By James Bandler with Doris Burke
FORTUNE -- A few months after she took over as the CEO of Hewlett-Packard (HPQ) last September, Meg Whitman held one in a series of get-to-know-you meetings with employees. To say the audience, a group of software engineers and managers, was sullen would be an understatement. As Whitman spoke, many of them glared at her. Others weren't making eye contact with their new boss. Their heads were down, and they were tapping furiously on handheld devices.
"Your comments are being live-blogged," one employee told her defiantly. Whitman challenged the man. "You all have taken leaking to a new art form," she said. "It's a sign of an unhappy company. You wish HP ill." The tapping suddenly stopped, and as the room fell silent, the mobile devices were lowered.
The employees' open contempt for the head of the company and Whitman's acknowledgment of their misery were signs of just how dire things had gotten inside the technology titan after a humiliating series of epic stumbles last year. Just in the few months before Whitman became CEO, there was the costly failed launch of a tablet computer, a mortifying public waffling over whether to spin off the company's giant personal computer business, and then the drumming-out of its third CEO in less than seven years.
If only HP's troubles were confined to a few months in 2011. For a decade now the company has sometimes seemed more like a tawdry reality show than one of the world's great enterprises. The public dysfunction started with the vicious infighting over HP's merger with Compaq in 2002, which reached its nadir when the company's high-profile CEO, Carly Fiorina, pilloried Walter Hewlett, a board member and son of a company founder, for daring to voice his opposition. There was a board riven by feuds -- so out of control that some directors were leaking secrets to the press while the chairman of the board was hiring private investigators to obtain their phone records (and those of reporters) to uncover the perpetrators. That bit of skullduggery ended with the company's chairman and its CEO both dragged before Congress to explain themselves under oath. Then came the ouster of the company's putative savior, CEO Mark Hurd, after allegations relating to his interactions with a marketing consultant who had been an actress in risqué movies; both parties absolutely, positively, categorically denied that there was any hanky-panky.
Dr. Phil could fill a month's worth of shows just examining HP's board, whose dynamics have resembled those of rival junior high school cliques more than what is supposed to be a sage guiding force. At times, as we'll see, HP directors have refused to be in the same room with one another and have accused each other of lying, leaking, and betrayal. Time and again they've failed in their choice of CEO -- their most important task -- selecting a new leader whose most salient trait is that he or she is the opposite of the last one.
All of this has impeded the company from tackling the fundamental problem it faces: Simply put, Hewlett-Packard has lost its way. The company is in the midst of an existential crisis. It remains a behemoth, No. 10 on the Fortune 500, with $127 billion in sales last year and $7 billion in earnings. But the trajectory is ominous. Those profits, for example, were 19% lower in 2011 than in the previous year. HP's business is under siege on almost every front, losing market share and facing declining margins.
It was a combustible mixture: long-term threats to the business combined with an impaired board and an ill-chosen CEO in Léo Apotheker (LAY-o AH-po-teck-er). The three ignited disastrously during the 11 months that the 58-year-old European software executive ran HP. Indeed, there's no better way to understand the company's plight today than to examine his tumultuous tenure. A Fortune investigation reveals that the turmoil of Apotheker's reign was even more intense (hard as that is to believe) than previously reported. From the slapdash hiring of a man with no experience in HP's biggest lines of business, to the half-baked ways in which the company tackled major strategic decisions; from the never-before-reported internal challenges to Apotheker by top executives, to the fact that HP chairman Ray Lane was a major force in the company's strategic decisions -- which he has since blamed on Apotheker -- the full story of HP's convulsive year has never been told. This article is based on interviews with more than 70 current and former directors, executives, and employees of HP, SAP (where Apotheker once worked), and other companies in the industry, as well as hundreds of pages of company and legal documents, many of them never before made public. (Citing a confidentiality agreement with HP, Apotheker declined to meet with Fortune in Paris, where he now lives.)
