Mark Hurd, ex-CEO of HPPssst. Did you hear the dirty little secret about Hewlett-Packard (HPQ)?

I don't mean the tawdry mess with Jodie Fisher that led to HP's board giving the boot to CEO Mark Hurd, despite his ability to double the company's stock price in five years. I mean the secret about HP itself, which Hurd did a heroic job of concealing until he was forced out by the board for fudging expense reports.

HP is a sprawling, ungainly conglomerate of tech companies that have only tangential connections to each other and that generate the most tepid of synergies. And the secret that Hurd kept quiet is that HP is probably better off in the long run broken up into at least three smaller companies that could manage growth more easily on their own.

Was Hurd an Irreplaceable CEO?

But in choosing to eject Hurd (apparently to preserve the HP brand just as it's launching Palm-fueled smartphones and tablets), HP's board made one colossal miscalculation: There really is no obvious candidate who can do what Hurd has done.

In expanding from revenue of $87.6 billion in 2005 to an estimated $125 billion this year, Hurd has not only performed a remarkably graceful act of executive triage but he has also managed to convince Wall Street that HP has a strong future. Now that he's gone, there may well be no managerial magician who can keep pulling off the legerdemain that HP is the destination vendor for corporations in the market for information-technology services.

For all the talk about companies like HP justifying their buying binges as creating a "one-stop shop," I have never once heard a chief information officer or even an IT manager say what they really want from a vendor is a one-stop shop. Wal-Mart's (WMT) all-in-one approach might work for sweatpants, groceries and toys, but a company's IT system is another matter. IT managers know as well as anyone that in Silicon Valley, more than in other industries, the best products and services often come from smaller, nimbler and more innovative companies, not bloated giants.

Distract the Market with Mergers. . .

There's another reason why companies engage in big acquisitions, and it has nothing to do with customers: Huge mergers can distract investors from weak financials and buy time for top management because of the years needed to integrate two giants. HP's previous CEO, Carly Fiorina, tried this by buying Compaq -- a deal so ill-advised it's taken nearly a decade to make it work. In that time the PC industry has become a stagnant, low-margin market increasingly dominated by Chinese manufacturers.

At first Hurd, who became CEO in 2005, won over investors through rounds of prudent cost-cutting. But soon enough he was back at the binge buffet: HP bought computer-outsourcing leader EDS for $13.9 billion in 2008, network infrastructure maker 3Com for $2.7 billion in 2009 and smartphone pioneer Palm for $1.2 billion this spring.

So let's get this straight: HP now wants to be Apple (AAPL), but it lacks a sure-fire hit like the iPhone or the iPad (or even the MacBook). And it also wants take on IBM (IBM) in outsourcing and Cisco (CSCO) in networking equipment, but it lacks the depth of either. And it also wants to keep selling its printers. And to pull this off, it needs to integrate its three major acquisitions with three different technologies, cultures and groups of workers.

. . .And Pay for It With Burgeoning Debt

There are also longer-term costs to consider. As DailyFinance's Peter Cohan pointed out, HP's debt has grown under Hurd. Long-term debt has increased from $3.4 billion in 2005 to $14 billion this year. So the growth in earnings that Hurd created by buying companies and cutting costs has meant borrowing more money. The chart below, courtesy of YCharts, compares HP's earnings growth with its debt-to-equity ratio: The former has flattened, while the latter has grown under Hurd.



Managing HP's expanding businesses while keeping investors happy is a thankless task, and among the few who could do it, there are probably even fewer who would want to. The person most qualified for it is probably Todd Bradley, as DailyFinance's Sam Gustin pointed out. But any smart executive knows a company can binge on M&A for only so long. Eventually, it either becomes too muscle-bound and debt-laden to thrive, or it stops bingeing and disappoints investors with flat earnings. Whoever HP's board chooses to succeed Hurd will face some tough choices.

But if the board were really honest with itself about the best strategy, it would use Hurd's departure as an occasion to break the company up into three smaller pieces -- a computer hardware maker, an IT services firm and a printer company. Find a solid CEO for each, and let them focus on what they do best.

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thorneko

Okay, I worked in Silicon Valley for 18 years, and there is a simple known fact about HP that can never be changed. HP makes it's money selling each and every one of you printer ink. Plain and simple. (Everything else HP has ever ventured into has never been very profitable, but by selling you ink they bankroll all their other tech ventures in what I personally believe is their vain belief that they are the best "tech" company out there.

September 02 2010 at 12:52 PM Report abuse rate up rate down Reply
dodacrazy

When the board members became more serious about security,well I guess they don't have one in place "betrayal" wow what a waste

August 24 2010 at 2:24 PM Report abuse rate up rate down Reply
dolfin1943

Too big too fast. Buyin business they know nothing about. As for one stop shopping. Only a fool would put their company totally in the hands of another company which is what you would be doing. This idea of having one company take care of all your IT needs is utter foolishness. Think about once they have total control of your IT they get to tell you how much it will cost, you lose your bargaining power quickly. Of course exactly what they want. I had a great career doing just that.

August 23 2010 at 1:11 PM Report abuse rate up rate down Reply
Alison

I have an HP printer and Laptop and both have had issues. The laptop has been a nightmare. The keys are worn off, the vents are at the bottom so it over heats, the "c" button will not come out as a capital "c" unless I put the caps button on. The problems are endless. All have been wastes of money and pieces of junk!!!!!!!!!!!! Do not buy from here!!!!!

August 11 2010 at 3:00 PM Report abuse +1 rate up rate down Reply
ant1433

Didn't they already break it up with Agilent?

August 11 2010 at 2:14 PM Report abuse rate up rate down Reply
Frederick

All I know, having a HP printer, PC, Camera and monitor, I use to able to go them with a problem and get a stright answer. Now I get anything but a straight answer. To contact them is worthless.

August 11 2010 at 1:46 PM Report abuse rate up rate down Reply
jc7667

Have never owned anything HP that wasn't a piece of JUNK!

August 11 2010 at 1:29 PM Report abuse rate up rate down Reply
jptenn05

HP used to be a good product, I will never buy anything made by HP again. I just bought 2 new pc's and neither one was a HP. I recently had a problem with my HP pc and called the company for advice (since I had already bought 3 from them) and they gave me a person that could not speak English, so I hung up and called back only to get another person who also could not speak English. I think they do this on purpose, so I have decided not to do business with them again. I wonder how many letters it will take before the company notices a difference in their sales.

August 11 2010 at 11:14 AM Report abuse rate up rate down Reply
Tom

Oh hell, lets break up all those silly mega businesses. Now that we have HP out of the way, lets take on Chase, then Verizon and after that, Frontier who just bought out Verizon (not Wireless). Then we can take on Verizon Wireless and all the other wireless carriers. Oh, yeah, Commcast, too.

August 11 2010 at 10:41 AM Report abuse rate up rate down Reply
jhphil8394

Please stop Canonizing CEO Mark Hurd. It is presumptious to assume since he cannot be there to wet nurse this once proud Company and its lame Board of Directors, no one else is qualified. He simply made the same mistakes as a long line of others, short-term gain for long-term pain. He drove up the Stock Price by severing personnel and continued the practice of Off-Shoring Manufacturing. In addition he foolishly used the savings to buy marginally positioned companies that eventually drove this company into debt. This Board of Directors did not learn anything from the Fiorina stewardship. Right the ship HP Board and hire a competent CEO. There are a host of qualified Men and Women available who will make quality instead of quanity their benchmark.

August 11 2010 at 10:28 AM Report abuse rate up rate down Reply