NBR Transcripts - February 9, 2005
Wednesday, February 09, 2005PAUL KANGAS, NIGHTLY BUSINESS REPORT ANCHOR: One of America's most powerful and visible corporate leaders is ousted from her job. Hewlett-Packard's Carly Fiorina is sent packing by the company's board. The move comes after months of speculation that HP needed a major shake up to make it a major and profitable competitor.
SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: We'll have an in-depth look at the developments at Hewlett-Packard today, including an interview with the woman whose work may have played a role in Fiorina's firing. And we'll talk with a management expert about what Fiorina did right and wrong at HP.
KANGAS: Break out the aspirin, new estimates show the cost of new Medicare drug benefit is now over $700 billion. That's almost double what the original price tag was.
GHARIB: And FTD is blooming on Wall Street. The floral delivery company is now trading as a public company again and it makes a budding debut on the big board.
KANGAS: I'm Paul Kangas.
GHARIB: And I'm Susie Gharib. This is NIGHTLY BUSINESS REPORT for Wednesday, February 9.
Good evening everyone. Carly Fiorina is out of a job tonight. After nearly six tumultuous years as chief executive of Hewlett-Packard, Fiorina was forced out by the company's board of directors today. Fiorina, one of corporate America's highest ranking female executives, was fired because she failed to transform Hewlett-Packard into a profitable technology leader after its bold acquisition of Compaq Computer. Investors seemed happy to see her go. HP stock surged nearly 7 percent on the news, up $1.39 to $21.53. Scott Gurvey reports.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: When the Hewlett Packard board of directors hired Carleton Fiorina in 1999, it wanted her to shake things up. There is no question that she did that. Driven, outspoken, controversial, all apply to the CEO known in the tech sector simply as "Carly," one of the few women to head a fortune 500 company. Her tenure brought layoffs at a paternalistic firm where layoffs had previously been unheard of. It saw the creation of a centrally managed enterprise, replacing an entrepreneurial structure where lines of business were nearly independent and it saw attempts to gain economies through acquisition, most notably the purchase of Compaq Computer in 2002. It was a move bitterly opposed by the son of one of HP's founders. Today Walter Hewlett declined to comment on Fiorina's departure. In the end, the stock chart tells the tale. In spite of the changes, HP shares have lagged the industry. Concluding its annual performance review, the HP board decided it was time for a new CEO.
VOICE OF PATRICIA DUNN, NON-EXECUTIVE CHAIRMAN OF THE BOARD: We think she did an outstanding job in affecting that transformation, in particular the Compaq merger integration was handled very, very well. This is a going forward issue in terms of the kinds of capabilities that we feel we need to major on.
GURVEY: Analysts say in part Fiorina is a victim of the times. After years of no growth in the tech sector, there are now signs companies are once again in buying mode.
MARK STAHLMAN, TECHNOLOGY ANALYST, CARIS & COMPANY: She painted herself into a corner. She's the only executive in the IT business who has consistently, publicly said this is no longer a growth industry. Nobody at IBM, Cisco, Microsoft, Sun, Intel, believes that. She was the only one. So she had isolated herself as a no-growth CEO. She's not right.
GURVEY: What analysts say will be right is a CEO who can handle HP's three distinct business segments, the highly profitable printing and imaging business, the high margin server and enterprise consulting business and the commodity PC business. The problem, the analysts say, is that each segment addresses a different audience.
TED SCHADLER, COMPUTER ANALYST, FORRESTER RESEARCH: It fits between Dell and IBM in a place that's not very attractive. So if you were to tilt one way or the other, you'd be more successful going after either Dell or IBM rather than both of them at the same time.
GURVEY: What is clear is that HP is forever changed from the company started in a garage by two Stanford grads, Bill Hewlett and Dave Packard. That event is credited as the birth of Silicon Valley. The year was 1939. Fiorina is due a severance package said to be worth $21 million. HP is scheduled to report earnings next week and told analysts today those results should meet expectations. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
GHARIB: Joining us now for more analysis about Carly Fiorina's ouster is Carol Loomis. She wrote the highly critical cover story in this week's Fortune magazine, “Why Carly's Big Bet Is Failing.” Hi Carol great to see you.