With Whitman, 55, now in place, the acrimony at HP seems to have eased. So far her strategy amounts to this: Let's execute better while we figure out our long-term plan. That's fine, as far as it goes. But the company will never come close to reclaiming its former glory unless she and the board can find a way to function together and, most important, until she can answer the real question: What is HP?
The saga of HP's 11 months under Léo Apotheker begins in November 2010. To understand it, you need to appreciate what he found and how HP got to that point. The company seemed strong at that moment, its swagger restored during the five years Mark Hurd had been in charge. Earnings per share had quadrupled. The stock price had doubled. HP was No. 1 in PC shipments, No. 1 in printers, No. 1 in servers.
But just under the surface was a very different reality: HP was traumatized, its employees disengaged. Internal "voice of the company" surveys revealed that morale had cratered. One top executive told Apotheker she felt "maimed" by Hurd's hard-charging style. A company hailed for its vaunted "HP way" -- which emphasized employee autonomy -- had stifled creativity to the point where workers now had a rueful phrase to describe the way they tuned out and pretended to be clueless when executives asked them to do something: "flipping the bozo bit."
HP was barely innovating. The company didn't boast a single hit consumer product even as 67% of its revenue stemmed from hardware. Apple (AAPL) had shown the riches awaiting those who invent hit devices. But there were no iPhones or iPads in HP's bland array of products. And Apple was only one rival for HP, whose diverse businesses meant it also competed with enterprise hardware and software companies such as IBM (IBM) and Oracle (ORCL) and consultants such as Accenture (ACN).
Faced with pressures on every side, HP had seen its numbers begin to slide. After nearly doubling in Hurd's first three years, for example, free cash flow sank from $12 billion in 2008 to $8.4 billion in 2010, his last year.
By contrast, the company HP dreamed of being, IBM, had soared by taking a different tack: It dumped its PC business and focused on high-margin software and services. That prompted what is probably an apocryphal, but telling, anecdote among enterprise techies: Two visiting consultants are waiting for the elevator at a big company's headquarters. One is from HP, the other from IBM. The consultant from Big Blue pushes the up button to visit the CEO on the top floor. The HP man, by contrast, hits the down button to see the IT guy in the basement. The message was clear: IBM was consorting with kings while HP was on hands and knees, fixing the plumbing. It wasn't just a metaphor either: IBM's pretax profit margins, just under 20%, were more than double the 8.7% HP achieved in Hurd's last year.
HP had been operated with an eye toward the short term. Hurd emphasized financial management. Revenues grew largely because of acquisitions -- including the Compaq deal, HP bought 86 companies under Carly Fiorina and Hurd -- and profits multiplied mostly because of Hurd's ferocious cost-cutting and growth in the PC business.
Hurd's early initiatives to pare spending were valuable and necessary. But as time went on it became harder to find waste, and the results became extreme. Employees practically needed an act of Congress to get approval to buy a piece of software. The headquarters of the tech company did not have Wi-Fi. And some minions took Hurd's edicts to self-defeating lengths. At HP's office in Fort Collins, Colo., for example, the lights shut off automatically at 6 p.m. every day, effectively forcing workers to go home. An intrepid few brought their own lamps to the office, only to be scolded by facilities managers, who told them to remove the lights.
Decay had begun to show in some HP offices. Mice skittered in the corridors. Spiders fell from cracked ceilings. As the company cut back on trash pickups, detritus piled up, and in one location workers took garbage home in their cars. Upon arrival, Apotheker was informed that HP was missing 85,000 chairs. The figure was so farcical that he had to check to make sure it was right. It was. Hurd might not actually have "burned the furniture to please Wall Street," as HP's chairman, Ray Lane, would later disparagingly put it. But the Hurd era's external success had concealed internal deterioration.
Before Apotheker ever came to HP, the company was known for its fractious board. Individual directors would cycle in and out, yet somehow the group seemed constantly divided by personal rivalries, bickering, and leaks to the press.
In one HP office, the lights went off at 6 p.m. to save money. Workers were scolded for bringing in their own lamps.
