Backfire: Carly Fiorina's High-Stakes Battle for the Soul of Hewlett-Packard

Backfire: Carly Fiorina's High-Stakes Battle for the Soul of Hewlett-Packard

3.6 3
by Peter Burrows
     
 

"In detailing the last hurrah of the ’90s merger mania, Peter Burrows has written what will become a classic read in modern corporate governance. It is the quintessential story of managerial versus shareholder prerogative, superbly related, which will certainly garner a wide popular and scholarly following."
–Charles Elson, Director, Center

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Overview

"In detailing the last hurrah of the ’90s merger mania, Peter Burrows has written what will become a classic read in modern corporate governance. It is the quintessential story of managerial versus shareholder prerogative, superbly related, which will certainly garner a wide popular and scholarly following."
–Charles Elson, Director, Center for Corporate Governance, University of Delaware

Hewlett-Packard, the venerable computer maker, was seeing hard times for the first time in its six-decade history. In an effort to shake things up, the company brought in an outside CEO–the daring and charismatic Carly Fiorina.

Fiorina brought style and new thinking to HP, but she also brought change. Her efforts at rapid reform frequently collided with the familiar "HP Way," the egalitarian corporate culture and integrity that Bill Hewlett and Dave Packard had instilled in the company from its very beginning. Many say her initiatives brought little immediate improvement in the company’s fortunes. Then came the single biggest move that would change HP forever: a proposed merger with Compaq. Rubber-stamped by the board, it seemed the deal would go through without a hitch. But board member and family scion Walter Hewlett saw HP’s merger with Compaq as potentially disastrous.

With the board firmly entrenched behind Fiorina, Hewlett faced a stark choice: accept what he knew to be a strategic error, or fight and potentially expose the company to a divisive, destructive public fray. Hewlett chose to fight and what followed was the biggest, most costly proxy battle in American corporate history.

Backfire tells the inside story of HP’s struggle to regain its former glory, and of the high-stakes battle between Fiorina and Hewlett over how best to achieve that goal.

Top BusinessWeek journalist Peter Burrows presents the controversial and gripping business story behind the epic battle in a tale that reads like a great novel of intrigue. Backfire offers the first blow-by-blow account of the corporate struggle that will eventually decide the fate of two computer-making giants. Burrows uncovers how Fiorina’s greatest victory might lead to her ultimate downfall.

With revelations about:

  • Fiorina’s time at Lucent
  • Over-aggressive sales practices that could spell failure
  • The courtroom drama
  • A behind-the-scenes look at what HP doesn’t want you to know

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Editorial Reviews

From the Publisher
"...Backfire, by BusinessWeek computer editor Peter Burrows...offer fresh insights about the epic battle and about Fiorina's ultimately successful purchase of Compaq." (Business Week, February 17, 2003)

Burrows, who reported on the merger of technology rivals Hewlett-Packard and Compaq for Business Week during late 2001 and early 2002, turns the notes from his day job into an uncompromising look at the deal and the woman who set it in motion, HP CEO Carleton Fiorina. Although George Anders's Perfect Enough (Forecasts, Jan. 20) covers the same territory, this account distinguishes itself with a deeper portrait Fiorina. Beginning with her childhood as Cary Carleton Sneed, Burrows traces Fiorina's ascent through a second-tier MBA program to early positions at AT&T and Lucent, uncovering former associates who shadow her success story with tales of ruthless ambition and a tendency to abandon ventures before she could be tainted by their failure. Burrows also depicts the discord within HP ranks over Fiorina, whose marketing-honed strategies were seen as a betrayal of the "HP Way," the leadership principles establishe d by the company's founders. Walter Hewlett, the second-gene ration director whose opposition to the merger intensified the shareholders' vote, gets substantially less play here than in Anders's version, and Burrows is much less accepting of Hewlett's version of events. But his skepticism also applies to HP's enthusiasm for the Compaq deal, which many industry experts scorned as a recipe for disaster. HP executives eventually stopped cooperating with Burrows once they determined they wouldn't be able to spin his reportage, but the book still manages to provide a richly detailed version of the legal wrangling that finally brought the deal to a close Although the prose is somewhat hurried, the comprehensive and near-instantaneous analysis will impress business readers. Agent, Martha Millard. (Feb.)
Forecast: This book and Perfect Enough have already been getting media coverage and will surely show up in the pages of every business magazine. Those curious enough will buy both books, though our preference lies with Burrows's account. (Publishers Weekly, February 10, 2003)

