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HP : company profile

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HP or Hewlett Packard is one of the world's leading technology brands, the global #1 in printers, and until recently in PCs as well, until that lead was captured by rival Lenovo. However, the company behind the brand appeared to have lost its way in recent years as a result of management turmoil and unpredictable changes in the direction of the market. HP reinvented itself in 2002 in a merger with competitor Compaq. Although full integration of what were already two huge businesses seemed at first to have gone smoothly, the enlarged business remained over-dependent on its original printers business for profits. The board certainly thought so, forcing out high profile CEO Carly Fiorina in early 2005. New CEO Mark Hurd demonstrated a firm grasp on the business, knocking rival Dell off its perch as the global #1 in PCs in 2007, and closing the gap with IBM in IT services by buying consultancy EDS in 2008. Yet Hurd too was unceremoniously dismissed in 2010. So was his successor less than a year later, after announcing a proposal to withdraw from the PC market and then signing off on the catastrophic purchase of software developer Autonomy. A slightly different break-up plan was completed in 2015, with the traditional HP brand split between two separate entities. PC and printer hardware now forms the core of HP Inc. Separate company Hewlett Packard Enterprise specialises in servers and storage, and has partly divested its services and software divisions.

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Brands & Activities

HP Inc was formed in November 2015 from the spin-off of the old Hewlett-Packard Company Inc's server, IT services and software businesses into new entity Hewlett Packard Enterprise. The slimmed down company adopted the new name of HP Inc. That split followed five years or more of growing turmoil within the wider IT industry, and a disastrous series of shifts in strategy by the group, especially after the sacking of CEO Mark Hurd in 2010.

By then, HP had already suffered several years of turmoil in its C-suite, mostly resulting from in-fighting between different members of the HP board over the controversial 2002 merger with Compaq. Hurd's predecessor Carly Fiorina had herself been fired three years after that takeover. However, Hurd appeared to deliver greater stability and was widely admired for refocusing HP between 2005 and 2010. Yet he too was asked by the board to resign in August 2010, following an accusation of sexual harassment from a part-time consultant. An internal investigation cleared Hurd of the harassment charge but revealed that he had falsified several expense claims in order to conceal an inappropriate "close personal friendship" with the woman. Subsequently there were claims that he had also discussed confidential company matters with her. He was replaced at the beginning of November 2010 by Leo Apotheker, a former CEO of German software group SAP.

Apotheker's tenure as CEO was disastrous, presiding over a near-50% decline in HP's share price. A series of strategic blunders culminated in two major business decisions delivered in August 2011. That month, Apotheker announced plans to withdraw from the personal computer business altogether by spinning off the PC division as a separate company. The reason, he said, was the heavy investment required to maintain a fast-changing consumer-oriented technology business. At around the same time, he also signed off on a deal to acquire British enterprise software group Autonomy for a lavishly inflated price of $11bn, some 10 times its annual revenues. That announcement was the last straw for HP investors. Under pressure from its shareholders, HP's board gave in and Apotheker was dismissed in September, the third CEO to be ousted in six years. Board director Meg Whitman, formerly CEO of eBay, was appointed as Apotheker's successor as CEO, and cancelled the PC spin-off plan at the end of October.

However, almost immediately after her appointment, problems began to emerge at Autonomy. A year later, HP claimed to have uncovered "serious financial improprieties" at the business prior to its purchase. That led to two huge charges for impairment against the business during fiscal 2012, followed by a series of lawsuits and counter-suits against the former leaders of Autonomy.

This chaos, accompanied by further slowdowns in sales of PCs and printers, prompted a rethink of Apotheker's spin-off strategy. A revised version was resurrected in 2014, in which the group would be split into two separate companies. That process completed in November 2015, with the group's B2B-oriented servers & storage, IT services and software divisions hived off into Hewlett Packard Enterprise.

Imaging & Printing is the original powerhouse of the HP business, and traditionally its most profitable hardware business by margins. However, performance has been transformed by the changing nature of the global market. The biggest impact has been on prices, which have fallen dramatically over the past decade. For the year to October 2016, HP Inc's sales from printing slumped by 14% to $18.26bn, the lowest figure since 1998. Margins are still solid at 17.1% (down from over 18% two years earlier), contributing operating income of $3.13bn. HP remains the undisputed global #1 in printers. Monitor IDC estimated shipments of 36.36m units in 2016, equivalent to 36.7% global share by volume.