CAROL LOOMIS, EDITOR AT LARGE, FORTUNE MAGAZINE: Hi Susie.
GHARIB: Carol, some people have said that your highly critical cover story played a role in the board's decision to fire Carly Fiorina. Were you surprised by the announcement?
LOOMIS: Well, I was surprised. I knew something was going on behind the scenes but I didn't expect it to be this extreme, so yes I was surprised.
GHARIB: Some people have been speculating that the board had asked Carly to hire a chief operating officer, but she didn't want to do that. In your interviews with the company, did you hear anything about that and do you think that was a catalyst?
LOOMIS: Well, I think that's a possibility for something that division between her and the board. I talked to her at great length when I was preparing this story about the question of whether a chief operating officer would be appropriate and she was firmly against that thought, because she doesn't think that you can separate strategy and execution and so therefore she did not think there was a need for a chief operating officer and maybe the board did. I think it's a possibility.
GHARIB: You did spend a lot of time on this story, three months, multiple interviews with Carly Fiorina. In your conversations with her, did she reveal at all anything that she would do differently, any lessons learned, any mistakes?
LOOMIS: Well she says that she wished she had been a little bit stronger when she was trying to paint the picture of how much HP needed to change. And she also says that she would have everybody that she had pushed out at the company, that she wishes she had done it faster. She learned that she should just been ready to do it faster.
GHARIB: So from all your interviews, do you think that her failing was the strategy itself or her abilities, her management abilities to execute that strategy?
LOOMIS: I think the basic mistake was the Compaq merger, HP spent $24 billion to make that merger and got very little in exchange and I think that put her into a position. This company is so hard to manage, that I don't even know whether anybody can manage it, because its structure is just not set up to be managed well.
GHARIB: Carol, one of the unspoken questions in this whole saga is Carly Fiorina's gender and whether or not that was a factor. Every year, she is at the top of "Fortune" magazine's list of the most powerful women in business. Do you think that she was held to higher expectations just because she's a woman?
LOOMIS: I don't. I don't think that gender had much to do with this at all. I'm sure it had a great deal to do with all of the attention that's being given this nationally, but I don't think gender was the problem here. I could be wrong, but it didn't look to me like that at all and I talked to her about gender and she said it was something she just never thought about and I think that's true.
GHARIB: You covered the whole panorama of "Fortune" CEOs. Any speculation on who you think is going to replace her. Will it be an insider, an outsider?
LOOMIS: I don't know who it's going to be but I would definitely guess it will be an outsider because I don't think there is anybody. I got to meet the top people. The guy they put in as temporary chief executive officer Bob Wayman is a terrific fellow but I don't think he wants the job. He was due to retire.
GHARIB: All right. Carol. I'm sorry we're going to have to leave it there. Thank you so much. We really appreciate and congratulations on a great story.
LOOMIS: Thank you very much.
GHARIB: We've been speaking with Carol Loomis, editor-at-large at "Fortune" magazine
KANGAS: Wall Street moved lower this morning as Cisco's disappointing earnings guidance dragged down the tech sector while the blue chips were hit by a jump in oil prices. The Dow fell 48 points early on while the NASDAQ Index was off 20. A midday recovery attempt came up short, so sellers came on strong again and the market ended at its lows of the day. The Dow Industrial average fell 60 1/2 points to 10,664.11. The NASDAQ Composite was down 34.13 at 2052.55. Standard & Poor's 500 down 10 1/3 points at 1191.99. In the bond market, the 10-year note rose 10/32 to 102 3/32 putting the yield at 3.99 percent.
GHARIB: Back now to our top story, the departure of Carly Fiorina at Hewlett Packard. Joining us now Mike Useem, professor of management at the Wharton school at the University of Pennsylvania. Hi Mike.
MICHAEL USEEM, PROFESSOR OF FINANCE, WHARTON SCHOOL: Hello, Susie.
