Monday September 11, 6:24 pm Eastern Time
Hewlett-Packard's CEO Fiorina continues H-P's reinvention
By Duncan Martell
PALO ALTO, Calif., Sept 11 (Reuters) - Chief Executive Carly Fiorina's bid to reinvent Hewlett-Packard Co. continued apace on Monday, as the No. 2 computer maker disclosed it was in talks to buy the consulting arm of accounting firm PricewaterhouseCoopers for $18 billion in cash and stock.
Taking a page from the playbook of No. 1 computer maker International Business Machines Corp.'s Chairman Lou Gerstner, Fiorina's and H-P's (NYSE:HWP - news) efforts underscore the importance of the burgeoning and increasingly important computer-services business to such stalwarts as H-P and IBM.
Times have changed. Three years ago, some Wall Street analysts publicly questioned the wisdom of Gerstner's aggressive bid to build IBM's (NYSE:IBM - news) services group into a global powerhouse. At the time, they cited concerns about the lower gross margins -- on the order of 20 percent -- that Big Blue garnered from services compared with 60-percent or more on the sale of huge mainframe computers, its bread and butter.
But time and Gerstner's relentless, nearly maniacal focus on customers and providing complete high-tech solutions, computers, services and software, seems to be paying off. With an army of 135,000 employees in IBM's global services business, it's by far the largest in the world and for the better part of the past 2-1/2 years has been growing at 20 percent or more each quarter. In the second quarter, the services business grew rising 2 percent to $8.2 billion, slower than in quarters past but still nothing to scoff at.
``This was clearly a priority and a missing link for H-P,'' said Toni Sacconaghi, an analyst at Sanford C. Bernstein.
In its fiscal third quarter, Palo Alto, Calif.-based H-P had a bang-up period for its services business: operating income for its unit that provides consulting services to businesses gearing up their technology to use the Internet rose 42 percent to $178 million from $125 million a year ago on sales of $1.8 billion.
For its fiscal year ended October 1999, H-P, known as the gray lady of Silicon Valley, had sales of $5.9 billion, or 14 percent of its total sales, from its consulting business. Compare that to IBM: its global services division generated 1999 sales of $32 billion, more than a third of Big Blue's total revenue.
While IBM long ago decided to become largely neutral from a hardware standpoint -- it will build computer systems using computers from Sun Microsystems Inc. SUNW.O, Compaq Computer Corp. CPQ.N , H-P, Dell Computer Corp. (NasdaqNM:DELL - news) and others including its own -- H-P's services business has historically existed to support the installation of its own gear.
If H-P and PricewaterhouseCoopers do come to an agreement, those days are over.
``H-P always kept its services business integrated within its organisation, more subservient to the product side of its business -- now H-P has taken a new view of services,'' said Allie Young, an analyst at market research firm Dataquest, a unit of Gartner Group. ``This changes the entire scope and face at things at H-P.''
The first acquisition since Fiorina, 45, came on board just a little over a year ago, H-P's talks are the latest in a reinvention that started about a year and a half ago, under former Chairman and Chief Executive Lew Platt. His final, most dramatic move as head of the venerable computer company was his decision to spin off its test-and-measurement business into a new company, Agilent Technologies Inc.
Since then, Fiorina has stepped up the pace.
Shortly after arriving from Lucent Technologies Inc., she told her senior troops of her plan for a massive reorganization of the 85,000-employee firm, according to a recent article in the Wall Street Journal. And she wanted it done in three months, nine less than what she was told was possible. It was.
Among other changes, she put Ann Livermore, who up until then ran the computer-server division, in charge of H-P's 100 biggest customers to respond to criticism by customers that they would often need to deal with myriad divisions within H-P separately just to complete a single, large order.
And now comes the planned PricewaterhouseCoopers deal and any number of challenges: retaining employees and top talent, rejiggering H-P's culture to reflect a more hardware-neutral view of selling those consulting services, and, perhaps thorniest of all, how to integrate the more-than 30,000 consultants now employed by PricewaterhouseCoopers.
``Here's quite an integration they'd have to go through,'' said analyst Richard Chu of SG Cowen & Co. ``That's a big challenge.''
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