HP manufactures and markets printer hardware, digital imaging devices such as scanners, and above all associated supplies and accessories. It offers a broad range of different inkjet, LaserJet and DesignJet models aimed at all levels of the market from entry-level home use to high end commercial printing. One of its main competitors, Canon, is also a key supplier, contributing laser printer systems for resale under the HP brand. The group's commercial printing division was enhanced in 2001 with the purchase of Indigo digital presses, and again in 2005 with the acquisition for $230m of Scitex, a market leader in industrial wide-format digital printing.

In Sept 2016, HP Inc also agreed to acquire Samsung's printer business for $1.05bn. It will continue to supply the Korean company with devices to be re-sold under its own name. Samsung was the #5 printer manufacturer in 2016 with around 3.6% global share by volume.

Revenues from printing were $18.80bn in ye 2017. The single most significant product line is supplies, primarily ink cartridges. These alone contribute two-thirds of revenues, or $12.4bn in ye 2017, compared to just $6.4bn from sales of new printers. HP has had less success with other hardware peripherals. In 2003, the group announced an aggressive push into the consumer electronics market with a broad range of new imaging and multimedia products. Initially HP said it would follow Apple and Dell into the music downloads market with plans to launch its own digital music player and MP3 service. Instead the company subsequently agreed a surprise alliance with Apple, agreeing to resell iPod players and to bundle Apple's iTunes software in its PCs. That partnership, agreed by outgoing CEO Carly Fiorina, was terminated two years later by new CEO Mark Hurd. Plans to launch a home media centre PC were also cancelled, although HP did push ahead with the launch of high-definition LCD and plasma TVs with wireless connectivity, as well as a number of digital cameras. Most of these mproducts were later discontinued. Also in 2005 the group acquired online service Snapfish in order to boost its profile in the increasingly competitive web-based photo printing market. Latterly, though, the group wound down its digital camera business as a result of intense competition from other manufacturers.

Despite the heritage of the Imaging & Printing Group, it was overtaken for the first time in revenues in 2007 by HP's Personal Systems Group (PSG), which markets personal computers. Although HP had maintained a presence in this market since the 1980s, the bulk of the business was added with the acquisition in 2002 of Compaq, then the world's #1 PC manufacturer. However, the complexity of the merger distracted management of the Compaq business, and allowed arch-rival Dell to seize the top spot later the same year. HP fought back, especially after the appointment of Mark Hurd as CEO in 2005, and HP regained the position of global #1 in personal computers in 2007 after a long and intense battle.

More recently, though, strategic mistakes, falling demand for PCs and intense competition from Asian competitors, especially in their home region, again undermined HP's dominance. According to figures from IDC, steady declines in HP's computer units eventually resulted in its being overtaken by Lenovo in 2Q 2013 as the global #1. It remains in second place, though the gap has narrowed significantly since 2015. For full year 2016, HP had 20.9% global share, narrowly behind Lenovo on 21.3%. HP retains the #1 position in the US and also in the EMEA region, but trails far behind Lenovo in Asia. It is #2 in PC monitors behind Dell.

The business is focused primarily on home and small or medium enterprise customers. In 2006, the group acquired Canadian company Voodoo, which made specialised high-end computers for dedicated PC gamers. The brand was discontinued in 2012.

In 2010, HP agreed a deal to acquire struggling wireless handset maker Palm for around $1.2bn in cash and debt. The deal capped years of declining performance at Palm, a pioneer in the smartphone sector with its original Palm Pilot device, but one whose early lead was completely eclipsed by the rapid growth of BlackBerry and iPhone. Palm's management team contributed their expertise to the launch in Spring 2011 of HP's first tablet device, TouchPad, designed to compete with iPad. However, the product failed significantly to secure interest from buyers, and it was discontinued after just six weeks on-sale. At the same time, the group also pulled the plug on its Palm devices, and later on its WebOS operating system as well, effectively writing off the entire acquisition. It did launch a range of tablet devices under the HP Slate sub-brand, but these made only a minimal dent in the market. More recently, HP introduced a new line in laptop computers, the Envy x2, in which the screen can be detached to form a separate tablet device.

The dramatic changes in the global PC market have been fully reflected in the steady decline of HP's personal systems business, from a high of $42.3bn in the year ending 2008 to a new low for the year to October 2016 of $29.99bn. That was the first time since 2006 that PC revenues were lower than $30bn. However, a recovery of sorts took place in ye 2017, with revenues rebounding to $33.37bn. Notebooks accounted for sales of $19.8bn, desktop PCs for $10.3bn, and workstations for $2.4bn.

