Hewlett-Packard: Is Leo Apotheker to Blame for Company Woes?

Reports emerged on Wednesday that the board of Hewlett-Packard Co. (NYSE: HPQ) may remove the company’s CEO Leo Apotheker after less than a year at the job.

HP board member Meg Whitman, the former chief executive of eBay (Nasdaq: EBAY) is reportedly being considered as his successor.

David B. Smith, chief investment officer of Rockland Trust Investment Management Group, in Rockland, Mass., said he was not surprised by the apparent end of Apotheker’s career at HP, although he was somewhat taken aback by the short length of his reign.

“Leo Apotheker failed miserably at HP,” Smith told the International Business Times. “His term at the company was marked by bad decision after bad decision.”

Indeed, during his brief stay at HP, Apotheker decided to dramatically shift the company’s strategy – among other things, he dropped the TouchPad tablet product line; planned to spin-off the personal computer (PC) business and focus on the higher-margin enterprise business which involves software, services and servers.

He also made a controversial (and very expensive) $10 billion acquisition of British information management software developer Autonomy Corp.

“He overpaid for what is essentially a second-tier software company,” Smith said.

Apotheker also repeatedly cut sales forecasts and backtracked on a pledge to integrate Palm’s webOS software into a suite of other HP products.

“When he came in, he said he would ramp up research & development (R&D) spending,” Smith noted. “Then, he backtracked on that and decided to cut back on such expenditures. This was typical of the kind of lack of vision and lack of clear strategy he has shown. These kinds of things cause a lot of confusion and don’t do much for investor confidence.”

Indeed, such new strategies (or lack thereof) have come under assault from both Wall Street analysts and irate shareholders.

Peter Misek, an analyst at Jefferies & Co., told CNBC: “Shareholders are beside themselves over the decline in share price, the company missing targets, the spinout of the PC business in such a haphazard way and the debacle with web OS.”

The writing may have been on the wall for Apotheker after the company posted less-than-stellar third quarter results, while share prices continued their relentless plunge. Since mid-February, HP stock has lost more than half its value.

Clearly, investors were elated by the news that Apotheker may be pushed out the door. HP shares jumped 6.72 percent in Wednesday’s trading.

Smith indicated that Apotheker may have been the wrong man for the job from the very beginning.

“He was the chief executive of a European software company called SAP and his term there was not very distinguished,” Smith said.
“We were told that after Mark Hurd was moved out, the company was going to get a new high-profile selection for CEO; so it was a head-scratcher when they picked Apotheker for what was ostensibly a prestigious position. I don’t think he had the track record for the HP job.”

There also seems to be something amiss with the culture at HP. Over the past six years, they have witnessed the awkward and/or forced departures of two high-profile chief executives – Mark Hurd and Carly Fiorina – over unusual circumstances.

Indeed, some analysts were puzzled by the apparent move to fire Apotheker and how culpable the board might be in the company’s ongoing problems.

Charles King, an analyst at Pund-IT, told Computerworld: What bugs me a little bit about this [is that] Apotheker was [not] making these announcements in a vacuum. The board had to be deeply involved.

King added that Apotheker might become a whipping boy for the board that was just as complicit in most of the decisions.”

Rob Enderle, an analyst at the Enderle Group, said that removing Apotheker might cause further disruptions to a company that is already in the throes of massive changes.

When you change a board you'll likely change what it thinks the company should have in a CEO, Enderle told Computerworld.

Companies in HP's space are required to be extremely stable and reliable. Changing the CEO spot destroys the image that you can trust the direction presented by the company or the promises of its executives.

And what about the presumptive successor Meg Whitman, the failed candidate for California governor?

“Meg Whitman – it’s probably the right move,” Misek told CNBC. “She’s an Internet pioneer – and the future of HP is based on embracing the Internet fully with their devices -- like Apple has. She would be a great interim step – and certainly we wouldn’t expect any violent surprises from her.

Smith concurs that Whitman would make a good interim CEO -- but she is definitely not the long-term answer.

“Her background is in the consumer space, not technology,” he said. “There are very different types of businesses. At the moment, I think HP is like a ship without a rudder.”

Regarding Apotheker’s relatively brief tenure, only about two percent of CEOs at large U.S. corporations are fired each year, according to Anna N. Danielova, assistant professor of finance at DeGroote School of Business in Hamilton, Canada.

“To be fired (as opposed to resigning), is not usual to begin with,” she said. “But to be ousted in less than one year is not typical, unless he was an interim CEO, which Apotheker was not.”

The average CEO tenure in North America is about 8 years, she indicated.

“It is too expensive for a company to change CEOs both in terms of money and time,” she explained. “Golden parachutes typically have to be paid out to an existing CEO; a board has to invest time into finding and hiring a replacement.”

Moreover, unfavorable press coverage about the company during this transition period would not help either.

Indeed, a Wall Street Journal survey of 30 companies in the S&P 500 index which removed their CEOs between January 2005 and June 2007 revealed that the shares of those companies have declined far more often than they have increased.

“This is because firms with ousted CEOs typically have big problems to fix,” Danielova added.

“Obviously a firm/board goes through such troubles only if the current CEO is costing more money (due to lost share value via bad managerial decisions, lack of vision, failure to execute right strategy, etc.) than the cost of finding a new leader.”