Backfire: Carly Fiorina's High-Stakes Battle for the Soul of Hewlett-Packard by Peter Burrows:
Suggests Fiorina's three-year tenure has not reversed H-P's decline and intimates H-P culture and traditions have been lost.
Explores Fiorina's personal life (childhood, two marriages) and professional background (specifically her moves at AT&T and Lucent) to identify character traits that drive her business dealings and "let them eat cake" reputation.
Gives ample space to Fiorina's detractors, weighing in with, "There was almost no mention of her relative lack of qualification for the CEO job. Few asked questions about her role at Lucent, which had begun its headlong fall by early 2000."
No other female CEO (and there have been only six CEOs of Fortune 500 companies to date) has elicited such strong positive and negative feedback.
No matter what either camp says about Fiorina, she is clearly poised to make history. (USA Today, February 24, 2003)

"...a good grounding in the background to the company and its key players-an interesting read..." (IT Week/www.vnunet.com, 19 March 2003)

"...a fascinating behind the scenes peek at one of the most powerful IT companies-some useful intelligence for IT managers..." (VNU Net, 19 March 2003)

"...more meaty, more colourful and generally a much more enjoyable read...the book also goes much further..." (Infoconomy, 11 April 2003)

"...riveting, colorful, fast-paced account of the Compaq battle". (New York Times Book Review, May 18, 2003)

"...This gripping, ongoing story includes fascinating personalities and dramatic boardroom and courtroom drama..." (Computer Consultant, April/May 2003)

"paints a nuanced and enlightening portrait of the leader of one of the most important high-tech companies". (The Boston Globe, June 8, 2003)

"...realistic and objective.... Backfire is definitely a must-read for investors, executives..." (The star online, 12 August 2003)

The New York Times
Taken on its own, Backfire is a riveting, colorful, fast-paced account of the Compaq battle. It is informed by a deep empathy for rank-and-file employees and retirees, who felt a profound nostalgia for a simpler era when the founders, ''Dave and Bill,'' could manage the company by just ''walking around.'' — Diana B. Henriques
Publishers Weekly
Burrows, who reported on the merger of technology rivals Hewlett-Packard and Compaq for Business Week during late 2001 and early 2002, turns the notes from his day job into an uncompromising look at the deal and the woman who set it in motion, HP CEO Carleton Fiorina. Although George Anders's Perfect Enough (Forecasts, Jan. 20) covers the same territory, this account distinguishes itself with a deeper portrait of Fiorina. Beginning with her childhood as Cary Carleton Sneed, Burrows traces Fiorina's ascent through a second-tier MBA program to early positions at AT&T and Lucent, uncovering former associates who shadow her success story with tales of ruthless ambition and a tendency to abandon ventures before she could be tainted by their failure. Burrows also depicts the discord within HP ranks over Fiorina, whose marketing-honed strategies were seen as a betrayal of the "HP Way," the leadership principles established by the company's founders. Walter Hewlett, the second-generation director whose opposition to the merger intensified the shareholders' vote, gets substantially less play here than in Anders's version, and Burrows is much less accepting of Hewlett's version of events. But his skepticism also applies to HP's enthusiasm for the Compaq deal, which many industry experts scorned as a recipe for disaster. HP executives eventually stopped cooperating with Burrows once they determined they wouldn't be able to spin his reportage, but the book still manages to provide a richly detailed version of the legal wrangling that finally brought the deal to a close. Although the prose is somewhat hurried, the comprehensive and near-instantaneous analysis will impress business readers. Agent, Martha Millard. (Feb.) Forecast: This book and Perfect Enough have already been getting media coverage and will surely show up in the pages of every business magazine. Those curious enough will buy both books, though our preference lies with Burrows's account. Copyright 2003 Cahners Business Information.

