The Case For the HP Way

The following letter by David W. Packard appeared as an advertisement in on March 14th.

At this point nobody knows whether the merger will survive next week's vote. I myself hope it doesn't. Ms. Fiorina's relentless pursuit of this merger has had a corrosive impact on HP's admirable corporate traditions.

Walter Hewlett has analyzed the financial and business flaws of the merge plan. I agree with his analysis, though I would be cautious about spinning off the printer business (more on this below).

Of equal importance, however, are the cultural, or even moral, aspects of the new direction HP has charted.

The HP Workplace

For half a century, HP was always considered one of the very best places to work. HP's precipitous decline and fall is well documented in Fortune Magazine's annual list of "The 100 Best Companies to Work for in America." In 1998 and 1999 (under Lew Platt) HP was #10. In 2000 HP dropped to #43, and by 2001 to #63. HP did not even make the latest Fortune list (Feb. 4, 2002). A recent list of the 100 best places to work in Silicon Valley did not mention HP.

If you think this decline is an inevitable result of the local economy, consider that Agilent rose from #46 in 2001 to #31 in 2002. Consider that Xilinx, which is headed by a former HP executive who insists he is following the true HP Way, is rated #6 in the 2002 Fortune list.

The recent decline of HP's extraordinary reputation as a great place to work should be of grave concern to HP shareholders, as it is to Bill and Dave's families.

A great company is not just a strategic plan, with employees as interchangeable as commodities. A great company is a great team of people and their unique way of working together.

HP has one of the strongest and most effective corporate cultures in business history. It would be a terrible mistake to throw it away and to try to replace it with a fruit salad of "the best" elements of two overlapping companies selected by a committee of experts in a corporate clean room.

As a preview of the "reinvented" HP, here is a recent posting on CBSMarketWatch: "I believe the layoffs were more destructive than anyone on the board can fathom. To select employees with no input from the first three or more levels of management and lay them off leads folks to conclude that the HP meritocracy is dead. Twenty-year veterans being let go with no input from their management is more than irresponsible."

The harsh and clumsy manner in which HP workforce reductions were executed last year contrasts sharply with the layoffs at Agilent, where CEO Ned Barnhold retained the respect of the affected employees. Anyone who believes that a weak economy (and the potential need for layoffs) must create arrogant management and disgruntled employees should study the example of Agilent.

Before voting on the merger, every HP shareholder should read the extraordinary about Agilent in Fortune 9Feb. 4, 2002): "How to cut pay, lay off 8,000 people, and still have workers love you." The contrast in style between Ned and Carly could not be more stark.

The Employee Polls

The recent report by ISS did not devote a single sentence to the question of whether HP employees support the merger and the regime of Carly Fiorina. But this is an essential question. The employees know more about HP's business than anyone else. They would have to make the merger (and the future of HP) work.

Hundreds of HP employees have written eloquent and passionate letters to me opposing the merger and Ms. Fiorina's demoralizing "reinventing" of the HP Way. I received 200 letters last fall opposing the merger before I got a single letter in favor.

Obviously, the employees who chose to write to me were not a random selection, and one could argue that they might represent only a vocal minority. Their story seemed so consistent, however, that I suspected there must be some truth to their reports, and I decided to commission an independent poll to investigate whether these letters expressed the majority employee viewpoint.

To be convincing (to me and others), such a poll needed to be conducted in a fully professional and transparent manner by a widely recognized independent firm. With this in mind, I commissioned the highly respected Field Research Corporation to design, conduct, and report three polls of HP employees in Corvallis Orego, Boise Idaho, and Fort Collins Colorado.

Field Research conducted these polls by dialing random phone numbers in these communities and interviewing current and former HP employees. In total, 940 current HP employees and 1,037 former HP employees participated in the survey. These sites were chosen because of their high concentration of HP employees in the general population.

I made a public promise, before the first poll, that Field Research would release the complete survey results directly to the public. The full results of these polls are available at www.field.com.

When the employee responses at all three sites are combined, and each site is given equal weight, opposition to the merger is greater than two to one, with 64% of HP employees against the merger and 28% in favor (8% offer no opinion).

