NQ Logic

Technology | Strategy | Consulting

Long Boards, Short CEO's

Rarely has the causality principle (“the same cause produces the same effect”) been more true in the technology world than in the past few weeks. Two very different multinational companies fired their CEO's for the same reason: under-performing stock price.

Yahoo! Chairman Roy Bostock fired CEO Carol Bartz on September 6, 2011. CFO Tim Morse has stepped in as the interim CEO, while the company is still in search for a permanent leader. Bartz's reign lasted 32 months.
On behalf of the entire Board, I want to thank Carol for her service to Yahoo! during a critical time of transition in the Company's history, and against a very challenging macro-economic backdrop. I would also like to express the Board's appreciation to Tim and thank him for accepting this important role. We have great confidence in his abilities and in those of the other executives who have been named to the Executive Leadership Council.” – Roy Bostock, Chairman of the Yahoo! Inc. board of directors [Sept 06, 2011]

On September 22, 2011 Chairman Ray Lane announced that HP board of directors has appointed Meg Whitman as president and CEO. Léo Apotheker stepped down as president, CEO and director of HP. Apotheker's reign lasted less than 10 months.
We very much appreciate Léo’s efforts and his service to HP since his appointment last year. The board believes that the job of the HP CEO now requires additional attributes to successfully execute on the company’s strategy. Meg Whitman has the right operational and communication skills and leadership abilities to deliver improved execution and financial performance.” – Ray Lane, Executive chairman of HP board of directors [Sept 22, 2011]

The troubled realities and problems are in fact much deeper and have long rooted explanations than what is mentioned in these companies' official statements. A closer look at the past few years’ of company histories should be done to understand their situations.

The Yahoo! Way

Yahoo! Inc. is an American internet corporation. Founded in California by Jerry Yang and David Filo in January 1994, the company was incorporated on March 1, 1995. The web site started out as a hierarchical directory of other websites, and was named "Jerry and David's Guide to the World Wide Web" but eventually was renamed Yahoo!, acronym for "Yet Another Hierarchical Officious Oracle”.

Source: Yahoo! original logo [Oct 20, 1996]

The iconic company is best known for being a leading web content provider, and one of the few survivors of the dot-com era alongside eBay, AOL and Amazon, but throughout its history it has always had trouble in stabilizing its revenue stream and finding great CEO's.

Terry Semel, who spent 24 years helping to build Warner Bros. into a U$11 billion company, was appointed as Yahoo! CEO on April 17, 2001. Replacing the first CEO Timothy Koogle (“TK”), his mission was to restore past growth and profitability in the middle of the dot-com bust. During his watch, Yahoo! expanded at a dramatic pace through large and costly acquisitions such as Overture for U$1.63 billion (2003), Kelkoo for €450 million (2004), HotJobs.com for U$436 million (2001), or Musicmatch for U$160 million (2004). Semel was instrumental in the Alibaba.com partnership (40% for U$1 billion stake), but was unsuccessful in buying Google, even for U$5 billion.

Despite turning Yahoo! into a global media company, Semel failed to acquire the best industry talents or integrate all the different acquisitions into one single company. In an attempt to regain investor confidence, Semel ended his six-year tenure as Yahoo! CEO on June 18, 2007 and handed over the reins to co-founder Jerry Yang. During his 5 years as a CEO at the Californian company, Semel managed to gain U$430 million in total compensation.

With Jerry Yang back at the top, morale and acquisitions were both on the rise. But the declining share price had triggered potential hostile takeover bids. On February 1, 2008 Microsoft and its solid balance sheet proposed to acquire Yahoo! for U$31 a share representing a total equity value of approximately U$44.6 billion (a 62% price premium). Yahoo! board declined the proposal but ultimately ended up giving its search business to Microsoft. After the Microsoft deal battle, Jerry Yang decided to step down as CEO.Under his watch the company has lost tens of billions of dollars in market capitalization, thousands of former Yahoo! employees, and lost credibility in the industry after the Microsoft deal fiasco.

Carol Bartz replaced co-founder Jerry Yang as CEO [January 13, 2009]. The former executive chairman of Autodesk had a single mission: to fix Yahoo!'s profitability and bring in a strategic focus to the media company. After multiple layoffs (3000 employees in April 2009, 600 in December 2010), cost cutting, missed financial targets and pale comparison with rival Google, outspoken Bartz was fired on September 6, 2011.

