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Capellas steps down at HP

Hewlett-Packard President Michael Capellas leaves to pursue other career opportunities--possibly at WorldCom.

Hewlett-Packard President Michael Capellas is leaving to "pursue other career opportunities," the company said Monday.

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Capellas has had "late stage" talks in recent weeks with WorldCom to take over as CEO, according to sources familiar with HP. Capellas will also leave the board of directors, said HP.

In a statement, HP Chief Executive Carly Fiorina said that Capellas had "reached a natural transition point" with the company, which he joined when HP swallowed Compaq Computer earlier this year. Capellas had been CEO at Compaq.

"Michael made a commitment to see the merger through, and now thanks to the hard work of the entire team, we are meeting or exceeding all of our integration targets," said Fiorina.

"I fully support this decision and appreciate the dedication and passion he brought to our joint endeavor," said Fiorina.

HP said that it won't hire another president. The operating executives of the company who previously reported to Capellas will now report directly to Fiorina.

Steven Milunovich, an analyst with Merrill Lynch, said that Capellas' departure would not help HP. "Although Capellas has not had a contract at HP, we hoped he would stay a couple years," said Milunovich in a research note.

HP shares fell on the news, down $1.83, or more than 10 percent, to $14.85. It was the most actively traded stock on the New York Stock Exchange.

Analysts were mixed about HP's plans not to fill the president's office with someone new. Fiorina may have to find a replacement for Capellas to help oversee operations, Milunovich said.

"Investors may doubt that CEO Carly Fiorina can handle such a big job herself," said Milunovich.

Martin Reynolds, an analyst with Gartner, said Fiorina could be stretched too thin. "It's too big a company for one person to hold all of those positions," he said.

"We felt Capellas was one of the great strengths of the deal," said Reynolds. "With his operational leadership skills we thought he'd be able to make this work. Now, obviously, we have some concerns."

Once a CEO, always a CEO
Sources familiar with Capellas' status at HP said that he had been dissatisfied at the tech giant.

Capellas was "not happy in his current role at HP," said one person familiar with the situation. "He wasn't being utilized."

The former Compaq chief started to entertain offers as early as last summer, just a few weeks after the close of Compaq's merger with HP, the person said. HP recently started its first full fiscal year as a combined entity with Compaq.

On the surface, Capellas' dissatisfaction seems to be a reversal. Just four or five months ago, Capellas was excited about the integration of Compaq and HP, leading some at HP to believe the president's position was providing a lot of job satisfaction.

Capellas, along with Fiorina, also stumped to push through the HP-Compaq merger, which was marred by a bitter proxy fight.

In recent months, however, it became clear Capellas missed being a CEO. Capellas has never been shy to express his desire--privately and publicly--to be a CEO of a company once again.

"When the merger was done, (HP) had hoped Michael would find the president's role a rewarding one. But he has said many times, publicly too, once a CEO, always a CEO," said a source. "It's not a surprise he is leaving."

Although there was speculation that Capellas could take over for Fiorina, sources said a switch wasn't likely.

"The question of him replacing Carly is just ridiculous," said the source, noting HP's board backs Fiorina. "What was required of Michael was to adapt from being in a No. 1 position to being in a No. 2 position at a much larger company. Clearly, Michael couldn't find satisfaction in that transition."

Although Capellas had talked of looking for a house in the San Francisco Bay Area, an HP employee noted that he never bought one. Instead, he was living in a house rented by HP on a short-term lease. Sources close to the company said Capellas had been looking for other jobs for some time.

By leaving during the first year after the merger's close, Capellas can collect on substantial payments under the terms of his employment agreement, which was amended by Compaq's board after the merger plans were announced but before the deal closed.

As part of that contract, he will receive three times his base salary of $1.6 million and three times his target bonus of $3.2 million. He also gets seven months' worth of bonus for the current year, amounting to more than $16.2 million in payouts. Capellas will have to repay with interest a $2.5 million loan, but not an earlier $5 million loan that was forgiven by Compaq prior to the merger's close, according to an HP employee familiar with the matter.

A source familiar with the situation said that HP had been planning to announce Capellas' departure later this week, but moved up the announcement after it was reported that Capellas was a candidate for the WorldCom job.

WorldCom or bust?
One of the opportunities that may await Capellas is the CEO slot at downtrodden telecom company WorldCom. He is the front-runner to replace departing WorldCom Chief Executive John Sidgmore, but no deal has been finalized, according to sources.

A WorldCom representative declined to comment. A source close to WorldCom could neither confirm nor deny that Capellas was a CEO candidate.

Citing sources close to the matter, the The Wall Street Journal reported that WorldCom's board is enthusiastic about Capellas, but that the company also has had serious discussions with XO Communications CEO Dan Akerson and BellSouth Vice Chairman Gary Forsee. There is a fourth, unidentified candidate, the paper said.

"In recent weeks, he's discussed taking a CEO position with WorldCom," said a source familiar with HP. "My understanding is that things were in the late stage of negotiations with the company."

WorldCom is on the hunt for a CEO to turn around the company, which is mired in a $9 billion accounting scandal, a Chapter 11 bankruptcy reorganization and a Securities and Exchange Commission probe. Former CEO Bernie Ebbers resigned in April, and WorldCom restated its results amid uncovered accounting fraud a few weeks later. In June, WorldCom fired Chief Financial Officer Scott Sullivan.

Last week, WorldCom said it expected to restate more earnings results.

With expectations of emerging from bankruptcy in mid-2003, WorldCom would be looking for a fresh start. Capellas could be a good fit since he helped stabilize Compaq before its merger with HP. In the tech industry, Capellas is known to have a strong focus on operations and customer relations.

Despite its troubles, WorldCom, which carries a commanding portion of Internet traffic through its UUNet division, still has strong assets and customer numbers. "Restatements of past accounting have no impact on its ability to continue to provide service to its customers," WorldCom said in a statement last week.

What is uncertain is whether WorldCom can meet Capellas' asking price. Any CEO compensation package would have to be approved by a bankruptcy court.'s Ian Fried, Dawn Kawamoto and John Spooner contributed to this report.