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Investors Wary of HP's Strategy in Acquisitions


PALO ALTO — Hewlett-Packard Co. is facing the first rumblings of investor dissent against Chief Executive Carly Fiorina.

The No. 2 computer maker said last month that it is in talks to buy the consulting business of PricewaterhouseCoopers for $17 billion to $18 billion. Investors have grown increasingly jittery about the possibility and say it would be the wrong move.

Fiorina has held the top job for more than a year and won accolades for reinvigorating Hewlett-Packard's sales force, overseeing the spinoff of the test-and-measurement unit and coordinating work between divisions. With all that done, investors said that she hasn't set a clear agenda for the future, and that if step one is this acquisition, Fiorina could stumble.

"I like her and she's done a pretty good job, but this may be her Waterloo," said Jerry Dodson, manager of the Parnassus Equity Income Fund, which owns 75,000 Hewlett-Packard shares. "If she does this, I think she'll regret it."

The move would mark the company's first major purchase since Fiorina was hired in July 1999, and some investors said there's just a 50-50 shot an agreement will be reached.

Hewlett-Packard shares have lost 28% of their value since the talks were confirmed Sept. 11, partly on concern that demand for personal computers has slowed. On Wednesday, the stock fell $2.06 to close at $44.44 on the New York Stock Exchange.

Fiorina wants to better compete with rivals such as IBM Corp. by providing more software and services to potential buyers of its computer systems. That may boost equipment sales and accelerate revenue growth.

As corporations expand their use of the Internet, demand has mushroomed for experts who understand Web sites, software integration, server computers and data storage. Buying the Pricewaterhouse unit would also give the company management consultants, broadening its services beyond most competitors.

Since joining the company, the former Lucent Technologies Inc. executive has aimed to round out its offerings. Hewlett-Packard this month agreed to buy Bluestone Software Inc. to get programs that help companies make better use of the Web, and said it would build its software unit around the purchase.

Consulting revenue rose 46% in Hewlett-Packard's fiscal third quarter, and the computer maker hired 600 new consultants during the period. Fiorina has said quickening growth means using purchases.

"The best way to accelerate our growth is through the acquisition of a premier consultancy," Fiorina said during a speech at a conference in San Francisco recently.

Spokeswoman Suzette Stephens declined to comment on the investor concerns, citing legal restrictions.

Successfully pulling off any merger is tricky business. Integrating new people, products and services into a different corporate culture presents a number of challenges that some companies don't recover from, and the hefty price tags can crimp profit for months.

Investors would rather see Fiorina focus on cutting costs, introducing products and better server computers to compete with rival Sun Microsystems Inc. and keeping the company's lead in printers--not spending time integrating a huge purchase.

"Buying a consulting firm--I don't know if that is the best use of their resources at this point," said Brian Eisenbarth, an analyst with Collins & Co., which owns 57,000 Hewlett-Packard shares.

Hewlett-Packard would have more success buying a software package that performs a key need and then throwing some marketing might behind it, as IBM did with Lotus Notes, investors said.

"Her strategy is a little unclear," said Trusco Capital Management analyst Christian Koch. "She needed to restructure the company; she's obviously executed on that. Now the question is: What's the next step to get growth going? That's a tall order."

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