Why Capellas Flew the Coop

Investors barely shrugged when Michael D. Capellas quit as president of Hewlett-Packard Co. (HPQ ) in November to take the helm at WorldCom Inc. And CEO Carleton S. Fiorina doesn't lament the loss of her No. 2, credited with a turnaround during his time as CEO at Compaq Computer Corp. "Frankly, his leaving is not an issue for this company, either short-term or long-term," says Fiorina.

What happened to the happy pair who fought to convince their investors that the deal to acquire Compaq was a sound move? Fiorina and Capellas insist there was no friction. "Carly and I have been through a lot together," says Capellas. "I would never have considered leaving if I didn't feel the company was headed in a positive direction."

But from the day the merger was completed, BusinessWeek has learned, the two clashed over the company's strategic direction and operational control. While the power struggle never broke out into open warfare, people close to the pair say Capellas became so frustrated that it hastened his exit.

Insiders say Fiorina maintained day-to-day control over operations. She had department heads, including Vyomesh Joshi, who runs the printer unit, sidestep Capellas and report to her, say HP executives.

Within weeks of the merger's May closing, Capellas was on the outside. While he had been billed as an operations ace who would stitch the two together, he was mostly a roving ambassador, reporting to investors and customers on the merger's progress. "Michael was president, not chief operating officer," says a senior HP exec. Capellas would only discuss some aspects of his tenure at HP. Fiorina, however, declined comment on any specific issues.

Capellas' biggest battle was over HP's sales model. He argued that to boost profits long-term, HP needed follow Dell Computer Corp.'s (DELL ) low-cost model of building and selling computers to order. Fiorina, however, favored fending off Dell with minor tweaks while continuing to use dealers, which accounted for two-thirds of the company's revenues in fiscal 2002. On Sept. 12, the HP board heard presentations from Capellas and other HP execs--and adopted the go-slow approach.

Two weeks later, Capellas took a call from a headhunter, the first in a series of fast-moving discussions that led him to WorldCom. Capellas left HP on Nov. 11, with a $14 million buyout package that had been included in his old Compaq contract. Fiorina announced he would not be replaced. Now, it's her show. Win or lose, she can trumpet that she did it her way.

By Cliff Edwards in San Francisco, with Steve Hamm in New York

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