Correction to This Article
A Sept. 22 Business article about Hewlett-Packard Co. incorrectly described the company's deal with the U.S. Army. Hewlett-Packard won a portion of a 10-year, $5 billion multi-vendor contract to provide the U.S. Army with computers, scanners and printers.
HP Stock Falters In Spying Scandal
Investors React to CEO's Link in Case

By Yuki Noguchi and Brooke A. Masters
Washington Post Staff Writers
Friday, September 22, 2006

The scandal over Hewlett-Packard Co.'s conduct in investigating press leaks started affecting its business yesterday for the first time, weighing down its stock price and raising questions about the future of its leadership.

Shares of the printing and computing company dropped 5 percent, the first major price dip since the company revealed early this month that it had obtained personal phone records of its board members and nine journalists under false pretenses. HP shares, which had been trading near a 52-week high of $37.25, dropped $1.91 to close at $34.87.

The decline came on the same day as a newspaper report that HP's president and chief executive, Mark V. Hurd, had personally approved an elaborate plan to trick a reporter into identifying her sources by sending her false information. That e-mail "sting" operation, reported by The Washington Post, was part of a broader leak probe that involved physical surveillance, false documents and electronic bugs, all in an attempt to flush out who on its board spoke with reporters.

Hurd yesterday offered to join HP Chairman Patricia C. Dunn and several others who are scheduled to testify next week at a House Energy and Commerce Committee hearing about the scandal. HP also disclosed in a filing that the Securities and Exchange Commission's enforcement division requested documents relating to its leak investigations and to the May resignation of a board member.

Separate probes by the California state attorney general, the Federal Bureau of Investigation and the Justice Department also are under way. New details are dribbling out almost daily about HP's spying efforts, which began early in 2005 after company leaders resolved to identify which board members were leaking confidential information to reporters.

Meanwhile, HP's board of directors met yesterday and Hurd plans to hold a news conference this afternoon.

"This has nothing to do with the strategy or operations of HP," Hurd said in a statement "What began as an effort to prevent the leaks of confidential information from HP's boardroom ended up heading in directions that were never anticipated."

But yesterday, investors who previously shrugged off disclosures of the company's spying activity reacted unhappily to the report that Hurd had approved an e-mail sting. The operation involved sending an e-mail embedded with software to trace where the reporter subsequently sent the message.

Hurd was brought in last year to help HP recover from the stormy tenure of his predecessor, Carleton "Carly" Fiorina. He is widely seen as crucial to the firm's future.

"Hurd is the guy driving the turnaround at HP, and it's not done yet," technology industry analyst Rob Enderle said. "This is pulling him away from managing the business and it's going to have an impact," which could cause a slowdown in the company's operations by next year, he added.

Research analysts at most of the major investment banks have so far shied away from trying to quantify the impact of the spying imbroglio on HP's bottom line. But there are contracts HP would not want to jeopardize because of any criminal investigations. Earlier this week, HP beat out some of its computing rivals by winning a $5 billion, 10-year deal with the U.S. Army to provide computers, printers, displays and scanners.

Analyst Roger Kay, president of research firm Endpoint Technologies Associates Inc., said the scandal was not likely to affect the company's sales. "You don't look at an HP server or laptop as a lesser product because the CEO ordered a sting operation," he said.

But Robert Passikoff, president of research consulting firm Brandkeys Inc., disagreed. His firm's surveys show that HP has lost 14 percent of what is known as "brand strength," a measure of consumer sentiment for a brand name, since the scandal began and has dropped from third place in its sector to seventh. While the allegations do not appear to affect how consumers think about the technical aspects of HP products, they have pushed down its reputation for openness, honesty and trustworthiness, Passikoff said.

The allegations dovetail with consumer fears about spyware and privacy loss in an information age, he said, noting that people are asking, "If they are doing that there, what are they doing to me?"

Until corporate spying became an issue for HP, the company stood to benefit from recent missteps by rivals Apple Computer Inc. and Dell Corp., which recently recalled millions of laptop computer batteries because of overheating. "People will reserve judgment on the company for a few weeks, but if there isn't a big change, with someone of high credibility brought in, it's going to start to affect business," said Paul Argenti, a professor of corporate communication at the Tuck School of Business at Dartmouth. "When a breach in ethics happens in a senior group of managers, it calls into question the management of the company."

"It takes years and years to build up a reputation and a few weeks to lose it. They're doing a very good job of losing it right now," Argenti said.

Although it remains unclear whether HP executives or its outside investigators violated laws, some analysts said the prospect of criminal charges against either the firm or its executives and directors could seriously tarnish the company.

"If it were simply a civil matter, it would be easier to solve," said Howard Rubenstein, founder of New York public-relations firm Rubenstein Associates. But in this case, where California officials are talking about criminal wrongdoing, "they've got to be cautious that they don't convict themselves out of their own mouths."

Staff writers Mike Musgrove and Ellen Nakashima contributed to this report.

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