GHARIB: Well, Carly Fiorina has been described as a smart businesswoman with lots of charisma and drive and energy. What did she do wrong? What went wrong? What was her failing?
USEEM: Well, I think you had it right in describing her as a person of enormous energy. She didn't shy away from getting into the game. She was decisive and a great communicator, but at the end of her day or maybe a little bit earlier in her day, what did seem to be the problem was a decision back in ‘01 to go after Compaq. Carol Loomis said this. I agree with that, that the Compaq decision, who knows. These things are always risky, but as history has played out over the last three years, just has not worked out. So great style, bad decision.
GHARIB: All right. So you think then it was the strategy, not her abilities. In other words, you don't think that another CEO could have pulled this off in terms of execution?
USEEM: In a position as CEO, you've got to be strategic. She was strategic. You've got to execute as well. You can't just be a dreamer. You actually got to make things happen on the ground. She's been criticized for her style, sometimes it's been said, too hands on, too micromanaging and instinct and the board, as you recall two weeks ago, said she had to give more authority to her top people and had been pressing her to bring in a chief operating officer so it's probably a mix of failed strategy and then shortcomings on the execution side. Had the strategy worked, I think we wouldn't be talking about execution. We probably wouldn't have had today's press release.
GHARIB: So do you think then, as the board looks for a new CEO, they're going to be looking for somebody who doesn't buy into the strategy, who's going to come in with a completely fresh start?
USEEM: Well, I think the board, almost predictably, almost surely will go to the outside. They'll certainly hire an executive search firm to take a look at internal and outside candidates. The board knows the problem. It just doesn't necessarily know the solution. Thus the choice of the next chief executive, critical and the marching orders will probably be to the new CEO, guide us through a process, a rethinking, is that the right strategy that we pursued with Compaq? And number two, whatever that strategy is or should be, can you execute? You've got to make it happen and this next CEO is going to be under enormous pressure to do exactly that.
GHARIB: Mike, you're a professor of management. You've studied this very carefully. Is there a management lesson here?
USEEM: I think there really is, partly because just Carly Fiorina is just so visible. We've all watched and studied her career and from it are many lessons but just to bring out at least for me the biggest idea looking back now on her five years at the company, got to give her high marks for her willingness to take on an extremely tough job. All tech companies of that scale have been struggling the last couple of years. She didn't shy away from that task. She was a brilliant articulator of her ideas, got to give her great credit for that. Those two aspects of leadership are very important. Everybody should have that capacity. On the flip side of that though, what defines great leadership are the great decisions made in the corner office when the doors are shut and it does seem that that decision back in ‘01 to go with Compaq was not the right decision, so her quality as a decision maker at issue here and that may have been her downfall.
GHARIB: Mike, always a pleasure talking to you, thank you.
USEEM: Good to talk with you Susie.
GHARIB: We've been speaking with Mike Useem, professor of management at the Wharton School.
KANGAS: There are new concerns tonight about the rising cost of Medicare. With Congress considering the tightest Federal budget in 20 years, Medicare's new prescription drug benefit is now expected to cost almost $3/4 trillion. That drug benefit doesn't take effect until next year, but already there are growing calls to change it. Darren Gersh reports.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: President Bush says after saving Social Security, it will be time to tackle Medicare's unfunded liabilities, and he urges patience for those worried about rising cost estimates of the new prescription drug benefit.
GEORGE BUSH, PRESIDENT OF THE UNITED STATES: Listen, the reforms haven't even begun yet. I signed a piece of legislation last year and the major reforms of providing prescription drugs for our seniors kicks in next year and I look forward to watching those reforms take effect. I'm convinced they'll have cost savings for our society and I know it will make the life of our seniors better.
GERSH: When the Medicare prescription drug benefit was first pitched to the Congress, the expected cost was $400 billion. Then a few months after it passed, the estimate was raised to $534 billion, but those projections included two phase-in years. The new estimate of $724 billion is the first to cover a full 10 years of drug benefits. Some conservatives now want to limit the scope of the drug benefit and even some Republicans want to change the law to legalize drug importation from Canada and let the government negotiate drug prices directly with drug companies.