Financials

HP's performance peaked in the year ending October 2010, as group revenues rose 10% to $126.0bn, while net earnings gained 14% to $8.8bn. Both figures were best-ever results, under-pinned by several years of relentless cost-cutting under CEO Mark Hurd. However, Hurd's sudden departure towards the end of that financial year and the subsequent turmoil under his successor Leo Apotheker left an indelible mark on fiscal 2011. Although revenues edged up by 1% to a new high of $127.2bn, net earnings slipped 19% to $7.1bn.

There was an even more dramatic slump a year later in the wake of Apotheker's own dismissal. Revenues for 2012 slipped back to $120.36bn, but bottom line plunged to a loss of $12.65bn. That included a whopping $18.0bn of impairments - much of it against the apparently disastrous Autonomy acquisition - and almost $2.3bn of restructuring charges relating to the combination of the personal systems and imaging divisions.

Performance has remained patchy. For the year to Oct 2013, revenues slipped back by a further 7% to $112.3bn, but that was a little better than many analysts had been expecting. Net income was back in the black at $5.1bn. For the year ending 2014, revenues slipped by a further 1% to $111.45bn, while earnings dipped 2% to $5.01bn. Around 35% of revenues were generated in the US in 2014. HP's final year as a single group, to Oct 2015, saw a further decline in revenues to $103.36bn. Net earnings fell to $4.55bn. That figure was stated after separation costs of almost $1.3bn.

HP Inc's first year post-separation witnessed a 6% decline in comparable revenues to $48.24bn, from $51.46bn as part of the old group. Currency fluctuations were a major contribuing factor in the decline, along with weaker international deamnd. US revenues edged up slightly to $18.0bn, but the gain was offset by a 10% decline in international revenues. Net comparable earnings plunged by 45% to $2.50bn. That included a $170m loss on discontinued operations as well as $205m of restructuring charges and a large negative pension charge.

There was a noticeable recovery in the year to 2017, with revenues rebounding to $52.06bn. Perhaps surprisingly, the best performance came from consumer PCs, with revenues up 18% year-on-year. However, costs and expenses were also up, resulting in only a marginal increase in net income to $2.53bn.

Management

Following the spin-off of HP Inc, Meg Whitman remained CEO of the HPE entity. Dion Weisler, previously EVP of the old printing & personal systems group, was elevated to CEO & president of HP Inc. Other members of the senior management team include Jon Flaxman (COO), Ron Coughlin (president, personal systems), Enrique Lores (president, printing, solutions & services) and Cathie Lesjak (CFO). Regional heads include Christoph Schell (president, Americas), Nick Lazaridis (president, EMEA), Richard Bailey (president, Asia Pacific & Japan).

Former Visa chief brand officer Antonio Lucio joined the group in Spring 2015 to become chief marketing officer of HP Inc. He departed in 2018 (for Facebook) and was succeeded by Vikrant Batra, previously global head of marketing, printing. Other marketing heads include Karen Kahn (chief communications officer), Jayanta Jenkins (global executive creative director & head of corporate brand), Alex Craddock (global head of marketing, personal systems), Jenny Sotto-Siquioco (marketing services director, Americas), Matt Cowling (head of global marketing, consumer PCs), Vincent Brissot (head of channel marketing & operations), Elizabeth Gillan (global head of events & sponsorship) and Dan Salzman (global head of media, analytics & insights).

Background

Hewlett-Packard was founded in 1938 as a partnership between former university classmates David Packard and William Hewlett. Its first product was a resistance-capacitance audio oscillator, an electronic instrument used to test sound equipment. The company's first factory was a small garage in Palo Alto, and among its earliest clients was Walt Disney, which bought eight oscillators for use in production of ground-breaking animated movie Fantasia. The key breakthrough for Hewlett and Packard came with a series of contracts from the US government following the outbreak of World War II. By the end of the war, Hewlett-Packard's revenues had leapt from less than $40,000 to over $1m. The company floated in the 1950s and established international offices. During the following decade, HP took steps into the medical and analytics sectors through acquisitions. In 1969, Packard left the company and spent almost three years as US Deputy Secretary of Defence in the first Nixon administration. He was re-elected chairman in 1971, and served in that position virtually until his death in 1996.