With his forceful personality and a rising stock price, Hurd, 55, managed to suppress the worst contentiousness. But his departure brought out the sharpest antagonisms in the board. Directors argued for an intense week before announcing Hurd's resignation on Aug. 6, 2010. Technically Hurd was pushed out for false explanations on expense accounts relating to interactions with contractor/actress Jodie Fisher. Despite a letter from Fisher's lawyer charging sexual harassment, the company found no evidence that Hurd had harassed Fisher. What doomed him was the board's view that he had misled them when he initially denied any relationship with Fisher. (A spokesman for Hurd declined to comment on the record; the ex-CEO has previously denied any impropriety, financial or otherwise.) Hurd was replaced on an interim basis by CFO Cathie Lesjak, a two-decade HP stalwart who made it clear she wasn't a candidate for the permanent CEO position.
The board's tensions did not abate when Hurd left. One of the ex-CEO's staunchest allies on the board was Joel Hyatt, the founder of a chain of legal clinics and later the co-founder of Current TV. Hyatt was prickly. He didn't hide his contempt for the two directors who had led the investigation of Hurd, Robert Ryan, an ex-CFO of Medtronic (MDT), and Lucille Salhany, the former chairman of Fox Broadcasting. He claimed they had railroaded the former CEO. For their part, Ryan and Salhany couldn't believe how long it had taken their fellow directors to recognize the gravity of what they viewed as Hurd's lies.
There was an almost dizzying array of ambitions and gripes among the directors. Lawrence Babbio, the former vice chairman of Verizon (VZ), hoped to be named HP's chairman. John Joyce, a former CFO of IBM, was vying to be president of HP. Several complained that Hyatt had been -- and was still -- channeling board discussions to Hurd. (Hyatt says his conversations with Hurd were proper and fully disclosed to the board.)
Hoping to mollify Hyatt, the directors named him co-chairman of the committee to pick a new CEO and lead the transition. But Hyatt wasn't placated for long. He was furious to learn that two directors had addressed employees about Hurd's departure without inviting him. "My colleagues aren't interested in my help," he seethed, resigning his title as co-chairman, though he stayed on the committee. When an article detailing the sexual harassment allegations against Hurd appeared, Hyatt accused his fellow directors of leaking. "We took a blood oath" to keep board matters private, he fumed, "and it didn't last 24 hours."
Despite the rancor, the search committee members tried to focus on finding a new CEO. They picked Spencer Stuart's James Citrin to run the search. (Citrin declined to be interviewed for this article.) Smooth, gregarious, wired into the C-suites of the world's biggest companies, Citrin had a network that few could match. He embarked on a two-track search, examining both internal and external candidates.
Four internal aspirants stepped forward. The strongest was Todd Bradley, the head of HP's personal computer group. His group generated $41 billion in annual revenue and had tripled its profitability during his tenure. But Bradley had shortcomings. His critics said he tended to mumble in presentations and was perhaps a bit too cozy with the press. His record as an infighter had made him enemies. Several top executives said they would resign if he were named CEO. For various reasons the other three internal contenders -- Ann Livermore, Tom Hogan, and David Donatelli -- were also ruled out.
Hurd certainly hadn't made the board's mission easy. At various times when he was CEO he had told three of the internal candidates they were his heir, according to people familiar with the matter. Hurd then turned around and told the board that none of them was ready to be CEO. Needless to say, that left bruised feelings that would ultimately sour relations with the next CEO.
Citrin was keen on Ray Lane, a managing partner of the venture capital firm Kleiner Perkins. Lane had a track record in enterprise software and one of the biggest Rolodexes in the Valley. After a successful turn as Oracle's president in the 1990s, Lane was pushed out by CEO Larry Ellison in 2000. He left an extremely wealthy man but bearing a grudge against his former boss. Lane was tempted by the HP job. But at age 65, he had young kids and other business commitments. He didn't want to work CEO hours and he preferred not to travel much. Lane withdrew after it was made clear that being chief of a $127 billion corporation is all-consuming.
