HP’s Whitman Starts CEO Tenure by Unwinding Apotheker’s Criticized Moves

Hewlett-Packard Co. (HPQ) Chief Executive Officer Meg Whitman, by abandoning a proposal to spin off the company’s market-leading personal-computer unit, took a step toward unwinding the moves that led to her predecessor’s ouster.

In her first major decision since taking over on Sept. 22, Whitman backed away from a proposition made by Leo Apotheker a month before he was fired. She said in an interview she may also resurrect a push into tablet computers, an effort that languished under the former CEO, and in another break with the past, Whitman is sharing management with Chairman Ray Lane.

“HP has been a comedy of errors, and selling a third of their revenue right now is probably not sound,” said Brian Marshall, an analyst at ISI Group in San Francisco. “This is obviously a pretty big reversal of the strategy Leo put into place.”

Hewlett-Packard, based in Palo Alto, California, follows Netflix Inc. (NFLX), another Silicon Valley technology company, in changing tack on policies that displeased investors. Netflix abandoned a plan this month to split into two businesses, a move that would have made subscribers choose between different services for DVDs and streaming video.

Whitman is keeping PCs to maintain a diverse product lineup and to help Hewlett-Packard drive bigger bargains when purchasing components. Her aim is to step up growth and avoid the management missteps that rankled shareholders and led the company to cut sales forecasts three times under Apotheker.

Costly Sale

The decision on PCs followed a review that found Hewlett- Packard’s role as the largest PC seller was too valuable to its brand, procurement power and customer relationships, the company said yesterday.

“If you try to hive a division off, it’s really hard because you almost have to recreate the whole thing,” Whitman said in the interview.

Offloading the division also would have rung up $1.5 billion in one-time expenses and $1 billion a year in ongoing costs related to replicating functions, Whitman said. And the spun-off company might have ended up competing with its parent in servers and other markets, she said.

Holding on to PCs affords the company purchasing advantages, giving it the clout to negotiate better prices for chips and hard drives, which are used in both PCs and servers. That’s especially useful with memory chips, given their volatile prices, said Richard Shim, an analyst at market research firm DisplaySearch, part of NPD Group.

‘Like Jet Fuel

“If you can ensure a certain volume then you can get a consistent price; it’s like jet fuel to airlines,” he said. Computer companies also benefit from packaging PCs, servers and other gear in the same sale, Shim said.

The move may affect Hewlett-Packard’s credit ratings, though. Moody’s Investors Service today placed the computer maker’s ratings on review for possible downgrade. The agency said in a statement it’s looking at the capital and liquidity implications of the decision to keep the PC group. The review affects about $24 billion of debt.

Hewlett-Packard rose 81 cents or 3 percent to $27.80 at 2:11 p.m. in New York. Before today, the stock had gained 18 percent since Whitman took over, while the Standard & Poor’s 500 Index advanced 14 percent.

Covering More Ground

While Whitman has taken charge of computer hardware and corporate functions, Lane is focused on software and technology services, she said. That lets the executives “cover more ground,” Whitman said. Lane, a partner at venture firm Kleiner Perkins Caufield & Byers, is spending 30 percent of his time working on Hewlett-Packard business, she said.

When Whitman agreed to become Hewlett-Packard’s CEO in September, it was on the condition that Lane be executive chairman, according to a person close to the company. The two executives compare notes on a daily basis and hold a more detailed meeting once a week, Whitman said yesterday.

Apotheker was ousted a month after announcing the spinoff idea, dogged by a slump that forced him to cut sales forecasts three times in less than a year.

He also undermined investors’ confidence with a $10.3 billion agreement to buy software company Autonomy Corp., announced the same day as the PC group review, and by killing the company’s TouchPad tablet computer less than two months after its high-profile debut.

HP’s Identity

The next test for Whitman will be the company’s Nov. 21 fourth-quarter earnings report, when she’ll give guidance for the current fiscal year, which ends next October, and detail her strategic plans for next year. Whitman and Chief Financial Officer Cathie Lesjak are working on those plans now, Whitman told analysts during a conference call yesterday.

“We confused the market pretty dramatically,” Whitman told analysts. “No matter where I go, the first question I get is, ‘What is HP?’”

While she wouldn’t get into details, the CEO reiterated plans to steer clear of large acquisitions and work on positioning the company to deliver cloud-computing services and capitalize on the merging of consumer and business technology in a way that companies’ information-technology departments can support.

Whitman also isn’t giving up on tablets, despite the dominance of Apple Inc. (AAPL)’s iPad, she said yesterday. The company is working with Microsoft Corp. to use the pending Windows 8 operating system on tablet computers, and Hewlett-Packard may come back to market with a tablet running its own WebOS software, she said.

“The market was created by Apple,” she said. “That doesn’t mean there couldn’t be a strong No. 2 player.”

To contact the reporters on this story: Aaron Ricadela in San Francisco at aricadela@bloomberg.net.

To contact the editors responsible for this story: Tom Giles at tgiles5@bloomberg.net

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