Despite HP's vigorous internal campaign for the merger (and large financial incentives for 6000 privileged employees), the poll shows that 58% of managers polled at these three sites oppose the merger.

Former HP employees at these sites oppose the merger by an even greater factor o four to one. Current Agilent employees in the Fort Collins area (who formerly worked for HP) seem nearly unanimous in their opposition, with 87% opposed and only 4% in favor.

Despite their opposition to the merger, most current employees said that they were currently very satisfied (45%) or somewhat satisfied (37%) working for HP. This indicates that the poll did not reach merely a group of inveterate complainers.

In response to another question, 67% of current employees said that HP is a worse place to work than when they started, with only 11% calling it better (22% say no change or offer no opinion).

These field polls are very arresting. Is it certain that they are representative? HP says that their own voluntary internal survey of a representative sample of employees across all regions and businesses shows that 66% of 420 respondents in January were somewhat or very supportive of the proposed merger.

HP suggests that the Field polls are biased since pro-merger employees may have elected not to participate, knowing that I paid for the poll. The Field poll was conducted by random dialing, and the employees were not asked to reveal their names. While employees may have known that I was against the merger, it is highly unlikely that an employee would fear retaliation from me for supporting the merger.

On the contrary, it seems more likely that an internal poll conducted by management might be biased. HP has communicated widely to employees that they should support the merger. In other contexts, HP has indicated that employees who do not want to take the journey should consider finding employment elsewhere. Here is Ms. Fiorina herself speaking: "That's why I've said from the beginning at HP that people need to choose. They need to choose to come along with the new HP and help build the new HP, or they need to choose that this is not what they want t do. And it needs to be a conscious choice." (Worldlink, Jan./Feb. 2001)

The HP poll was conducted by e-mail and was directed at a list of specific individuals. Even if HP promised that the results were anonymous, an employee might easily worry that this may not in fact be true. In the current context of mass layoffs and possibly vindictive management, why take a chance? Less than 50% of the employees selected for HP's voluntary poll (420 out of about 860) actually elected to participate. The Field Poll participation was much higher.

An expert hired by HP has suggested the Field polls, while perhaps valid locally, may only represent pockets of opposition rather than the true attitude of HP employees around the world. A more plausible hypothesis is that management's voluntary internal polls simply failed to register the full extent of employee opposition.

False LaserJet Analogy

Dick Hackborn's recent letter to shareholders draws a totally unconvincing parallel between the Compaq merger and the original business plan for the LaserJet.

At the start, the LaserJet was a local initiative in Boise, not a massive project to redesign the entire company. The LaserJet business model did differ in some ways from previous HP products (the major partnership with Canon, the need for higher volume and lower margins, an R and D percentage that reflected the research contributed by Canon). Unlike the Compaq merger, however, it was never perceived as a case of betting the company and risking the future of the employees. My father and Bill just said: "Go ahead and prove that you are right." It was HP's traditional pattern of pushing responsibility down as far as possible along with accountability.

In any case, Canon brought an essential technical capability to the partnership that HP did not have and could not easily have developed. This had nothing to do with acquiring market share or scale. The LaserJet turned out to be a major success, and everyone is grateful to Dick Hackborn for his role.

The employees of Hackborn's own Boise division, however, now strongly oppose the merger. A recent letter to the editor pointed out that "when a survey indicates that a sizeable majority of the Idaho operations employees oppose the merger, one must conclude that the members of Hackborn's former flock do not accept the gospel now preached by their former leader. Their majority position comes about despite their knowing him better than any other group in the company."

Public Statements

Ms. Fiorina's merger campaign aggressively features photographs of young Bill and Dave in their garage with their first oscillator. Ms. Fiorina sserts ownership of (one might say she hijacks) Bill and Dave's partnership to save her entirely unrelated merger agenda. Many Hewlett-Packard employees and family members deeply resent this misappropriation. Quotations by my father are routinely twisted out of context to serve the merger campaign.