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Product Details

ISBN-13:
9780471267652
Publisher:
Wiley
Publication date:
02/07/2003
Pages:
312
Sales rank:
403,831
Product dimensions:
0.81(w) x 9.00(h) x 6.00(d)

Meet the Author

PETER BURROWS has been a technology journalist for BusinessWeek for nine years, during which time he has written several cover stories on Hewlett-Packard. As the department editor for BusinessWeek’s computer coverage, he has been the principal chronicler of Fiorina’s tenure at Hewlett-Packard.

Read an Excerpt

Thank God for her.
-Anonymous HP investor, leaving the courtroom after Carly Fiorina's testimony

The line started forming outside of the Court of Chancery in Wilmington, Delaware, at 3:00 a.m. Scruffy college students in parkas and heavy blankets set up lawn chairs to hunker down for the long wait. For $60 an hour, they held spots for the high-priced lawyers involved in the landmark case that was set to start that day. Soon after sunrise, dapper stock traders, hoping for some big courtroom news, stood sipping coffee to shake off the chill of the morning air. Law professors waited patiently to witness a chapter of corporate law history. Business reporters from around the country stood sharing war stories and speculating about who would be the day's winner. By the time a security guard opened the heavy courthouse doors, more than 200 people snaked down the side of the massive building.

They were all waiting for what was expected to be corporate theatre at its best. At the start of the working day on April 23, 2002, Judge William B. Chandler III would open the trial to consider Walter Hewlett's lawsuit against the company that bore his name. 10117_Burrows_01.r.qxd 12/31/02 2:54 PM Page 13 Like most companies, HP is technically incorporated in the state of Delaware for tax purposes, so the case had ended up here. Neither civil nor criminal, the court's sole purpose is to resolve internal corporate disputes. Hewlett's suit, filed less than a month before, made one simple yet monumental request of the court: Throw out the shareholder vote taken on March 19 that had narrowly cleared the way for HP's merger with Compaq.

Like all great dramas, this one was filled with rich characters and timeless themes. Here was Walter Hewlett, the intensely private son of one of the company's cofounders, coming out of the shadows to defend his father's traditional values. Rather than pursue risky blockbuster deals, he believed HP should return to operational discipline and the hard work of inventing great products. To some, he was a courageous corporate governance hero, daring to stand up to management and its rubber-stamp board. To others, he was a meddling, spoiled scion longing for a simpler time.

His foe, Carly Fiorina, was as different from him-and from that old HP-as she could be. She was stylish, where HP was stodgy. She preferred bold moves and "transformational" management philosophies to HP's watchful, steady-as-she-goes approach. She was a marketer in a company of hard-core engineers. And she had earned her stripes at AT&T, a hierarchical world of pinstripe suits and power lunches-not the egalitarian, Western ways of HP, where the dress code was khaki and the preferred lunch spots served burgers or burritos. Although the monetary stakes were high, this was not just another greedy corporate imbroglio. This was a fight for the soul of a company. HP had been wildly successful. It had never suffered so much as one annual loss in 63 years. But what made HP a management icon was how it achieved those results. For decades, the company had balanced stellar financial performance with unquestioned integrity, from how it kept the books to how it treated its employees and customers. It had plowed millions into the communities in which it did business, not only out of charity but out of a progressive self-interest in keeping them strong. Put simply, it seemed HP had figured out the magic formula for how to run a company. Everyone won-investors, customers, managers, and employees. A frequent member of Fortune magazine's "Most Admired" companies list, HP had been a shining example of the best that Big Business could be. But that was a different time. During the late 1990s, HP had descended into mediocrity. Badly outpaced by rivals, the company's sales growth and morale had plummeted, and its reputation as an innovator had languished. After almost three years on the job, Fiorina certainly hadn't reversed HP's decline. In fact, some thought she had only accelerated it. Now, she would probably lose her job if the Compaq deal was voted down. This trial would determine not only the future of this powerful woman, but also how HP would try to regain that magical formula.