With 680 million users worldwide, U$6,324 million in revenue in 2010 and 13,600 employees worldwide Yahoo! is today a leading online global brand tailored to marketers and advertisers. But in a deflationary digital economy coupled with a global economic recession, Yahoo! has a harder time defending (and even less, expanding) its virtual online presence.

Source: Yahoo! Share Price [Sept 07, 2011]

Undoubtedly, without its two large investments in Yahoo! Japan (35%) and Chinese Alibaba (43%), the Californian company’s valuation would be much less than the currently estimated U$23 billion. Many have been rumored to be interested in buying Yahoo!, among them Microsoft, Alibaba.com, and major Silicon Valley VC's.

The HP Way

HP is a different story altogether. The company is a more mature American technology icon than Yahoo!. Founded by Bill Hewlett and Dave Packard in 1935, today HP ships more than 1 million printers per week, 48 million PC units annually, and one out of every three servers worldwide. Similarly to Microsoft, HP is a leader in both the consumer and the business segments, a rare feat.

HP is one of the world's leading ICT companies in terms of net revenue, U$126 billion in FY10, up 10% from the previous year. The non-GAAP operating profit for the same FY10 was U$14.4 billion. With over 324,000 employees worldwide as of October 31, 2010, and over 1 billion customers around the planet, HP was the first ICT company that crossed and stayed above the symbolic U$100 billion in yearly revenue since 2007.

On July 19, 1999, HP named Carleton "Carly" S. Fiorina as president and CEO. The former Lucent Technologies executive and most powerful woman in American business, according to Fortune magazine at the time, was a unique phenomenon in the US corporate world. She led the biggest IPO in US history at the time and ran the largest telecom equipment company in the world turning in U$19 billion in annual revenue.

As her first significant strategic move, HP announced its merger with Compaq on September 4, 2001 for U$25 billion in stocks after a very lengthy and costly fight. This move was considered at the time to be the biggest merger ever in the ICT industry and a most risky acquisition. Unfortunately, the legendary HP was beginning to struggle in the competitive hardware PC business. Squeezed by IBM on the high end and Dell on the low end, HP (now with Compaq) could not satisfy their investors with their low profits. Ultimately, Fiorina, the mastermind behind the Compaq acquisition, was fired by an impatient HP board. Fiorina walked away with a U$21 million check on February 10, 2005.

On April 1, 2005, Mark Hurd was named CEO of HP. The former executive of NCR, a spin-off of AT&T that makes automated teller machines, had one clear mission: fix HP profitability. He was previously named CEO of NCR in March 2003 and engineered a substantial turnaround in the company's fortunes, while making large acquisitions. His past experience was going to serve him well in his HP adventure.

Under his watch, HP went on a frenzied acquisition mode: Mercury Interactive for U$4.5 billion (2006), EDS for U$13.9 billion (2008), 3Com for U$2.7 billion (2009), Palm for U$1.2 billion (April 2010), 3PAR for U$2.35 billion (September 2010), ArcSight for U$1.5 billion (September 2010) were among the most important multi-billion dollar HP acquisitions. But with aggressive cost-cutting, Hurd improved profitability, and grew revenue at the same time. He laid off 15,200 workers shortly after becoming CEO, reduced the IT department from 19,000 to 8,000, and consolidated the 85 worldwide data centers into 6.

HP became the number one technology company ahead of IBM, despite spying scandal from board members and other executives. HP's stock price doubled under his leadership (from U$21 to just below U$42) despite reports of low employee morale, long term debt exposure and below average net profit margin. Shockingly on August 6, 2010, CEO Mark Hurd resigned under pressure by the board over a sexual harassment investigation. He later joined rival Oracle as Co-President.

On September 30, 2010, Léo Apotheker (ex-SAP Co-CEO) became HP's new CEO and Ray Lane (ex-Oracle President and COO) was elected to the position of non-executive Chairman at HP. Apparently exhausted from all the infighting, most board members did not meet with Apotheker during the interview process. In September 2010, Léo Apotheker took the helm and, understandably reshaped the Board, bringing seven new directors, notably Ray Lane and Meg Whitman (ex-eBay CEO). A new strategy was decided and put in place by Apotheker, but the 40% drop in share price within his first 10 months of being the CEO, drastic decisions and the costly £7.1 billion Autonomy acquisition did not leave any room to turn around the troubled company. On September 22, 2011, he was fired by Ray Lane and replaced by Meg Whitman, two people he brought with him during the early board reorganization of 2010.

