San Jose Mercury News (CA)

December 23, 2001
Section: Business
Edition: Morning Final
Page: 1F

VC LEGEND LEADS CHARGE FOR HP-COMPAQ
WITH TIES TO BOTH COMPANIES, PERKINS HAS UNIQUE PERSPECTIVE
MATT MARSHALL, Mercury News

Thirty-six stories above the placid blue waters framing Alcatraz Island and the Golden Gate Bridge, Thomas Perkins fidgets in his chair. If conversation lulls, his thumbs twiddle impatiently. He is a man driven by ambition. Perkins, 69, has turned his Silicon Valley venture capital firm, Kleiner Perkins Caufield & Byers, into the most successful VC firm in the world. Kleiner Perkins has returned around $20 billion to investors over its 30-year history. But Perkins‘ impatience comes from his latest, unexpected challenge: the bitter battle over the proposed merger of Compaq Computer with Hewlett-Packard. As a board member of Compaq — and former executive at HP, the Palo Alto computer firm where he cut his teeth more than four decades ago — he has become one of the most outspoken backers of the merger. But some HP heirs — sons and daughters of founders William Hewlett and David Packard — have signaled their intent to vote down the deal, saying a merger doesn’t make economic sense. They also say the layoffs likely in a merger threaten to ruin HP‘s vaunted tradition, the so-called HP Way, which they say emphasizes company loyalty…

…A merger will create a mammoth company that can take on giant IBM — and beat it. HP and Compaq, he explains, have better ties with Microsoft and Intel — two other key protagonists in the computer industry drama. Together, he says, the foursome create an industry standard that can easily outdo IBM. ”Microsoft will be the software department, Intel will be the hardware department, and HP-Compaq will be the marketing-customer delivery department,” he says. ”Wouldn’t you go for it?” In part, Perkins is fighting for Compaq. But he also is fighting for his right to interpret the legacy that Packard and Hewlett left for Silicon Valley..

I remember opening the paper a couple of days before Christmas, 2001 and feeling like I had just been kicked in the stomach.  It was not the best time to be an officer of HP. Bill Hewlett’s son and HP board member, Walter, had come out swinging against the HP-Compaq merger, and Carly Fiorina, my boss, was under incredible pressure to sell the deal despite howls from the local press, the Hewlett and Packard families, an active message board for HP employees, and now a fractious board of directors. And there it was in black and white in the morning paper:   Tom Perkins, a Compaq board member and a driving force behind the merger had a plan to turn HP — the company whose logo said “invent” — into the marketing department for Intel and Microsoft.  I had to think hard about how I was going to face my own Technology Council and reassure HP’s 12,000 engineers that — despite what Perkins said in the  interview –  the company was not backing away from its commitment to innovation.

Earlier in the month, Carly had invited us to her house for a very low-key holiday celebration — much more subdued and informal than the elegant holidays parties that were the custom when the company was doing better.  Carly had paid for much of it out of her own pocket.  It  turned out to be a  tense and not not very festive evening.  Carly was running on a few hours of sleep, and the rest of us were trying to tie down the ship’s rigging in the middle of a storm. There was an air of uncertainty. We sat around smaller tables with our spouses as dinner was served.  Carly and her husband Frank were at an adjacent table.   As much to break the tension as anything, the discussion at our table turned into a silly  guessing game over which actors would be cast to play which of us when the HP-Compaq Merger Movie was made (West Wing star Allison Janney was the consensus choice to play Carly).   We must have been loud, because I could see Carly stiffen.  Carly didn’t know who on her own staff she could trust, and it must have sounded like we were tossing off the seriously difficult times that would be coming for HP and its employees.  We weren’t.

I spent virtually all of my time that winter keeping our major technology initiatives on track, promoting strategic product directions with customers, and talking to our engineering teams around the world.  The outcome of the proxy fight was uncertain and there would have been antitrust repercussions if HP and Compaq had gotten too cozy, so Webb McKinney, who was in charge of HP’s side of the integration team and the clean room that allowed the companies to begin planning merger details without violating antitrust laws, kept most of us with day-to-day management  responsibilities in the dark about post-merger plans for technology and products.

Once shareholders approved — by a hair’s breadth — the merger, Perkins was named to the board of the new HP.  Compaq’s  Shane Robison was named to a new position that combined my old CTO role and a Chief Strategy Officer position that had not existed before. I was still concerned about the Perkins comments from his December interview.  My first encounters with the Compaq technologists were not encouraging. I got into a shouting match with one of Robison’s staff members about how much HP should be investing in security for its products.  This was less than a year after the 9/11 attacks, and I had been working closely with CTO’s of other Silicon Valley companies and federal agencies to forge a comprehensive strategy for information and communications security.  The official Compaq position was that this was a problem for Microsoft, not HP, and I was told to keep quiet about it.

Imagine my surprise when Perkins and Robison led an effort to form a Technology Committee for the HP board to oversee and track R&D the same way that Audit, Governance, and Compensation Committees oversee financial  and operational matters.  I didn’t always agree with the direction it took, but it seemed to breathe new life into a technology governance process that had been stalled for many months.  Prior to that, HP — like most companies — did not place much visible  faith in its board to integrate technology into corporate governance.   There were a few public boards that had technology committees. They had been prominently featured in the  magazines for directors that wrote about best board practices, but those articles were disappointing:  most existing technology committees were for  informal oversight of technology spending by CIO’s.  What Perkins was  proposing was something different — and so at odds with his public statements about the value of a merged HP and Compaq that it took me a little while to catch on.   The HP Technology Committee would not only monitor  technology developments, it would help educate the board about new trends and directions that would impact board-level decisions and provide informed advice on the technology implications of financial and personnel decisions, including how to maintain a workforce advantage.