Well before 9 o'clock, the sweeping, spiral stairway leading up to the third-floor courtroom was jam-packed as the principals began to arrive. Hewlett's group turned up first, at 8:50. Hewlett's lawyer, Stephen Neal, led the clan, nodding gregariously as he cleared a path for his client. With his wife Esther walking calmly by his side, the slightly stooped Hewlett shuffled nervously, wearing an uncomfortable smile. An unlikely and reluctant media star, he would have preferred to be practicing his cello or working in his computer lab. He stopped to quickly shake a reporter's hand before moving into the courtroom.

It would take another 15 minutes, long after most of HP's lawyers and handlers had arrived, for Fiorina to show. Her entrance befitted one of the business world's newest superstars, one used to traveling with the accoutrements of a wealthy jet-setter. Like Hewlett, she was coming from the luxurious, $320-a-night Hotel du Pont, just three blocks from the court. Unlike Hewlett, who walked to court, she arrived in a limousine to avoid the gaggle of photographers lurking en route. She walked with a regal calm into the courtroom, flanked by her husband Frank and her lawyer Larry Sonsini. Just five weeks before, she'd presided over the shareholder meeting looking embattled and exhausted. Now, the bags under her eyes had disappeared. Despite working her typical long hours-she could go for months on four or five hours of sleep a night-she appeared well rested.

A slightly clenched jaw was the only visible sign of the fierce determination that had brought her to this courtroom. It was time to give the performance of her life, and she was ready.

Neal was ready, too. It had been seven months since Hewlett had come to his office seeking counsel. From the start, Neal had been pleased with the case. Hewlett was a wealthy client from a legendary family-never a bad thing, particularly in a terrible year for business. And while Hewlett was no doubt an underdog, he was far from alone in his fears about the deal. Wall Street hated it, too. HP's shares had plunged by nearly 35 percent from the time the deal was announced to the day Hewlett visited Neal's office. Since then, the attorney had served as Hewlett's field general on the case-plotting strategy, wooing reporters, and coordinating the efforts of Hewlett's other advisors.

The case was a huge opportunity for Neal in personal terms, as well. He was the CEO of Cooley Godward, and he would like nothing better than a victory over the prestigious firm of Wilson Sonsini Goodrich & Rosati across the street from his office. The trial would pit Neal against rival Larry Sonsini, the "it" lawyer of Silicon Valley-advisor to stars such as Apple's Steve Jobs and Sun Microsystems' Scott McNealy. The case also appealed to Neal's love of fighting high-stakes battles, even when the deck was stacked against him. For eight years, he had defended Charles Keating, the poster child of white-collar crooks for his role in the savings and loan scandals of the 1980s. Neal had stuck by Keating, and ultimately got his 10-year sentence dismissed, after Keating had spent 4 years behind bars waiting for appeals.

