Evans assesses his track record and looks at his move to arch rival Oracle

By Steve Evans

Mark Hurd HP Oracle
The garage in the back garden at 367 Addison Avenue in Palo Alto, California is a humble building, but the impact it has had on the IT industry is immeasurable. Way back in 1938 Dave Packard and Bill Hewlett held their first business meeting there, and the following year they sealed their business partnership, the name Hewlett-Packard chosen on the toss of a coin.

The company’s first product was an audio oscillator – an electronic test instrument used by sound engineers. Among its first customers was Walt Disney Studios, which purchased eight oscillators to develop and test a sound system for the movie Fantasia. In the years that followed HP expanded its portfolio to include more electronic test equipment, such as signal generators, voltmeters and wave analysers.

The 1950s saw HP float on the stock market, build its own headquarters and make its first acquisition when it bought FL Moseley, a producer of graphic recorders, laying the foundation for the company’s printing business. International expansion also arrived in the 50s thanks to a new manufacturing plant in Germany and a marketing organisation in Switzerland.

Its first computer arrived in 1966, the HP 2116A, described as the world’s first "go-anywhere, do-anything computer", followed two years later by the 9100A, touted in ads as a "personal computer", one of the first recorded uses of the term. As HP grew so did the area of California it was based in. The phrase Silicon Valley was eventually coined to cover the huge number of technology companies operating there, with Palo Alto and HP at its centre.

Fast forward to 1999 and HP hired Carly Fiorina as CEO. The year before she had been named the most powerful woman in business by Fortune magazine following her work at AT&T and Lucent. She oversaw huge changes at HP during a time of economic uncertainty; the dotcom crash of the early 2000s hit Silicon Valley hard and HP was no exception. Its market value halved during her tenure and she slashed the workforce in order to cut costs and kick-start regeneration.

Fiorina’s time at HP saw two of the most significant moments in its history. Towards the end of 1999 HP spun off Agilent, ridding itself of its measurement, components, chemical analysis and medical businesses and retaining its computing, printing and imaging businesses. The IPO created an $8bn company with 30,000 workers, at the time the biggest IPO in Silicon Valley history.

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Leaving HP to concentrate on its computer division saw Fiorina champion a merger with Compaq. Despite opposition from HP board member Walter Hewlett, the $25bn deal went through in 2002, creating the world’s largest PC maker. At the time, Compaq was also the biggest shipper of Windows servers, and Fiorina’s argument was that adding that business to HP’s strength in Unix servers would give it a better platform with which to attack IBM, Sun and the like.

But, as integration dragged on, concerns over the company’s performance resulted in the board attempting to move power away from Fiorina and increase the influence of division heads. Fiorina resisted and was asked to resign. She did in February 2005, the year in which Dell overtook Compaq as market share leader in the lucrative PC server market. HP’s stock actually jumped on Fiorina’s exit, a sign that Wall Street had lost faith in her leadership. She was replaced by Mark Hurd in March that year.

HP’s plan to diversify power at the company had been leaked to the Wall Street Journal and one of Fiorina’s last acts while in charge was to instigate a hunt for whoever was leaking the information. Patricia Dunn, HP’s chair at the time, continued the search. She hired a team of security experts; they in turn hired private investigators who used an illegal technique known as "pretexting", which involves pretending to be someone else – in this case HP board members or journalists – to access phone records. Dunn denied any knowledge of the methods used by the private investigators but still stood down from her role. All charges were eventually dropped.
Dunn’s position on the board was taken by CEO Mark Hurd, and for a while everything went swimmingly for HP.

Hurd out
The facts of Hurd’s departure from HP are this: the company said an internal investigation found "numerous instances" in which Hurd submitted inaccurate expense reports intended to conceal Hurd’s "close personal relationship" with an independent contractor. The inquiry was launched after the unidentified contractor claimed she had been sexually harassed by Hurd.

The company’s general counsel, Michael Holston, said Hurd’s behaviour reflected a "profound lack of judgment" and violated HP’s standards of business conduct. He stressed, however, that the company found no evidence of sexual harassment. Hurd said of his departure: "I realised there were instances in which I did not live up to the standards and principles of trust, respect and integrity that I have espoused at HP."

It’s no exaggeration to say that Hurd had turned HP around. A strict regime of cost cutting and acquisition-based growth saw the company reclaim its position as the world’s biggest PC maker by units shipped, while in 2007 HP smashed through the $100bn revenue barrier – the first technology company to do so.

Hurd’s cost cutting was brutal. Around 50,000 workers lost their jobs during his tenure; he consolidated HP’s 85 data centres down to just six and slashed wages. His strategy worked – HP grew and grew. But with this new, leaner HP came a shift in reputation to a "cost control machine", as Gartner’s Martin Reynolds put it when we asked him for his view on Hurd’s tenure: "Hurd’s approach branded HP as a low-cost supplier, suppressing the image of the company as an innovator."

