The Inside Story Of Carly's Ouster

By the end of 2004, the pressure in Hewlett-Packard Co.'s (HPQ ) corner office was almost unbearable. With Chief Executive Carleton S. Fiorina's efforts to fix the $80 billion computing colossus stalled and tensions building with the board, one of high tech's most powerful executives began mulling an exit plan, BusinessWeek has learned.

Around the holidays, Fiorina held separate meetings with at least four high-profile chief executives to glean advice on making a "graceful exit" from HP, according to industry sources. These industry luminaries, approached by Fiorina at yearend business conferences, included Cisco (CSCO ) Chief Executive John T. Chambers and Intel President Paul S. Otellini. During the conversations, Fiorina told the CEOs she was feeling some pressure from HP's board and inquired about face-saving ways to leave the company should she decide it was in the best interest of shareholders, according to the sources. Chambers and Otellini didn't return requests for comment. A spokeswoman for Fiorina says it is "complete and utter fiction" that she talked to Chambers and Otellini about leaving and adds that Fiorina never contemplated leaving HP.

It was a decision she didn't get a chance to make. On the evening of Sunday, Feb. 6, HP's board hunkered down with Fiorina in an emergency meeting held at Chicago's O'Hare Hyatt Hotel. As a light rain drizzled outside, the directors stewed over their star CEO's failure to execute her ambitious plan for the company. In addition, directors were concerned about the "board's inability to work constructively with [Fiorina]," according to an HP insider. The next day, they asked Fiorina to step down. And on Wednesday, Feb. 9, at 5 a.m. Pacific time, HP stunned the world, announcing Fiorina's dismissal, ending her 51/2 year stint atop one of the legends of Silicon Valley.

Despite the surprise announcement, the board's concerns about its chief had been mounting for nearly a year. Sure, she had dazzled directors and many investors with her passionate work in pushing through the controversial merger with Compaq Computer Corp. in 2002. And the immediate integration of the two companies bested expectations, silencing even her fiercest critics. But by late 2003, investors began shifting their focus from the Compaq deal to HP's ebbing position against key competitors IBM (IBM ) and Dell (DELL ). They bored in on the ragged financial performance that led to the swooning stock price. "[Fiorina's] good with marketing; she's a good speaker for the company," says a former HP executive. "But this is a company that doesn't need a statesman. It needs a hands-on operations person."

The tide really began turning against Fiorina following HP's massive profit shortfall in the third quarter of last year. That marked HP's second miss in five quarters and further damaged the company's credibility on Wall Street -- a major issue, since HP's stock has long traded at multiples well below those of its competitors. Although Fiorina fired three top sales executives for the miss, the board's doubts about its CEO grew. At the same time, the board's proddings of Fiorina to bolster HP's operations talent went largely unheeded.

As HP struggled to nail down its operations, some directors were chagrined that Fiorina didn't move more quickly to strengthen HP's position against Dell and IBM. For instance, although HP has gradually built up its direct-sales efforts to better compete with ultra-efficient Dell, some directors felt the company wasn't moving fast enough, according to the HP insider.

In addition, HP balked at a major acquisition to bolster its money-losing software business. In 2004, HP had considered acquiring Veritas Software but didn't move quickly enough, according to current and former HP execs. In December, Symantec (SYMC ) gobbled up the profitable software company -- leaving some HP directors unhappy. "Things needed to make us more competitive in certain segments weren't being done," says the insider.

By November of 2004, HP's directors began holding periodic conference calls -- without Fiorina -- to discuss their CEO's performance. And by the time of the board's January meeting in San Francisco, it enlisted three directors to meet with Fiorina to discuss its concerns with her performance. The trio produced a document indicating their concerns represented the consensus of the entire board.

The ensuing board meeting, which was supposed to be an annual strategy review, became focused on the performance of Fiorina and HP. And during the meeting, directors pushed forward a plan to distribute some of Fiorina's operating responsibilities to her key lieutenants. Sources familiar with the reorganization plans say they are on hold because of the management shake-up.

It was a heavy blow to Fiorina's credibility as the company's leader. Just weeks later, she was out. It had become increasingly clear that HP's need for a nuts-and-bolts operations whiz far outweighed the benefits of a high-profile CEO.

By Ben Elgin in San Mateo, Calif.

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