If not Lane, then whom? Citrin was enthusiastic about a former enterprise software CEO, whose career he'd been tracking. But hiring him would take courage. He'd been fired after a short, rocky tenure. HP directors were skeptical. But the more they learned, the more impressed they became.
The man had expertise in enterprise software, an area the board thought HP needed to move deeper into. He spoke five languages and had worked on three continents, a major plus considering that more than 60% of HP's business was now overseas. He was a bold choice, Citrin told the search committee, and if they picked him, they would be remembered for making "one of the best CEO picks ever."
Apotheker's rise had been impressive. He was born in 1953 to Polish refugees who settled in Germany after World War II. His father acquired a textile factory with help from the Marshall Plan. Apotheker spent his first eight years in Aachen, Germany, and then moved to Belgium. He studied international relations and economics in Israel.
In 1988, Apotheker joined SAP (SAP), then a small German business software concern, and launched its operations in France and Belgium. Apotheker was a master salesman, deploying cold logic rather than charm. "He could sell ice cream to an Eskimo," says one former deputy. "But he wouldn't just sell ice cream. The customers loved the insights they were getting out of this guy." Apotheker's brilliance and his astute push for key acquisitions such as BusinessObjects helped SAP become an international force. By 2005 he was a contender to become SAP's CEO.
Still, it sometimes seemed as if there were two Apothekers. There was the awkward, self-deprecating version who kept a statue of a clown on his desk, a gift from his children, to remind himself to be humble. And there was the imperious tyrant who could be so overbearing that his enemies dubbed him the Sonnenkönig, the Sun King.
The stories of his nastiness flew around SAP. One poor fellow was only a few sentences into a presentation when Apotheker began bombarding him with questions, according to two people who were present. After several minutes under this fusillade the man sank to the floor, whimpering, "What do you want me to do? What do you want me to do?" Apotheker was capable of absurd flights of invective. "Bring me the liver of that asshole," he raged on one occasion to a stunned deputy, who didn't know whether to laugh or to cry. "I will eat it for breakfast."
An SAP presentation, part of a campaign Apotheker led to "disrupt" Oracle, portrayed Larry Ellison as a fly.
Apotheker thought of himself as an honorable man, according to colleagues. But he viewed the world as a place filled with retribution and betrayal, so he was willing to throw an occasional elbow if need be. After all -- at least, in his mind -- that's what everybody else was doing. Some of the seeds for Apotheker's downfall at HP were planted in precisely that sort of thinking.
It began with a feud between Apotheker's prior company, SAP, and Oracle. As SAP saw it, Larry Ellison's company had barged into its turf -- back-office software -- in 2004, buying PeopleSoft, and later Siebel and others. Ellison, who seems to revel in psychological warfare, gleefully trashed his rival in public. (An Oracle spokeswoman declined to comment.)
In response, Apotheker led a campaign called Project Apollo. The secret operation was rolled out at SAP's summer sales meeting in July 2005. The goal was to motivate the troops by "highlighting the falsehoods Oracle tells about SAP" and to "demonize Larry Ellison to the field," according to a memo prepared for the event.
The presentation included a video that depicted Ellison's head on a fly's body. It was time, Apotheker said as the fly buzzed above him, to "treat Oracle like the pesky, annoying bug it is." At that point, a can of bug spray was aimed at the fly. "And that is how we intend to treat the annoying lies," Apotheker intoned, "by swatting them away with facts."
But Project Apollo wasn't just a truth squad. It became an expensive and ultimately self-defeating attack strategy. The plans, outlined in SAP documents that emerged in subsequent litigation, included a "disinformation campaign" against Oracle and efforts to "disrupt" its rival.
Apotheker ordered SAP to "exploit" the opportunities "to the hilt." One part of the campaign involved a then-newly acquired software company called TomorrowNow, which provided service for users of PeopleSoft and Oracle software, among others. SAP hoped to use TomorrowNow to lure customers from those companies. The problem was that, as even SAP would later admit, TomorrowNow was able to provide cheap service because it was secretly and illegally downloading software from Oracle.