SEN. JOHN MCCAIN, (R) ARIZONA: I look forward to working with my colleagues to eliminating the egregious and outrageous provision that was also added that prohibits Medicare from negotiating with the drug companies for lower drug prices.
GERSH: Medicare spending is growing so fast that in a few decades it is projected to gobble up half the Federal budget. And for now the trend is to add costs. The government recently approved new coverage for everything from Viagra to obesity treatments when medically necessary.
WILLIAM NISKANEN, CHAIRMAN, CATO INSTITUTE: It is unfortunately a part of a larger pattern in which governments transfer income from the young and unborn to the current older people.
GERSH: But liberal advocacy groups see it differently. They argue the new cost estimates for Medicare show out-of pocket spending by seniors skyrocketing in return for what they call a relatively skimpy drug benefit. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
KANGAS: Now, let's take a look at our stocks making news tonight.
And to no one's surprise, topping the active list on a hefty 68 1/2 million shares, Hewlett-Packard (HPQ) up $1.39, traded as high as $22.20 and Merrill Lynch today upgraded it from "neutral" to "buy." Interestingly, Bear Stearns downgraded it from "peer perform" to "under perform."
Pfizer (PFE) next in volume, number two, down $0.31.
Lucent Technologies (LU) dropped a dime.
General Electric (GE) a $0.34 loss.
Nokia (NOK) fifth in big board volume was down $0.04.
Texas Instruments (TXN) lost $0.72.
Motorola (MOT) $0.62 drop.
Time Warner (TWX) lost $0.07.
ExxonMobil (XOM) $0.24 loss.
And then Advanced Micro Devices (AMD) moving up $0.30, traded as high as $18.45 after Morgan Stanley upgraded it from "equal weight" to "over weight" and also boosted its price target to $25 a share. We had two new public offerings today, Valor Communications (VCG) which is involved in telecom services, 29.4 million shares offered to the public at 15, opened at $15.55. The high of the day was $15.70.
And then a familiar name FTD Group (FTD), this is the flower and gift company, 13.1 million shares offered at $13, opened at $13.90 and that was the high of the day.
American International Group (AIG), big insurance company, up $1.58. Fourth quarter earnings $1.15, up from $1.03 last year and that does include the losses linked to the tsunami disaster. So those results were quite impressive.
CIGNA (CI), another big insurance company, up $1.43. Fourth quarter earnings jumped to $2.41, up from $1.49 a year ago, $0.80 above the Street estimate and that exclude profits from the sale of the company's retirement benefits business.
Computer Sciences (CSC) fell $2.52. Third quarter earnings were higher, $0.82 versus $0.68, but Standard & Poor's downgraded the stock from "strong buy" to just a "buy" today. That hurt it a little bit.
Playboy Enterprises (PLA) moving up $0.74 traded as high as $14.35. Fourth quarter earnings for Playboy, $0.43 versus a loss of $0.26 a share last year. Standard & Poor's today issued a "buy" recommendation on Playboy stock.
Timberland Company (TBL), well known for its boots, up $5.12. Fourth quarter earnings $1.29, nicely higher than $1.10 a year ago and the company is predicting double digit earnings and revenue growth in 2005.
Star Gas Partners (SGU), a huge loss, down $2.40, a 35 percent drop. The company had a first quarter operating loss of $2.07 a share, versus earnings of $0.12 last year. As the problem, the company cited a rise in heating oil prices which hurt its profit margins and also caused it to lose a number of customers.
NASDAQ 100 (QQQQ) down $0.63.
And then Google (GOOG) down $7.06. Citadel Investment Group cut its stake in Google from 6.6 to 4.6 percent.
Cisco Systems (CSCO) $0.61 drop.
Microsoft (MSFT) $0.17 loss.
But eBay (EBAY) moved up $0.46.
Apple Computer (AAPL) down $2.16.
Intel (INTC) an $0.11 drop.
