HP's Fierce Face-Off

To find out how that equation works, you have to get inside the Carly Fiorina mindset. Enter her well-appointed corner cubicle, and she will tell you about how successful companies have to accelerate change and embrace risk--something she says she learned as a sales manager at the once great and now battered Lucent. "If two years from now we want 10% growth," she says, "we have to keep moving into new categories."

The one category Fiorina keeps hammering away at is services, a catchall name for the lucrative fixing-up, installing and consulting contracts that midsize businesses across America, overwhelmed by the demands of new technologies, are increasingly willing to pay for. One way to get more service business is to buy a consulting firm like PricewaterhouseCoopers, which Fiorina tried but failed to acquire in 2000. But there is another way. Call it the Gillette strategy. Just as that company virtually gives away razors to make a killing on blades, HP could opt to gather more strength in the PC and low-end server businesses in order to sell more service contracts as part of the package. "I certainly don't see PCs as white elephants," she says. "Getting on the desktop brings you a lot of opportunity."

Hewlett, on the other hand, has his elephant gun aimed squarely at those big beige bundles of Intel chips and Microsoft software. It doesn't make sense to him--or to some industry analysts--to spend so much money on other people's technology, especially now that Dell seems to have the PC direct-sales market sewn up. "Strapping together boxes and selling them is not an area where HP is doing well," Hewlett points out. "Why get further into that business?"

A far brighter path, Hewlett says, would be to spend a few billion growing HP's most profitable division, the one that makes printers and digital cameras. There's an alternative Gillette strategy: seed the exploding digital-camera market now; cash in on lucrative printing services later. Think of all those PowerPoint presentations and full-color reports that companies across the country are sending to Kinko's right now. That, argues Hewlett, should be HP's turf. "Our printing business alone is worth more than our current stock price," he says.

Printing and imaging have long been the jewels in HP's crown, and Fiorina bristles at the suggestion that HP doesn't innovate enough (indeed, the company recently introduced the first photo printer that prints directly from a digital camera's storage card). She slams Hewlett's alternative as a waste of opportunity. Roughly 25% of the profit a combined HP-Compaq would make, in the best-case scenario, would come from printing and imaging. "It would be an easy course if we were focused on the short term," she says. "We're looking 10 years ahead."

Of course, that sidesteps the question of whether HP and Compaq can successfully merge without leaving the floor slick with blood. Most large-scale tech-firm mergers have been hideous disasters. Compaq's last acquisition, the Digital Equipment Corp., was a textbook example of how not to do it. Good products died, top talent fled and resentment lingered for years after management cut 15,000 jobs. Now HP plans, upon the merger, to lay off 15,000; it also hopes for cost savings of $2.5 billion. A team of 500 is working full time on integrating the companies, though most of what they have done so far is talk about culture clash--how HP's engineers try to solve a problem by discussing it while Compaq managers prefer to impose a solution from above. "We're the cultural astronauts," says Webb McKinney, head of the integration team. He had better hope they are not brought back to Earth too quickly.

Is this the HP way? Certainly Bill and Dave would have balked at laying off 15,000. In 1970 they chose cutting work hours 10% over firing 10% of the company. On the other hand, Fiorina's gamble on greater growth is about as gutsy as their decision to build an oscillator in their garage back in 1939. "I respect her for being aggressive," says Craig Barrett, CEO of Intel, HP's largest vendor. "And I'd label her a work in progress." This is what the HP story has that Enron's doesn't: a heroine in transition and a $25 billion cliffhanger.