HP CEO Door Revolves – Goodbye Léo, Hello Meg

HP Q2 2011 Highlights

• Meg Witman replaces Léo Apotheker as HP CEO
• IT market share fell to 3.4% in Q2 2011
• Leads the IT, server, PC and peripherals markets
• Lost share in EMEA and the Americas
• Has opportunities of building share in Asia Pacific
• Should look to integrate its business, not offload them
• Needs a vertically – not horizontally – integrated strategy
• Cloud services will help it through the new recession

The CEO door at HP keeps revolving. We’ve hardly had time to get used to Léo Apotheker when we hear Meg Witman, ex boss of eBay, has replaced him. The Who sang ‘meet the new boss – same as the old boss’ and in that sense Meg’s challenges are much the same as before.
Nevertheless we thought it would be a good idea to look at the status of the company today (despite also having reviewed it in August), as well as a few of the opportunities and challenges its new CEO faces.
Its three announcements at the time of its Q3 results were deeply concerning. In particular:

• It announced it was considering offloading its PC division – surprising given its market lead and relatively strong profitability (at least in comparison with IBM and the market’s rate at the time when it sold its PC division to Lenovo)
• It announced that it was stopping production of some WebOS smart phones and tablets from its acquired Palm business, leading (wrongly) to the suggestion it was giving up on WebOS as a unifying infrastructure; even more surprising that it would announce this along with the possible PC business offloading
• It announced it was paying a staggering $11.2 billion for UK-based Autonomy- a price three times higher than the company’s total revenues since its foundation and many multiples of its PE ratio

The combination of the three announcements at least helped to mask the disappointing revenue results: they also signalled a lead into an integrated systems approach perhaps more akin to Léo’s previous experience as boss of SAP. It was one way of becoming more vertically integrated like IBM, Oracle and (most importantly) Apple and would help HP start to break away from its over reliance on the horizontal market. With Autonomy on board, for instance, it would be able to compete with IBM, Oracle Exadata and Teradata for business analytics workloads much more effectively than it does today through its alliance with Microsoft.
However the destabilisation of these announcements, combined with a loss of market share and share price, undoubtedly contributed to Léo’s demise.

HP’s Market Share And Share Price Have Been Falling

Meg’s challenge is greater than Léo’s Mark Hurd’s or Carly Fiorina’s, as she joins at a time of crisis for the company (see Figure 1 for a quarterly comparison of HP’s share price and IT market share). Carly’s big move was the acquisition of Compaq, which many of us thought was a very bad idea, but she had a few quarters under her belt before pushing for it. In fact it was the only time in 23 years at IDC that I was instructed not to publish my analysis until a very positive piece went out from our US group. Loooking at its ‘blog’, there’s no particularly positive view of Meg’s arrival now. The acquisition took a long time, given the opposition of some of the board and an economic slump started with the terrorist attacks on America on September 11th 2001. HP’s share price also declined with the Credit Crunch in 2008, but its market share picked up as businesses shifted strongly to industry standard servers and consumer spending stayed strong.
We may still waiting for the signal event which will name the current economic crisis – Greece falling out of the Euro perhaps – but few can deny that we’re currently in one.
Meg is in something of a perfect storm, with the economy and HP’s product positioning both at a low point. As in football, HP’s status will certainly improve temporarily from changing its boss, but big changes will take time. An immediate challenge will be whether she reverses the three decisions in the time between getting her feet under the table and the end of the financial year in a few week’s time. We believe it would help stabilise the company, since blaming the old boss is allowed in our industry.

HP Leads The IT, Server, PC And Peripherals Market – Is Building In Outsourcing And Networking

However Meg will be pleased to discover she’s taking over a company with a very high profile. It is the leader of the overall IT market with a 3.4% share in Q2 2011. It also leads the server, PC and peripherals areas (see Figure 2).
HP has to change and become more vertically integrated, especially as Apple’s quarterly revenues will probably overtake it in a few quarters’ time: however it can do so from a position of strength. Its challenge is to create its own ecosystem in each area, creating HP customer experiences to replace Microsoft ones in server and PC areas for instance. IPG is the closest to such an approach of its various divisions today. We believe that it also needs to break down the silo’ed planning and go-to-market approaches of all of its divisions. The fact that its PC group has little in common with the others is a reason for integration, not offload.

EMEA Weak, Opportunities In Asia Pacific
In yesterday’s call HP’s CFO mentioned weakness in its sales to the Public Sector and Europe, but we don’t think it should be overly concerned. There will be major declines in both areas as a result of austerity budgets and the Euro crisis. As a very major supplier to both areas HP is undoubtedly going to feel the heat. We believe that Cloud services will be a countervailing business in this recession and HP has major opportunities, given its investments and relatively clear strategy. However even here it will need to seize the initiative to make sure it isn’t dependent on its partners driving the business. It needs the channel to position its offerings to new customers, but needs to clearly articulate an HP set of integrated, relevant Cloud services.
There are still many opportunities for HP to grow its business in Asia Pacific in the current downturn. By becoming more competitive it should be able to grow its market share there, which is the lowest of the three worldwide regions (see Figure 3).

Some Conclusions – A Rockier Road For Meg

Time will tell whether or not Meg has the right capabilities to lead HP successfully, but she certainly has a rockier road to travel than her three predecessors given the perfect storm of the economic downturn, HP’s old fashioned structure and the inconsistency of the three announced changes.
Despite already confirming that these are still on the table, we hope HP will keep its PC business, reaffirm its intentions in the smart phone and tablet space, continue to use WebOS as a unifying glue and perhaps even jettison Autonomy in favour of a database company (of which Ingres is our favourite).
Its longer-term challenges are growing the business in Asia Pacific, breaking down the silos of its business divisions and becoming a vertically (rather than horizontally) integrated company. In the mean time it will need to batten down the hatches to ride the storms of the new recession without the reliance on buoyant consumer demand. Its investments and offerings in Cloud services should help.
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