Applied Materials (AMAT) was off $0.36.
And then a major loser, Synaptics (SYNA) tumbling $7.43. Bear Stearns earlier this week expressed concern that Apple Computer is developing its own interfaces in house and Synaptics got a lot of business from Apple.
Yahoo! (YHOO) was down $0.77 a share, tenth in volume.
And then Inspire Pharmaceuticals (ISPH) plunging $7.12, 44 1/2 percent drop. The company said its late stage trials of its dry eye treatment were disappointing and it will continue to hurt profits until the year 2007.
And those are the stocks in the news tonight. Susie.
GHARIB: Thanks Paul. Five former Bank of America employees were charged with mutual fund trading abuses today. It's the final step in the bank's previous settlement of similar charges with the Securities and Exchange Commission. Bank of America will pay $500 billion in fines for market timing trades. In today's charges, three of the five former employees have agreed to pay fines for making improper transactions. The other two are apparently going to fight the accusations.
KANGAS: Tomorrow, our home economist's take on the rising costs of healthcare.
GHARIB: American makers of movies, music and software are asking the government to stop their products from being pirated in China. The U.S. firms say that they're losing over $2.5 billion a year to Chinese piracy. Today they asked the U.S. trade representative's office to launch a legal action against China at the World Trade Organization. The companies say 90 percent of U.S. movies, music and software sold in China is counterfeit.
KANGAS: Wal-Mart is closing a store in Canada, just as that store's workers were on the verge of unionizing. Wal-Mart Canada says union negotiators made unreasonable demands, which would have made the store unprofitable and inefficient. The 190 workers will get severance pay after the May shutdown, but they won't get other jobs. Wal-Mart Canada has never closed a store without relocating it since entering that country in 1994.
GHARIB: Here's a now look at what's happening for tomorrow. Weekly jobless claims and the December trade deficit numbers come out. Also tomorrow, Treasury Secretary John Snow testifies in front of the Senate Budget panel. As for earnings, Aetna, Dell, May department stores, Pixar, and XM Satellite Radio are expected to report.
In the money file tonight, just 65 days to go until your Federal income tax return forms are due to the IRS. But what if you didn't have to file those forms? What if the tax system were overhauled to make things simpler and easier? Here's Terry Savage, author of "The Savage Truth on Money."
TERRY SAVAGE, AUTHOR, "THE SAVAGE TRUTH ON MONEY": It's tax season and once again, the nation emits a collective groan. Even Form 1040a, known as the short form, comes with 64 pages of instructions. The IRS code and regulations now total more than 11 million words and cost Americans some $225 billion a year to comply. There must be an easier way. In fact, there are two possible solutions competing for attention, if only Congress would consider them. The first is the flat tax -- an optional 20 percent flat tax with nothing but a personal deduction for yourself and your children. You could choose to stick with the current system and its cherished deductions, whichever gives you the lowest bill. Opponents argue that a 20 percent flat rate is too high and much too easy for the government to increase once deductions disappear. Instead they propose a national sales tax -- the fair tax, they call it-- instead of an income tax. This sales tax of about 23 percent would be levied on all goods and services sold at retail. Those at the poverty level would get an advance rebate. Proponents say the national sales tax would cause prices to fall once the hidden costs of the income tax disappear and they predict the economy would boom. Retirees worry about being taxed again as they spend their savings. Obviously, no one tax proposal can please everyone, but I think the real reason we won't get tax reform is that the current complicated system of dealing out tax favors has one very powerful group in its corner: Congress. I'm Terry Savage.
KANGAS: Recapping today's market action, technology stocks lead the markets lower. The Dow falls 60 1/2 points, the NASDAQ falls 34 points. To learn more about the stories in tonight's broadcast, go to nbr.com.
GHARIB: And that's NIGHTLY BUSINESS REPORT for Wednesday, February 9. I'm Susie Gharib. Good night everyone. Good night to you, Paul.
KANGAS: Good night, Susie. I'm Paul Kangas wishing all of you the best of good buys.