It was in the 1970s that the group truly found its direction, with the arrival of the computer revolution. HP introduced the world's first handheld scientific calculator in 1972, and went on to unveil a series of PCs and compact mainframe computers. However perhaps the most important development was the introduction of the first LaserJet and inkjet printers, which quickly established the standard for office printing. By the 1980s, HP was established as the dominant force in computer printing technology. However the group continued to maintain its position in the PC sector. In 1989 the company acquired leading workstation manufacturer Apollo Computers, as well as Texas Instruments' line of UNIX computers.

In 1999 HP spun off its $1.6bn medical devices and electronic testing equipment as Agilent Technologies. That same year, Carly Fiorina was recruited from Lucent Technologies to become the group's new CEO. She began an overhaul of HP's cumbersome management structure, cutting jobs and combining divisions to focus on growth. She also followed the hugely successful example of market-leading IBM, which had successfully reinvented itself as an IT services business. Fiorina elevated HP's support department into a fully-fledged IT services company. As the technology boom reached its peak, HP's sales came close to hitting $50bn. Firmly established as the #2 computer company worldwide, it nonetheless continued to trail IBM, almost twice its size. In 2001, the technology boom suddenly burst, and HP was hit by a major downturn in spending. Revenues slipped by 7% overall (after 15% growth a year earlier). North American revenues were hardest hit, down by 13%. In September 2001, after several months of negotiation, HP announced the deal that would transform the company, and finally put it within striking distance of arch-rival IBM.

Compaq Computer Corporation had been founded in 1982 by Rod Canion, Jim Harris and Bill Murto, three senior managers from Texas Instruments. Their initial product, sketched on a paper place mat in a Houston pie shop, was arguably the first IBM "clone", a portable personal computer which could run all of the software being developed for the IBM PC, but at a significantly lower price. They raised initial funding from high-tech venture capital firm Sevin-Rosen Partners and floated in 1983, shipping more than 53,000 portable PCs the same year. First year revenues were $111m, then a record for any US start-up. In 1984, the business moved into Europe and also introduced its first desktop PC. By 1986, Compaq had shipped its 500,000th PC and sales had leapt to over $500m, another record. In 1988, it overtook Apple and Olivetti to become the 2nd biggest computer supplier in Europe. Seven years later, after a bitter price war with IBM as well as other clone manufacturers, the group was crowned as the #1 PC manufacturer worldwide. In 1998, Compaq threw itself whole-heartedly onto the internet, acquiring search engine portal AltaVista as its launch pad for establishing a global online marketplace. (It sold most of its shares a year later for a substantial profit). By 2001, Compaq remained the #3 computer hardware company behind IBM and HP, but its dominance in the PC sector had come under increasing pressure from another rival, Dell. Even before the full downturn in the technology market in 2001, sales of PCs globally had begun to stall. Facing the possibility of even fiercer competition in future, Compaq agreed to merge with HP in a bid to counter Dell and overturn IBM's dominance of the computer market as a whole.

However, while each company's managers saw the clear benefits of merger, not all shareholders shared their views. Fiorina and her team at HP could not have anticipated the force of opposition to the merger, not least from their founders' own families. David Packard had died in 1996, followed by William Hewlett earlier that year in 2001. However Hewlett's son Walter argued that the deal would dilute Hewlett Packard's printer business by creating a larger, lower-margin computer division, and he united the families of both founders in opposition to the deal. An increasingly bitter war of words ensued. Most seriously of all, Hewlett was able to pull together a voting block equivalent to around 18% of the company's shareholders. By early 2002 there appeared a distinct possibility that the merger deal could be voted down. In a bid to save her job as well as her deal, Fiorina embarked on a high-profile tour of the group's institutional shareholders to explain her rationale for the merger. The deal was finally voted through by a slim margin. HP then took the brave decision to ask Walter Hewlett to remain a director of the company. He responded by launching a lawsuit against the group accusing HP of "buying" vote approval from institutional shareholder Deutsche Bank. The directorship offer was promptly withdrawn, and the HP-Compaq merger was completed in May 2002.

