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Apotheker Said HP Would Get Out Of The PC Business

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Apotheker Said HP Would Get Out Of The PC Business, A few months after she took over as the CEO of Hewlett-Packard (HPQ) last September, Meg Whitman held one in a series of get-to-know-you meetings with employees. To say the audience, a group of software engineers and managers, was sullen would be an understatement. As Whitman spoke, many of them glared at her. Others weren’t making eye contact with their new boss. Their heads were down, and they were tapping furiously on handheld devices.

“Your comments are being live-blogged,” one employee told her defiantly. Whitman challenged the man. “You all have taken leaking to a new art form,” she said. “It’s a sign of an unhappy company. You wish HP ill.” The tapping suddenly stopped, and as the room fell silent, the mobile devices were lowered.

The employees’ open contempt for the head of the company and Whitman’s acknowledgment of their misery were signs of just how dire things had gotten inside the technology titan after a humiliating series of epic stumbles last year. Just in the few months before Whitman became CEO, there was the costly failed launch of a tablet computer, a mortifying public waffling over whether to spin off the company’s giant personal computer business, and then the drumming-out of its third CEO in less than seven years.

If only HP’s troubles were confined to a few months in 2011. For a decade now the company has sometimes seemed more like a tawdry reality show than one of the world’s great enterprises. The public dysfunction started with the vicious infighting over HP’s merger with Compaq in 2002, which reached its nadir when the company’s high-profile CEO, Carly Fiorina, pilloried Walter Hewlett, a board member and son of a company founder, for daring to voice his opposition. There was a board riven by feuds — so out of control that some directors were leaking secrets to the press while the chairman of the board was hiring private investigators to obtain their phone records (and those of reporters) to uncover the perpetrators. That bit of skullduggery ended with the company’s chairman and its CEO both dragged before Congress to explain themselves under oath. Then came the ouster of the company’s putative savior, CEO Mark Hurd, after allegations relating to his interactions with a marketing consultant who had been an actress in risqué movies; both parties absolutely, positively, categorically denied that there was any hanky-panky.

Dr. Phil could fill a month’s worth of shows just examining HP’s board, whose dynamics have resembled those of rival junior high school cliques more than what is supposed to be a sage guiding force. At times, as we’ll see, HP directors have refused to be in the same room with one another and have accused each other of lying, leaking, and betrayal. Time and again they’ve failed in their choice of CEO — their most important task — selecting a new leader whose most salient trait is that he or she is the opposite of the last one.

All of this has impeded the company from tackling the fundamental problem it faces: Simply put, Hewlett-Packard has lost its way. The company is in the midst of an existential crisis. It remains a behemoth, No. 10 on the Fortune 500, with $127 billion in sales last year and $7 billion in earnings. But the trajectory is ominous. Those profits, for example, were 19% lower in 2011 than in the previous year. HP’s business is under siege on almost every front, losing market share and facing declining margins.

It was a combustible mixture: long-term threats to the business combined with an impaired board and an ill-chosen CEO in Léo Apotheker (LAY-o AH-po-teck-er). The three ignited disastrously during the 11 months that the 58-year-old European software executive ran HP. Indeed, there’s no better way to understand the company’s plight today than to examine his tumultuous tenure. A Fortune investigation reveals that the turmoil of Apotheker’s reign was even more intense (hard as that is to believe) than previously reported. From the slapdash hiring of a man with no experience in HP’s biggest lines of business, to the half-baked ways in which the company tackled major strategic decisions; from the never-before-reported internal challenges to Apotheker by top executives, to the fact that HP chairman Ray Lane was a major force in the company’s strategic decisions — which he has since blamed on Apotheker — the full story of HP’s convulsive year has never been told. This article is based on interviews with more than 70 current and former directors, executives, and employees of HP, SAP (where Apotheker once worked), and other companies in the industry, as well as hundreds of pages of company and legal documents, many of them never before made public. (Citing a confidentiality agreement with HP, Apotheker declined to meet with Fortune in Paris, where he now lives.)

With Whitman, 55, now in place, the acrimony at HP seems to have eased. So far her strategy amounts to this: Let’s execute better while we figure out our long-term plan. That’s fine, as far as it goes. But the company will never come close to reclaiming its former glory unless she and the board can find a way to function together and, most important, until she can answer the real question: What is HP?

The saga of HP’s 11 months under Léo Apotheker begins in November 2010. To understand it, you need to appreciate what he found and how HP got to that point. The company seemed strong at that moment, its swagger restored during the five years Mark Hurd had been in charge. Earnings per share had quadrupled. The stock price had doubled. HP was No. 1 in PC shipments, No. 1 in printers, No. 1 in servers.

But just under the surface was a very different reality: HP was traumatized, its employees disengaged. Internal “voice of the company” surveys revealed that morale had cratered. One top executive told Apotheker she felt “maimed” by Hurd’s hard-charging style. A company hailed for its vaunted “HP way” — which emphasized employee autonomy — had stifled creativity to the point where workers now had a rueful phrase to describe the way they tuned out and pretended to be clueless when executives asked them to do something: “flipping the bozo bit.”

HP was barely innovating. The company didn’t boast a single hit consumer product even as 67% of its revenue stemmed from hardware. Apple (AAPL) had shown the riches awaiting those who invent hit devices. But there were no iPhones or iPads in HP’s bland array of products. And Apple was only one rival for HP, whose diverse businesses meant it also competed with enterprise hardware and software companies such as IBM (IBM) and Oracle (ORCL) and consultants such as Accenture (ACN).

Faced with pressures on every side, HP had seen its numbers begin to slide. After nearly doubling in Hurd’s first three years, for example, free cash flow sank from $12 billion in 2008 to $8.4 billion in 2010, his last year.

By contrast, the company HP dreamed of being, IBM, had soared by taking a different tack: It dumped its PC business and focused on high-margin software and services. That prompted what is probably an apocryphal, but telling, anecdote among enterprise techies: Two visiting consultants are waiting for the elevator at a big company’s headquarters. One is from HP, the other from IBM. The consultant from Big Blue pushes the up button to visit the CEO on the top floor. The HP man, by contrast, hits the down button to see the IT guy in the basement. The message was clear: IBM was consorting with kings while HP was on hands and knees, fixing the plumbing. It wasn’t just a metaphor either: IBM’s pretax profit margins, just under 20%, were more than double the 8.7% HP achieved in Hurd’s last year.

HP had been operated with an eye toward the short term. Hurd emphasized financial management. Revenues grew largely because of acquisitions — including the Compaq deal, HP bought 86 companies under Carly Fiorina and Hurd — and profits multiplied mostly because of Hurd’s ferocious cost-cutting and growth in the PC business.

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