Meg Whitman will work for U$1 a year, and could have a target bonus as much as U$2.4 million for fiscal year 2012, depending on share price value.

Whitman decided to keep the strategy and execution begun by Léo Apotheker earlier. Since the announcement, HP's stock price gained one dollar (+4.7%).

Afraid of a possible hostile take-over (especially from rival Oracle), HP has recently hired Goldman Sachs to defend itself from activist investors.

Source: HP Financial Results [August 2011]


Although Yahoo! and HP are very different, they are sharing the same pain in current embattled times: a declining and dangerously low share price exposes them for hostile take overs. Both boards tried multiple times to rejuvenate their splendor in naming CEO's with competence and impressive résumés, but have ultimately failed.

A few conclusions can be drawn from these two similar stories, and can be extrapolated to other troubled technology companies:

  1. Boards are more transparent.
    In the past, it was quite rare that board room discussions were leaked to the mass media. Today the internet, the media outlets and attitudes regarding board authority have rebalanced the information asymmetry. More and more often, troubled technology company board discussions surface to the public knowledge as a new 'transparency' tactic to influence the inside vote or outside opinion. Unfortunately this tactic only brings confusion to the public, accelerates the downward spiral, and boards are becoming more nervous about their decisions and their consequences.

  2. Boards have less time.
    Business cycles in the technology industry have accelerated over the recent decades and companies that used to think in years, have to think in months (if not days). This acceleration has drastic consequences, leading to today's common crisis in board rooms. Boards, and even more so CEOs, are now on a quarterly probation. Moreover, in this unstable economic period of speculative uncertainty, where investors with large clout and capital are trying to find a safe haven at any cost, stock prices are extremely volatile, immediately reflecting (and reinforcing) the level of faith in technology company's announcements. So rather than having a longer perspective for the company's role in the technology marketplace, investing in R&D, making bold bets, most troubled technology companies are using "leading from behind" strategy as an excuse in their lack of guts, anticipation and judgment.

  3. Boards pay too much attention to stock prices.
    In choosing to focus too much on stock price and short-term results, rather than financial stability and delayed pay-offs for long-term investments, boards have turned away from their main responsibilities. Troubled technology companies are now confusing the incremental measurement of their efforts with their ultimate strategy (See Meg Whitman's compensation structure, which is solely based on share price performance). Making acquisitions with some 'synergies', loosely connected to a vision, have become a quick way to make over their financials and market perceptions for the next few quarters.

  4. Boards do not anticipate end-of-growth stage.
    Regularly technology companies hit a wall of growth and cannot expand beyond their current stage for various reasons: geography, customer segment, end of product life, disruptive technology, regulations, etc. Then it is time to divest part of the companies' business, and consequently dilute their market cap and stock price. Very few boards have the fortitude to formulate, execute and support such a strategy (e.g., IBM selling their PC business to Lenovo in 2004). Troubled technology companies typically hold on to their end of life product/service and end up becoming a "too big to fail" company with a mixed portfolio and message. This ability to foresee market reactions both at the beginning and the end of a product/service life is indeed a rare and a unique capability of the boards (e.g., Apple, Google, IBM).

  5. Boards do not always make a good CEO succession plan.
    Troubled technology companies always choose an outsider as their new company CEO in the hopes that an external leader could lead them to fresher insights and a faster recovery. Unfortunately, a steep learning ramp-up period, mistrust of the senior leading team and disengagement toward current strategy have been the more standard results of the initial shock therapy (quite the opposite of the insider CEO approach).

It is unfortunate that market leaders such as Yahoo! and HP are in such a despair but their boards certainly own a large part of that responsibility. It should not come to anyone's surprise that after having created much value for shareholders, companies can also destroy value for them. Such is a company's life in modern capitalism.

A good Board can't make a company, but a bad one will inevitably kill it.” — Barry M. Weinman, Managing Director and Co-Founding Partner Emeritus, Allegis Capital [Sept 26, 2011]

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