Ms. Fiorina ran a prominent ad accusing the William and Flora Hewlett Foundation of "selling over 5.5 million HP shares for more than $100 million, taking advantage of a brief spike in the stock price [Walter takes credit for causing.

This gratuitous accusation of insider manipulation was swiftly rebutted by the Hewlett Foundation, whose continuing stock sales were part of a regular long term program. HP itself had been a major purchaser of shares sold by the Foundation.

When Walter Hewlett announced that he had been asking HP to disclose the existence of discussions contemplating an extremely large compensation package for Ms. Fiorina, the HP Board issued a sanctimonious public letter (Feb. 28) accusing Walter of making "deliberately misleading statements to the public" and of putting his "personal agenda in front of the interests of HP and our shareholders."

Yet the March 5 Proxy Analysis by Institutional Shareholder Services (ISS) makes a special point of praising Walter and stating that "HP's decision not to disclose what clearly were very advanced discussions falls far short of the good governance" (emphasis added).

In major ads boasting about the ISS endorsement, Ms. Fiorina shamelessly tried to give unwary readers the impression that Lew Platt and the Packard Foundation had actually endorsed her merger. In fact they are unanimously opposed.

There is no moral equivalence between the strong but factual statements made by Walter Hewlett and what appears to be a systematic campaign of disinformation and character assassination waged by Ms. Fiorina and the HP Board.

This all may sound like politics as usual. After Enron who expects a corporation to tell the truth?

The fact is that everybody expects more from HP.

Families and Foundations

Ms. Fiorina says that the Hewlett and Packard families and their foundations have a short term investment horizon,that we will not accept short term risk in return for long term gain. This is simply false. The Packard Humanities Institute, which I head, maintains ample liquid reserves to cover our grants programs for three years, and we could easily accommodate an even longer temporary dip in the value of HP stock. I personally continue to hold HP stock my parents gave me forty years ago, never giving a thought to its short term volatility. The long term value of our HP stock has always been our investment focus.

We would, of course, oppose any plan that recklessly put the long-term visibility of the company and its employees at risk in return for a short term windfall in money or prestige for certain individuals.

Ms. Fiorina also says we are averse to change and prefer a "static" world. I myself have been a professor of Ancient Greek, which might seem to suggest a backwards view. But my professional work (from the 1960s) has focused on the use of technology in the humanities. The Ibycus computer system, which I developed and sold, was widely used in major universities. The first version of Ibycus (1975-85) used HP 1000 series minicomputers, and I was a registered HP OEM. Largely because of Ibycus, many people considered Classics to be far ahead of other fields in the humanities in its use of modern technology. I mention this because the media often terms me a "philanthropist" (which may be true now), but I spent many years actively moving my own profession into the future, often with the help of HP products.

Who Opposes the Merger?

Despite the media's desire to portray this conflict as a soap opera feud, and despite Ms. Fiorina's claim that Walter's attitude was unexpected and inexplicable, the opposition to the merger has always extended far beyond the families of the founders.

The Field polls demonstrate that HP employees at three strategic sites strongly oppose the merger. It seems very likely that most other HP employees share their view.

Walter Hewlett's co-trustee is the proxy solicitation is Edwin E. van Brunckhorst, a former Chief Financial Officer of HP. My father trusted his financial judgment beyond that of any other person. The Packard Foundation Board, which unanimously opposes the merger, includes Lew Platt, a former CEO of HP, Dean Morton, a former Chief Operating Officer of HP, and Dick Schlosberg, a former CEO of the Los Angeles Times.

I myself have spoken recently with many former top HP executives, who indicated to me their strong opposition to the merger, though some cannot speak out because of their current affiliations.

Most recently, Paul Miller, a distinguished former director of HP (who chaired the Finance Committee of the HP Board) publicly announced his own view that the merger "is not a good long-term strategy."

The Future

What if the merger is rejected? At a recent security analyst meeting (Feb. 27), several top HP executives made presentations. Naturally, all recited their support for the merger, but the reports themselves demonstrate that HP has excellent opportunities without the merger.