A few months later, doubts were raised over the success of the integration of the two companies when former Compaq boss Michael Capellas resigned unexpectedly from the company in order to take control of troubled Worldcom. However HP appeared to shrug off these concerns, reporting strong results for 2003 which seemed to show integration between the two companies proceeding smoothly. Yet underlying performance remained a serious problem. Far from establishing a clear lead over Dell in the PC market, Compaq-HP was actually overtaken by the challenger in sales in 2002, while HP's services division still struggled to catch up with IBM and EDS. The over-dependence on printers led an increasing number of commentators to question the validity of the merger with Compaq. HP's shares plunged after the merger and failed to recover for several years.

Meanwhile, behind the scenes, the group's board became increasingly unhappy with CEO Fiorina's flamboyant and autocratic management style. As the only female executive running a Top 20 US company, Fiorina achieved superstar status in both her own industry and in the general financial community, and it was clear that she enjoyed being in the spotlight. Senior managers were reported to have felt that Fiorina spent too much time grooming her public persona at a string of conferences and conventions, and not enough back at base running the company. At the same time she was known for occasionally harsh treatment of failure within HP, and a reluctance to share the spotlight with others. The simmering tension within the company came to a head in early 2005, when Fiorina was apparently ordered by the board to delegate more management responsibility in order to rebuild HP's challenge to Dell and IBM. She apparently refused. After a two-day meeting, the group board asked for her resignation. Shortly afterwards, Mark Hurd, previously head of NCR, was appointed as Fiorina's successor. Among his first moves was the launch of a major restructuring program which cut around 14,5000 jobs worldwide or 10% of HP's total workforce.

A year later, HP became the subject of an embarrassing privacy scandal as a result of the unlawful methods employed to uncover the source of leaks of confidential information relating to the build-up to Fiorina's ousting. The investigation was itself successful, identifying the board’s longest-serving member, George Keyworth II, as the source of the leak. However, in the course of the inquiry, private investigators hired to conduct the search apparently posed as other board members under suspicion in order to gain access to their personal phone records, and also obtained phone records for nine financial journalists who had covered the story. Another group director, Thomas Perkins, resigned from HP in protest over the methods used, and eventually forced the board to issue a statement over the affair. This culminated in the resignation of non-executive chairwoman Patricia Dunn. The State of California subsequently issued criminal proceedings against several people involved with the case, including Dunn. HP itself later settled a civil case brought by the state with a payment of $14.5m. (The case against Dunn was subsequently dropped, and that against her co-defendants reduced from felony to misdemeanour). None of this appeared to affect the continuing rehabilitation of the company, which ended 2006 within a whisker of retaking top spot in the global PC market from Dell. It finally achieved that goal the following year.

Much of the credit for HP's turnaround went to CEO Mark Hurd, widely regarded as having done an excellent job of refocusing the widely diversified group. In addition to careful management of HP's costbase, he also strengthened the group's IT services division by acquiring rival EDS for $14bn in 2008. By 2010 he had re-established HP as one of the world's most admired technology groups. As a result, it came as a considerable shock in August that year when Hurd was asked by the board to resign following an internal investigation triggered by claims from a part-time contractor accusing him of sexual harassment. Although Hurd was found not to have breached HP's own guidelines on sexual harassment, or indeed conducted a sexual relationship with the woman in question, the internal investigation revealed a number of falsified expense claims from him which, said the company, demonstrated a "profound lack of judgment that seriously undermined his credibility and damaged his effectiveness."

Hurd's successor was named as Leo Apotheker, a German who had previously been one of two joint CEOs at business software company SAP. Yet Apotheker's brief tenure at HP was disastrous. It began with a public row with Oracle, a former ally of HP which was already involved in a bitter feud with SAP. Oracle's CEO Larry Ellison publicly condemned the HP board for sacking Mark Hurd, and also for hiring a man who he believed had presided over a controversial corporate espionage case in which staff at one of SAP's subsidiaries hacked into Oracle computers. Soon after his appointment Apotheker raised HP's financial forecasts, only to downgrade them again months later. Several disappointing quarters followed, during which an internal memo from Apotheker was leaked in which he encouraged staff to "watch every penny" of costs. Shortly afterwards he agreed an absurdly over-priced offer for British software maker Autonomy, equivalent to 10 times annual revenues. The decision to pull the plug on HP's tablet after just six weeks on-sale, and the announcement that the company would quit as the world's biggest PC maker by separating out that business, confirmed suspicions that Apotheker, but also the HP board, had no real idea what they were doing. Acknowledging the reality of the widespread condemnation of Apotheker, the board took the decision to sack him in September 2011.

Last full revision 24th June 2017

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