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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