Mark Hurd's HP Successor Faces Challenge of His Half-Finished Expansion

The sudden departure of Hewlett- Packard Co. Chief Executive Officer Mark Hurd leaves the company in search of a successor who can integrate more than $20 billion in acquisitions and maintain sales growth.

Hurd resigned after an investigation found he had a personal relationship with a contractor who received numerous inappropriate payments from the company. His exit will force a fresh CEO to follow through on a half-finished expansion into new businesses ranging from smartphones to networking gear.

“It’s a very different company from what it was when they brought in Hurd,” said Rick Sturm, CEO of Enterprise Management Associates, a technology researcher in Boulder, Colorado. “There are very few people in the world who can fill these shoes, but they need somebody who can come in and oversee this diverse organization that’s been created.”

Under Hurd, HP retook leadership in the personal-computer market from Dell Inc. and used deal making to expand into such areas as computer services. The company’s stock-market value increased by more than half to $97.7 billion since Hurd took the helm on April 1, 2005. HP raised its full-year earnings forecast yesterday, evidence the company expects to keep growing in his absence.

“While we agree that HP is a large organization that can continue performing due to its strong momentum, its ability to continue executing over the longer term will depend on who is ultimately selected for the top job,” Abhey Lamba, managing director of ISI Group, a research firm, said in a note.

Replacement Candidates

Chief Financial Officer Cathie Lesjak, 51, will become interim CEO, though the 24-year HP veteran said she doesn’t aspire to replace Hurd permanently.

HP may look to the executive suites of companies such as Apple Inc., Oracle Corp. and Microsoft Corp., said Gartner Inc. analyst Martin Reynolds. Apple marketing vice president Phil Schiller may be among those considered, Reynolds said.

Ray Lane, former chief operating officer of Oracle, would also provide the kind of leadership HP needs, said Neil Sims, a managing director at Boyden, an executive search firm.

Lane, 63, is a managing partner at venture capital firm Kleiner Perkins Caufield & Byers. Schiller, 50, heads Apple product marketing. Lane and Kristin Huguet, a spokeswoman for Apple, declined to comment.

IBM Executive

Another outsider is Steve Mills, who has run the software group at International Business Machines Corp. for a decade and recently took over the hardware division, said Sturm of EMA. Colleen Haikes, a San Francisco-based spokeswoman for IBM, didn’t immediately return a message left after business hours.

Internally, HP also has a handful of prospects. Analysts and recruiters say Hurd’s role could be filled by members of the executive staff, including Todd Bradley, who oversaw the successful integration of the Compaq acquisition; Vyomesh Joshi, who runs HP’s printer business; and Ann Livermore, who oversees the enterprise unit. General Counsel Michael Holston said the company won’t discuss possible candidates.

HP initiated the investigation on June 29 after an outside contractor made a claim of sexual harassment. The woman, who HP declined to identify, worked on marketing tasks for two years, the company said. The probe found violations of HP’s standards of business conduct, though it didn’t find violations of the harassment policy.

Expense Receipts

Hurd submitted receipts for expenses ranging from $1,000 to $20,000 over two years, including meals and travel, that should have been labeled as personal and not related to business, said a person familiar with the situation.

The expenses were incurred at HP-hosted “CEO forums,” mostly in North America, in which Hurd participated, this person said. Hurd, who is married and has two children, intends to pay the company back the entire amount.

Hurd didn’t have an affair or an intimate sexual relationship with the woman, said Gloria Allred, a lawyer with Allred, Maroko & Goldberg in Los Angeles, who is representing the woman. Allred, who specializes in discrimination suits, has represented clients in cases involving O.J. Simpson, Scott Peterson and Charlie Sheen.

Discussions of Hurd’s departure began last month, the person familiar with the matter said. Hurd wanted to keep his job, and he and the board couldn’t agree on a way to continue working together, the person said. He “loves this company” and found resigning extremely difficult, the person said.

Gina Tyler, a spokeswoman for Palo Alto, California-based HP, declined to comment.

Severance Payout

Hurd will get a severance payment of $12.2 million, plus other benefits that include a prorated vesting settlement of 330,177 restricted HP shares. He received $30.3 million in compensation in 2009 and $42.4 million the year before.

Hurd stands to receive $40 million to $50 million before the end of the year, estimates Frank Glassner, CEO of Veritas Executive Compensation Consultants LLC in San Francisco, who analyzed an HP regulatory filing listing Hurd’s options and restricted stock units.

“The board took immediate action in this matter and their decision was right and necessary to uphold HP’s values of trust, respect and uncompromising integrity,” Holston said.

Hurd isn’t the first CEO to resign after a relationship surfaced. In 2005, Boeing Co. ousted CEO Harry Stonecipher for having an affair with an employee, 15 months after he returned from retirement to lead the company’s recovery from a purchasing scandal. Boeing is the world’s second-biggest commercial jet builder.

“It would be difficult for me to continue as an effective leader at HP and I believe this is the only decision the board and I could make at this time,” Hurd, 53, said in a statement. “I want to stress that this in no way reflects on the operating performance or financial integrity of HP.”

EDS Takeover

Hurd, who took over as CEO after Carly Fiorina stepped down in 2005, used acquisitions to expand in businesses that generate wider profit margins. Hurd’s biggest deal came in 2008 with the $13.2 billion takeover of Electronic Data Systems Corp., a provider of computer services. That catapulted HP to No. 2 in the services market, behind IBM, helping offset a slump in demand for PCs and printers.

This year, Hurd acquired 3Com Corp., stepping up competition with Cisco Systems Inc. in networking equipment. He also bought smartphone maker Palm Inc.

“Clearly he’s been a significant leader and visionary in restructuring the company,” said Jeffrey Fidacaro, an analyst at Susquehanna Financial Group in New York. “It’s going to be a significant loss to the company in terms of operations.”

To contact the reporters on this story: Ian King in San Francisco at ianking@bloomberg.net; Joseph Galante in San Francisco at jgalante3@bloomberg.net.

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