Carly Fiorina has a Hegelian moment
About a month ago, at a party in San Jose celebrating the 20th anniversary of the PC, I bumped into Fiorina and asked her which management thinker most influenced her. She told me Hegel, as in the German philosopher. Scratching my head a bit, I asked her to elaborate. After all, Hegel is not technically a management thinker, and there are probably scant few CEOs who can even say what his main ideas were, let alone draw inspiration from them. All I remember from college about Hegel is thesis-antithesis-synthesis, the notion that two opposites can combine to create something different and better. Karl Marx thought this formulation was really something, and, apparently, so does Fiorina. "My job at HP," she explained to me, "is finding the synthesis in an incredibly complex portfolio."
That seemed like an erudite answer at the time, but given her just-announced $20 billion merger proposal with Compaq, I'm not so sure Fiorina is looking for synthesis in the right place. Investors certainly don't think so. Hewlett-Packard's stock is down more than 20 percent since the deal was announced Sept. 4. Part of that, of course, is the skittishness of the current market. But the larger argument against combining HP and Compaq to make the biggest PC company in the world is that the PC business is no longer an industry anyone wants to be in. Not even Carly Fiorina.
The current economic slowdown and consequent softening in PC demand aren't helping matters. But here's the main problem: The limiting factor for a computer is no longer the speed of the machine, but rather, the speed of its connection to the Internet. So people don't want faster machines--they want cheaper machines. And that has been putting downward pressure on margins, which are going from negligible to nothing. In the nine-month period ending July 31, HP's operating margins went from 8 percent to 3 percent. During the same period, Compaq had negative operating margins.
Combining the two companies is a bit of attempted mathematical alchemy that just won't add up. As Hegel might point out, there is no synthesis here. Compaq is not the antithesis of HP--it's practically the same thing (minus HP's printer business). Both are already such large players in PCs and servers that they're unlikely to get many benefits from increasing the scale of their manufacturing operations or raw-materials purchases. (Perhaps the only business worse than PCs right now is PC components, so it's questionable how much more those guys can be squeezed.) Fiorina gets to fire 15,000 people with overlapping jobs, but whoop-de-do--if the 1990s taught us one thing it's that downsizing is not a gift that keeps on giving. You get a one-time gain, and then you're back where you started. Time for another merger.
Fiorina knows that the only way to save HP is to get out of the PC business.
She even admitted that she and Compaq CEO Michael Capellas "carefully" considered dumping the PC divisions during the merger discussions, but both ultimately rejected the notion. And her stated goal of the merger is to beef up the services side of the business (IT consulting, integration, hosting, etc.), where the margins are a lot higher. Both Compaq and HP already collect billions of dollars in revenue from IT services, but those services are still just a sidelight compared to their PC and server businesses. If Fiorina really wants to make a push away from hardware and into services, it makes far more sense for her to buy--as has already been pointed out ad nauseam in the press--an IT consulting outfit. Of course, last year she tried and failed to do just that, with the consulting arm of PricewaterhouseCoopers. But if she could have pulled it off, that purchase would have had a better chance of giving her the synthesis she's looking for.
As it is, she now has two massive companies with hardware businesses at their core. The HP-Compaq merger is not about thesis-antithesis. It is more about putting together two like concepts. That does not get you any synthesis. It does not create some new services juggernaut capable of taking on IBM. All it gets HP is $20 billion closer to irrelevance.
I sure am glad I went to that party celebrating the 20th anniversary of the PC. It helped me realize how irrelevant the PC, and thus HP, has become. It makes you wonder what the 25th anniversary will look like and whether Carly Fiorina will be around to celebrate it.
As an editor at large for Business 2.0, Erick Schonfeld contributes to the editorial development of the magazine, writes feature stories, and pens a weekly online column (called "Future Boy"). Schonfeld is also a contributing editor for Fortune, where he has written about technology and investing for the past seven years.