Reality Vs. Wall Street

It has been about a month since the most visible female chairman/CEO in this or any industry over the past five years, Carly Fiorina, was asked to leave by Hewlett-Packard’s board. At the same time news broke that Circuit City was considering an offer to go private.

Both are stories of expectation vs. reality, Wall Street style.

High-profile, energetic, willing to take on the families of founders David Packard and William Hewlett in the Compaq merger, and willing to take on the existing corporate culture of HP, Fiorina was fearless.

But as one anonymous employee was quoted as saying after the announcement was made, “People here either loved her or hated her. There was no middle ground.” Patricia Dunn, director and non-executive chairman, said during a conference call after the ax fell, Fiorina’s fate was sealed because “It was a matter of hands-on execution.”

It was an execution alright, bloodless, but an execution nonetheless.

Someone who’s getting a reported severance package of $42 million does not need defending. But if you take a look at the numbers you’ll scratch your head.

In HP’s fiscal year ended Oct. 31, 2004, revenue rose 9 percent to $80 billion while net earnings were up $1 billion to $3.5 billion. So maybe HP’s fiscal first quarter was a disaster? Well for the quarter ending Jan. 31 overall HP revenue grew 10 percent to $21.5 billion, but just 5 percent when adjusted for currency ups and downs. Consolidated net income was up only 1 percent to $943 million.

The CE related side of HP’s business — PCs, imaging, printing and the like — was healthy. But HP’s board said server business suffered. Outsiders cited her management style and the bridges she burned to get the Compaq deal approved did her in.

But the key issue was that the stock price performed woefully. Major stockholders felt that Fiorina was the boss and she was to blame. But the question is: With sales up 9 percent and net earnings up $1 billion in the past fiscal year, why was the stock performing so badly?

The expectations of Wall Street are the answer. Wall Street wanted more. What many forgot is that HP is still in a comparatively low margin business, yet it made a profit of a billion dollars. That’s reality. But it wasn’t enough for Wall Street.

Separately, when Circuit City reported last month that it was considering a $3.2 billion buyout to go private, the news was greeted positively by many industry executives. A typical reaction was from PRO Group’s Roger Heuberger, who told TWICE, “They won’t have anyone from Wall Street looking over their shoulder.” Highfields Capital Management LP, the investment group that made the offer, basically said the same thing in their initial public statement.

By going private Circuit City could set long-term goals. If they fail to produce an adequate return immediately on a specific projection, management can still press on without having its stock getting trashed.

Now, I’m not suggesting that HP go private. But this tale of two technology companies should be a cautionary one for privately-held firms, especially retailers, who are attracted to the allure of going public. It is a double-edged sword.