Legally speaking, Hewlett's case was not much rosier than Keating's had been. Filed nine days after the March 19 shareholder vote, it hung on two allegations, neither of which would be easy to prove. The first centered on whether Fiorina had muscled Deutsche Bank, one of HP's top 20 investors with more than 17 million shares, into voting for the acquisition on the morning of the vote. The evidence was certainly intriguing. Just days before the vote, the bank had decided to vote all its shares against the deal and contemplated publicly declaring its opposition.1 But suddenly, after a phone conversation with Fiorina and HP chief financial officer Bob Wayman at 7 o'clock that morning, the bank had thrown its shares-possibly enough of them to swing the entire vote-in support of the acquisition. But how had she done it? Was it just through the force of salesmanship? Or had HP offered big banking contracts in the future? Had she threatened to cancel existing banking work? Making matters more interesting was a phone message Fiorina had left for Wayman on March 17, which was intercepted and leaked to the San Jose Mercury News on April 10.2 In it, Fiorina said that she or Wayman might have to do "something extraordinary" to win the support of Deutsche Bank and another big shareholder, Northern Trust. Just how Fiorina defined extraordinary was the question. It was delicious cloak-and-dagger stuff-and very likely worthless in court. So far, there was no actual evidence of wrongdoing.

Neal would need a smoking gun-a contract, a witness, or some document that confirmed that HP actually bought Deutsche Bank's votes. Many observers were convinced something fishy had occurred, but proving it was another thing. Fiorina could have delivered a promise or threat with nods and winks, without putting pen to paper. But would a judge really undo one of the biggest mergers in history on the basis of such flimsy evidence?

The second allegation had grabbed fewer headlines, but held more promise of standing up in court. It alleged a cover-up of sorts-that HP's management had withheld damning information about the merger from investors. Fiorina had persuaded many investors that this merger would be different from other failed deals, because a crackerjack integration team of top HP and Compaq staffers had spent almost 1 million hours planning every detail of how to bring the companies together.

Neal had evidence that challenged Fiorina's rosy outlook. In the weeks prior to the trial, the Hewlett camp had received a stream of information from HP insiders that told a different story, including anonymous phone calls from senior executives and unsigned letters slipped under doors in unaddressed manila envelopes. Among the 40,000 memos, e-mails, and other documents HP had been forced to hand over after the lawsuit was filed were so-called value capture updates. Prepared by members of that much-lauded integration team, these documents suggested the company was not going to hit the targets Fiorina had promised Wall Street. These reports seemed to be the smoking gun Neal needed. Fiorina had seen these documents, yet decided they were not something investors also needed to know about. Still, it wasn't enough that the documents existed.

To win, Neal had to prove that Fiorina knew the reports spoke the truth. In other words, Neal wouldn't win just by proving the Compaq purchase would be a disaster for HP. He had to prove that Fiorina knew it, too. He had to prove that she was a liar.

As Neal rose to make his opening argument, he knew everyone in the courtroom was wondering the same thing: What does he have? Hewlett sat hunched at a table behind his attorney. Sonsini, the man who had advised Hewlett to vote with the board, sat just feet away from Hewlett, across the center aisle that separated the two camps. Fiorina sat against the wall at the far left of the courtroom, as if trying to get as far away as possible from Hewlett.3 Neal, impressive at six-foot-four with a low, resonant voice, played his best card first: the claim that HP had withheld vital information from investors that would have cast major doubts on the merger. He first needed to establish for the court what HP had promised investors, in its presentations to Wall Street, in Fiorina's speeches, and in government filings such as the S-4, the document companies use to register new merger-related shares.

Most everyone in the courtroom knew the basics. For starters, Fiorina promised huge cost savings-$2 billion in fiscal 2003, and $2.5 billion every year afterwards-but she said HP would make these cuts without sacrificing too much in the way of sales. Most analysts figured HP would take a 10 percent hit to its top line as a result of the merger, but Fiorina argued it would be no more than 4.9 percent. Then there was the question of profitability. Walter Hewlett's advisors believed the new HP would lose many high-end, lucrative computer contracts. All told, it would lose roughly $0.26 of profit per every dollar of lost sales. But Fiorina believed most of the lost sales would be in the cutthroat PC business, where margins were negligible. As such, HP figured it would lose only $0.12 per dollar of lost revenue. The bottom line: HP shareholders could expect a 12 to 13 percent increase in the value of their shares in 2003, the company had predicted. Although the math worked, Neal argued that Fiorina knew the reality was different. It all came down to how you interpreted the value capture updates.

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