Monday Note

HP’s Board of Directors has accumulated an impressive record of bad judgment calls, the latest being the lame lawsuit against their recently deposed CEO, Mark Hurd, who quickly joined Oracle as Co-President and Director.

The History

Once a revered Silicon Valley icon, HP was arguably the first worldwide success to emerge from pre-war Stanford where Bill Hewlett and Dave Packard studied under the illustrious Frederick Terman. Unfortunately, the insiders who were groomed to replace “Bill & Dave”—first John Young, an HP lifer (1968-1992), followed by Lew Platt, another long-termer (1966-1999)—presided over the company’s long slide into comfortable bureaucracy and middling financial performance.

In 1999, HP’s Board was seduced into giving the CEO mantel to Carly Fiorina, a gerontophiliac sales exec from AT&T/Lucent…only to fire her in early 2005. Known for her posturing and opaque pronouncements, Fiorina antagonized and mystified insiders and industry observers alike. John Cooper, CNET’s Executive Editor and longtime tech writer, characterized one of her more frustrating talks as “a Star Trek script” containing “enough business-babble to reduce even the most hardened McKinsey consultant to a state of dribbling catatonia”. Nice.

To succeed Fiorina, HP went outside again and, this time, managed to snare an experienced and accomplished CEO: As head of NCR, Mark Hurd had led the company through a successful turnaround.

About a year after Hurd’s election, HP’s Board became embroiled in the Pretexting scandal. Board members spied on employees and journalists—and even on each other—in an attempt to track down leaks of confidential strategy documents. This ugly episode led to several Board and executive departures: Chairwoman Patricia Dunn was thrown under bus; HP’s General Counsel, Ann Baskins, “took the Fifth” at a Senate hearing; another director, Tom Perkins, and several employees left as well. What Mark Hurd actually knew or did in relationship to this episode has never been clarified.

Despite the scandal and the departures, Hurd made good on his reputation as a turnaround CEO and, through carefully crafted acquisitions and cost-cutting, put HP back at the top of the computer industry in just five years. His wizardry with numbers, his sober talk, and his attention to execution left the impression that HP had finally found the right helmsman.

But then disaster struck. As discussed in our August 29th Monday Note, HP’s Board unceremoniously fired Hurd, publicly berating him for conduct unbecoming a CEO and barely stopping short of accusing him of fraud. And then, after pillorying him, the company inexplicably paid off the “disgraced” Hurd to the tune of $30M to $40M. HP shareholders sued the directors and the media roasted them.

Enter Ellison

Larry Ellison and Mark Hurd have known each other for several years. They’d been business partners when HP and Oracle allied themselves in serving large government and enterprise clients—and they’re tennis buddies as well.

After harshly criticizing HP’s trustees for firing a star executive, Ellison hired Hurd. In keeping with his leadership style, Ellison made room for the new lieutenant by summarily chucking the previous tenant, Charles Phillips, who, ironically, had also become embroiled in a “relationship contretemps” with an ex-paramour. I’ll hasten to say that I prefer Larry’s summary and clean manner to HP’s: Chuck Phillips had a successful career at Oracle, Larry wished him well on his way out, the money flowed, and everyone moved on to the next stage of their lives.

Except for HP’s Board. When they found out that Hurd was joining Oracle, they sued him, claiming that he was surely going to use confidential, proprietary HP business information in his new position.  Joe Nocera, who had already criticized HP’s handling of Hurd’s firing in an August 14th NYT piece, excoriated the company’s directors for their foolish lawsuit in a September 11th column: “The Hewlett-Packard board is back to doing what it does best: shooting itself in the foot.”

Nocera is right…the HP lawsuit is a boneheaded move, for two reasons.

First: California case law isn’t terribly supportive of non compete agreements. Silicon Valley would grind to a halt if engineers and execs couldn’t move from Google to Facebook and Twitter. Other states may differ, but California says you can’t prevent someone from working. In specific cases, you may have to compensate the individual for the loss of employment, for the forfeited (current and future) gains, but not in perpetuity. No slavery. (You’ll find more details here.)

We can safely assume Oracle’s attorneys vetted Hurd’s exit agreement and decided the risk was worth it. Such suits rarely end up in court, they’re settled “amiably”, meaning money changes hands. The move to Oracle might cost Hurd some of his HP exit package, but that’s probably outweighed by his new employment deal.

Second: Let’s look at the numbers. In the month since the Board fired Hurd, HP’s shareholders have lost 15.5% of their investment, more than $15B:

Since Ellison announced he was hiring Hurd, Oracle has gained 19.9%, $22.9B:

If, as reported, Ellison owns 23.4% of Oracle, he just made more than $5B. (Admittedly, the just announced strong quarterly results represent about half of that.)

The Future

For Oracle, the way forward looks good. The company’s business is doing very well and the team is now stronger. Rumors about Ellison’s next deal range from buying Dell and giving it to Hurd to run, to acquiring HP itself. Both sound a bit outlandish…like many of the condottiere’s pronouncements.

For HP the future isn’t as promising. One has to wonder how the Board will redeem itself and recapture the lost confidence and squandered shareholder value. The latest rumor is they’ll turn to an insider for their new CEO, someone like Ann Livermore—on the HP Way since 1982—who’s currently head of HP’s Enterprise Services. Or Vyomesh Joshi, who’s been running HP’s printing business for 30 years. There’s also Dave Donatelli, a recent 2009 hire from EMC, in charge of HP’s storage activities; and Tom Hogan, at HP since 2006, Executive Vice President, Enterprise Sales, Marketing and Strategy. Finally we have Todd Bradley. Bradley joined HP as head of the PC and smartphone business in 2005 after running Palm (which was acquired by HP in April 2010). Personally, while I’d like to see Todd get the top job, I’m not sure he deserves the aggravation of the HP Board that comes with the CEO hat.

—JLG@mondaynote.com

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