A committee like this would have been helpful years before, because HP had a history of plunging into technology investments and acquisitions that, to most technology observers, made little sense.  HP’s  decision in 2000  to purchase a middleware/software company called Bluestone was one such decision.  A distant fourth in a crowded and fragmented marketplace, the idea behind the Bluestone acquisition was based on a faulty reading of HP’s current capabilities in the space, the ability of any small entrant to alter the dynamics of the marketplace and the needs of HP-UX customers who felt themselves always last to the trough when third-party software developers released new products.  After two years of chaos and the dismantling of HP’s web services organizations, Bluestone was dumped at a $400 million  loss.

HP’s decision to sell its considerable VLSI design assets to Intel was also  made for financial reasons, although it was widely known in HP’s technology community  that the success of its 32 and  64 bit  processors, including  Itanium,  depended on custom chipsets that HP had invested  in for many years.  The original architects of Itanium were on my staff,  and it was hard to peel them off the ceiling when the announcement was made, especially since they had virtually no voice in the decision-making process.

Officers were invited to sit in on the  entire HP  board meeting, except for the closing executive sessions.  Even so,  it took me awhile to realize how rare technology discussions actually were. After a particularly fiery Industry Analysts’ Meeting, during which I made a slash-and-burn  presentation on our competitive advantages over Sun Microsystems –  that made the analysts smile but our marketing folks queasy — Carly asked me to reprise the talk for the board.  Patty Dunn (who would later take over as Chairman  in a controversial  tenure after Carly’s dismissal in 2005) and others approached me to say how much they appreciated the competitive information and the willingness to be combative in defense of HP product strategy.  They claimed, incredibly, that it was the first time they had heard this kind of presentation.

The Perkins proposal would have given the board a lens to look at issues like these — necessary in  a company where financial forecasts are only as good as the underlying technology.  HP was not only one  moving in this direction.  Motorola and other technology companies  had — at about the same time — formed Perkins-style Technology Committees.  Ram Charan’s book  Boards That Deliver helps explain why technology companies need to take the Technology Committee seriously, more importantly, how they can help  a board move beyond the role of compliance to a deeper assessment of health and prospects:

Financial health, operating performance and risk each require separate attention.  A company can show good operating performance while financial health…is in decline. Dot-com companies, for example, were notorious for delighting their customers with fantastic (or fantasy) products and services while bleeding cash.  Similarly financial health can appear to be sound when in fact the guts of the business have been severely compromised.  Any risk can be underestimated, especially when it is assessed piecemeal, rather than in totality.

The reason that the Technology Committee is a good idea for  public technology companies is that the worlds of innovation and execution are going to collide, and a board cannot deliver value by simply checking off a box on a governance worksheet.   What do you know, for example, about the real performance of key technology executives  without a deep insight into how they would be evaluated by their peers  and competitors?  How do you know that an acquisition based on a couple of good financial quarters and self-congratulatory product  press releases has no market advantage over an in-house solution?   That’s not the kind of question that due diligence is going to ask. After I left the company, I watched the downsizing of research and heard often from former friends and colleagues who thought one decision or another was wrong-headed, and I often  wondered about how effectiveness the committee actually was.  And then I would see something preserved that made no short-term financial sense, although everyone knew how important the technology would be some day.

When I joined the board of RSA Security, I was definite about my plans.  “Look,” I told CEO Art Coviello, “RSA’s performance is a three-legged stool, and the board needs to be as informed about the technology and markets as it is about finance and operations.” Ram Charan would have said the three legs are Finance, Operating Performance and Risk. I said the risks are Technology, Markets and Organization. Both Art and Chairman Jim Simms were on board, but it was not an easy proposition to sell to the rest of  RSA’s board, although I did.  The RSA Technology Committee had a big impact on board dynamics and ultimately on the long-term health of the company.  It is one of the WWC success stories that I will tell in more detail in a later post.

I can’t think of any reason that the board of directors of  a public company — especially a technology company — needs seven CFO’s, but that is the profile of far too many companies.  Even  on boards where the majority of the non-management directors are CEO’s, financial expertise overwhelms all other skills, and it is not healthy.  It’s hard to find a technology company that has failed in recent years where the  roots of failure were not widely known on that other planet outside the boardroom.  I emphasize public companies only because they are great targets.  Later stage privately held companies would also be wise to pay attention to board dynamics and find some way get a handle on the company’s technology.

Once I got over the stomach ache that Tom Perkins gave me, I realized why technology had a seat at the table of his boards.   Kleiner-Perkins got to be the world’s greatest venture capital firm by delving deeply into the  technology implications of business decisions.  Engineers have the impression that board rooms are filled with accountants who know very little about the details of the  business but are not shy when it comes to talking about it.  Enter the Technology Committee.

I always liked the scene in Annie Hall where Alvy Singer, the Woody Allen character,   is getting more and more annoyed by a guy standing behind him in a movie theater line who is carrying on about Marshall McCluhan, trying to impress his date:

Man in Theatre Line: It just so happens I teach a class at Columbia called “TV, Media and Culture.” So I think my insights into Mr. McLuhan, well, have a great deal of validity!

Alvy Singer: Oh, do ya? Well, that’s funny, because I happen to have Mr. McLuhan right here, so, so, yeah, just let me… [pulls McLuhan out from behind a nearby poster]… Come over here for a second… tell him!

Marshall McLuhan: I heard what you were saying! You know nothing of my work!…How you got to teach a course in anything is totally amazing!

Alvy Singer: Boy, if life were only like this!