I especially recommend the upbeat report by Vyomesh Joshi (VJ), HP's President of Imaging and Printing Systems (filed with the SEC on March 5). The issue here is not milking a cash cow, but grasping an enormous opportunity to expand HP's role in imaging and printing beyond the current 4% of pages now printed digitally. I personally agree with VJ that these opportunities can best be addressed in the context of a broad IT company (like the current HP) rather than a spun-off printing company. But VJ's references to the Compaq merger read like footnotes to an otherwise self-sufficient story.

The admorable repot by Ann Livermore on HP's services business seems unduly concerned with the benefits of jumping overnight into third place (in size) and thereby "winning a place at the table." I suggest that organic growth could build an even sounder foundation for long-term success. My father always warned that "more businesses die of indigestion than starvation."

HP has tremendous depth of talent, waiting to be freed from the temporary distraction of an ill-conceived merger plan. Some previous HP executives could conceivably play an interim role (perhaps on the board), but this is secondary. HP is more than ready and able to move forward on its own.

It might require a little time for HP to recover from this unhappy episode, but the long term is what really matters.

Some Employee Quotes

If these opinions (from letters to me by HP employees) are at all representative, one wonders how current management could execute successfully a merger plan that requires massive layoffs while retaining the loyalty and dedication of the surviving employees.

"HP employees on the whole are very intelligent and they are not opposed to change or to taking difficult steps to remain competitive. I think the smooth spin-off of Agilent is a prime example of these traits. However, the merger with Compaq is not the same thing, and it is universally opposed by everyone at HP I've talked about it with. This merger will cause the soil that everybody at HP has built their career on to shift and move."

"Her 'reinvention' process has been ineptly handled and greatly disruptive. The recent layoffs (victims of which were called 'participants'!) were nothing more than random pogroms. Talented individuals that never had anything but glowing performance reviews were let go, and critical projects were damaged."

"I don't feel like the employee is an asset to the new HP, but more like an expendable toner cartridge that is tossed out when it has served its purpose."

"Internally the WFR (work force reduction) of August is compared to terrorism. If layoffs eliminated bottom performers, we would know how to avoid layoffs: improve performance. The WFR appeared to be absolutely random, just like a terrorist attack. There is no defense against a random attack. Resignation to one's fate is a logical result. Enthusiasm and energy are destroyed."

"Allowing a layoff that included highly ranked employees who have dedicated their careers to HP is not the way to lead. This last action is, in my opinion, an absolute affront to everything Bill and Dave for.

'To do layoffs from the top, with no input from the first level of managers who really know who is performing and who is not, was very difficult. It is hard to support a layoff when you are not involved in the decisions. My own staff were not affected, but I found it difficult and frankly humiliating to wait by my phone for 2 days to hear if any of them were to be laid off. To see both high and low performers leave the company in a seemingly random layoff was very, very difficult."

'The names for the last layoff were identified at a remote location by people who didn't know who they were laying off %85 Everyone is a target. Anyone could get the axe for whatever unknown reason."

:In the August layoff I saw very good experienced employees being laid off because their current particular job was going away. None of them were given the opportunity to switch to different jobs at HP."

"Your statement about the direction the HP company is going is everything I've been thinking and feeling for the past year. I have witnessed recent layoffs that were so unprofessional. It left such a bad feeling. Many of us were shamed that we were employees of this company. In the past, if employees for whatever reason would not be part of our workforce, it was done in a manner that the peers, the company and the person left with dignity. To have some of my co-workers tapped on the shoulder, marched out of the area, then return to inform us that they would be leaving%85"

"Bill and Dace would talk long and passionately%85about how it made good business sense to manage poor performance and to preserve the massive investment the company has made in people. All gone. Low performers?,don't retain them,don't move them into a job more suited to their talents,don't invest money in developing their skills. Fire them, and quickly too. HP employees used to be fiercely loyal and proud to be a part of the company's success."

"[We resent the shallow, short-sighted management values that have dislodged time-proven, more patient approaches. [This is made all the more extreme by the central concentration of authority in most all aspects of running the place. In spite of the centralization, we know operate more inefficiently than ever I've observed in my twenty-two years."

"HP is an American national treasure that we all care deeply about, even those outside the HP family."