In 2007, Oracle sued. Apotheker was grilled for eight hours by Oracle's lawyers. He dodged and weaved. He insisted SAP shut down TomorrowNow after it learned of its unethical practices. Apotheker remained bland and vague throughout the deposition. Only when the lawyers read him SAP's "attack plan" to "seek and trash Oracle" did Apotheker flash a rare grin. He shouldn't have been smiling. Within three years the suit would blow up in his face.
In June 2009, Apotheker was promoted from co-CEO to CEO. The world economy remained fragile, and like most companies, SAP was suffering. The company was forced into global layoffs for the first time, infuriating its unions.
Apotheker made things worse for himself. When he was co-CEO, SAP had raised the lucrative fees that it charged to maintain its software. Customers resisted, but even as the economy tumbled into recession, Apotheker wouldn't yield. For months he refused to roll back the increase and squabbled in public with his customers. Only after clients had fled did Apotheker finally relent.
It was too late. In February 2010, SAP's executive chairman and co-founder, Hasso Plattner, called him. After all the hard things that had transpired, Plattner told him over the phone, SAP needed a "new face, a happy face." Apotheker was instructed to leave that day. Stunned, he retreated to his home in Paris and sank into a deep funk. Six months later, Apotheker got a second chance. It was Jim Citrin calling about the CEO job at HP.
Citrin's report on Apotheker largely defended his performance. It quoted insiders saying that the CEO fell victim to a perfect storm of circumstances while trying to make bold strategic changes. The report did mention the botched maintenance hike, but it failed to explain the leadership deficits that undid Apotheker at SAP -- faults that would undermine him at HP: his negativity, his nastiness, and his unwillingness to be coached.
The announcement that Apotheker had been named CEO and Lane would be chairman came on Sept. 30, 2010. The Apotheker appointment shocked the tech world. Media reports had predicted the new CEO would be Todd Bradley or Ann Livermore. Within HP, jaws dropped. Léo who? SAP had one-eighth its revenue. For crying out loud, there were HP senior vice presidents who ran units bigger than all of SAP.
For the board, no other candidate had come close. Apotheker had struck just the right notes: He understood the strengths and weaknesses of HP and of key executives; he spoke of the need to restore innovation. True, he was an outsider, but he acknowledged his lack of experience and the board had a solution: Lane, a Silicon Valley blueblood, would guide him. As part of being hired as chairman, Lane had asked who the new CEO would be; he had enthusiastically endorsed Apotheker.
The full board never met Apotheker and Lane before hiring them. As one director told New York Times columnist James Stewart, many were too exhausted by the fighting. Board members did discuss the consequences of hiring two men without hardware backgrounds, but they felt that Bradley and the other HP executives could coach them. They briefly discussed Oracle's litigation against SAP and were assured there was little likelihood Apotheker would become ensnared in it. It was no big deal.
Still, Oracle was emerging as a potential plague for other reasons. Larry Ellison was friends with Mark Hurd and livid at HP's decision to fire him. Ellison publicly accused the board of making "the worst personnel decision since the idiots on the Apple board fired Steve Jobs many years ago." Only one month after Hurd resigned from HP, Oracle hired him as co-president.
The news exploded inside HP, which had a complex relationship with Oracle. The two companies were competitors -- but also partners, sharing some 140,000 customers. Within 24 hours of the news, HP filed suit against Hurd, claiming he had put the company's most valuable trade secrets in peril. (Even that move had unintended consequences inside HP. Its general counsel, Michael Holston, filed the suit without consulting the full board. Director Hyatt was furious. "You did what?" he bellowed at Holston. Hyatt thought it would jeopardize HP's relationship with Oracle.)
When Ellison learned that HP had hired two Oracle antagonists, he swung back into action. The timing of Apotheker's appointment was fortuitous. His first day of work, Nov. 1, coincided with the start of Oracle v. SAP, the trial to assess the size of damages for the theft of Oracle software by SAP's unit, TomorrowNow. Oracle's lawyers announced they planned to subpoena Apotheker if he came within 100 miles of Oakland, where the trial was being held.
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