Is HP looking to get away from that image? Was Hurd’s departure a convenient opportunity to remove him and turn around public perception? HP declined comment for this feature so it’s unlikely we’ll clear up the issue of whether the company was entirely happy with Hurd’s leadership; as Reynolds points out, it’s hard for a CEO to remain popular when he has made such savage cutbacks.

During a conference call to discuss HP’s Q3 earnings, Cathie Lesjak suggested Hurd’s impact would be felt for a while yet: "Mark Hurd left this organisation with an extremely strong, talented management team, an organisation of over 300,000 employees who know what the strategy is and are excited about executing on that strategy," she said. "So, he left it in great shape. We are very well positioned, we think of ourselves as kind of a team on a mission. We’ve been on that mission for some time now and we’re focused on moving ahead with it."

So what about acquisitions? Hurd’s tenure saw HP acquire, among others Mercury Interactive for $4.5bn, Opsware for $1.6bn, 3Com for $2.7bn, Palm for $1.2bn and, most significantly, IT services provider EDS for an eye-watering $13.9bn. Early indications are that the acquisition-based strategy will continue. In the weeks following Hurd’s departure HP won the bidding war for cloud storage firm 3PAR and also boosted its security portfolio with the $1.5bn acquisition of ArcSight.

"When you have a winning strategy, I don’t see the motivation to change it," says Lesjak. "It’s something that we’ve been building for the last four plus years. And we’ve made conscious decisions about what acquisitions and gaps in our portfolio that we needed to fill."

Larry Ellison HP Oracle
Management merry-go-round
Hurd’s familiarity with acquisitions and subsequent integration is one reason he walked straight into another job – co-president at business software goliath Oracle. It is expected that Hurd will help lead the integration of Sun Microsystems, acquired by Oracle for $7.4bn last year. The acquisition of Sun will see Oracle move into space occupied by HP such as servers and other data centre products, and it is expected Hurd’s knowledge of this area will serve Oracle well. It’s also a move HP tried to block in the courts, saying Hurd will have no option but to reveal trade secrets.

The move had been rumoured since Oracle CEO Larry Ellison, a close friend of Hurd, criticised HP for making it impossible for Hurd to continue as CEO there. In an email to the New York Times, Ellison said: "The HP board just made the worst personnel decision since the idiots on the Apple board fired Steve Jobs. In losing Mark Hurd, the HP board failed to act in the best interest of HP’s employees, shareholders, customers and partners. The HP board admits that it fully investigated the sexual harassment claims against Mark and found them to be utterly false."

Hurd will replace Charles Phillips at Oracle. Phillips is himself no stranger to controversy. Earlier this year images of Phillips with his former mistress appeared on billboards in New York, Atlanta and San Francisco and more recently he was publicly corrected after suggesting that Oracle has a five-year, $70bn acquisition strategy.

This managerial merry-go-round has provided tech watchers with a great deal to talk about. boss Marc Benioff called it a, "great enterprise software soap opera" – but Hurd’s arrival at Oracle does raise a few questions. How will Hurd’s approach work at Oracle? How will he take to being given orders? It’s not hard to imagine the odd ego clash between Hurd and Ellison.

Fun times, no doubt, but what about HP? What does it stand for these days? Reynolds’ point about Hurd "suppressing" HP’s reputation as an innovator was backed by IBM boss Sam Palmisano. In an interview with the Wall Street Journal he said: "HP used to be a very inventive company," adding that it only bought 3PAR because it had to. "HP had no choice," he said. "Hurd cut out all the research and development."

"The company has two directions it can go in," says Reynolds. "It can either continue its strategy of improving efficiency and selling products at decreasing prices to increasing numbers of people, or it can rapidly change direction. HP needs a broader vision for the future; its cloud strategy is not very strong. Maybe it needs to think seriously about whether it makes sense to remain a massive conglomerate."

Reynolds speculated that this could include selling certain parts of the business to enable HP to concentrate on others, perhaps spinning out its print and PC units to focus competition on IBM and Oracle in the services, software and other hardware fields.

At the time of going to press the search for a new CEO was ongoing with no clear front-runner emerging.

A few names have been mentioned, from IBM’s Steve Mills to EMC’s Pat Gelsinger and internal candidates such as HP’s PC division chief Todd Bradley or Lesjak. One rather ridiculous suggestion is that of Charles Phillips, which although it would give the whole situation a nice symmetry is unlikely to happen, according to Reynolds. It’s also unlikely that HP will hire from inside as most candidates are aligned with Hurd’s reign, Reynolds argues.

[After publication it was announced that former SAP head Leo Apotheker would join HP as CEO. Read CBR’s reaction to the appointment here]

HP is no stranger to controversy at the top. But, although this latest episode has given everyone plenty to read, write and pontificate about, it’s difficult to see HP suffering long-term. It is, as Reynolds says, "really strong, and will continue to be so."

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