Professional Documents
Culture Documents
Case:TheMergerofHewlett
PackardandCompaq
(A) Strategyand
valuation
AsaShareholderinHP,Wouldyou
VoteyourSharesinFavoroftheDeal?
WhatistheEfficiencyofHPBoard?
Boardfailedtoidentifythestrategicthreatsastheywere
emerging Nowreactingtocompetitorsthreat
Strategicdilemma:doingthedealandnotdoingthedeal
areriskyalternatives outcomeofboardsdelayedaction
HPboardhadachancetoconfrontthestrategicissuesatthe
timeitappointedFiorina
AnnualPretaxCostSavingsasaResultof
ProposedMerger
Administrative/IT costs
$625 million
Cost-of-goods-sold benefits
$600 million
Sales-management benefits
$475 million
$250 million
Marketing efficiencies
$125 million
Compaq
LeadersinPCs
Intelservers&storage
Faulttolerantcomputing
Strengths
Highperformancecomputing
Globalreach
Establisheddirectsales
capabilityinresponsetoDell
Continuedcostcutting
Opportunities
Directsales movinginright
direction
Enterpriseconsultingand
financialservices
WeakpositioninUnixmarket
WantstobemorelikeIBMbut
forcedtocompetewithDell
Majorityofsalesarenot
directandthusCPQisunable
tomatchDellscoststructure
inPCs
Commoditizationofcore
computingbusinesses
Competitionand
fragmentationofhigher
marginservicebusiness
Weaknesses
Threats
HP
Imaging
Strengths
Brandandchannelclout
owingtodominantimaging
business
PCsandInterservers:trapped
betweenDellonthelowend
andIBM/Sunonthehighend
Cyclicalproofimaging
suppliesbusinessesprovide
annuitylikehighmargin
revenuestreams
HighcostsandlowR&D
productivity
SecondonlytoSununUNIX
marketshare
Opportunities
Nodirectdistribution
Lackofbreadthandscalein
service
Directdistribution
Continuedcompetitionform
lowprice/qualitycompetitors
Costcuttingandrealignment
ofR&D
Maturationofcorporate
printingmarket
Lessmatureinternational
printermarkets
Uncertaingrowthprospects
forUnixmarketontheheels
ofdotcombustandongoing
telecomcontraction
Commercialprintingsystem
Weaknesses
Threats
ContestbyWalterHewlett
AgainsttheMerger
Credibilityof
mergersynergies
Strategicrationale
forthedeal
Impactofspecific
dealterms
Meaningof
mergerofequals
WhataretheChallengesinthisDeal?
Layoff
Expectedintegrationacross
160countriesinvolving
150,000people
Highendtonowlowend
customers
Innovationtocommodity
typebusiness
ChangeinHPway
Lowmargin,lowjobsecurity
business
Compaqhasstruggledfor
yearswithlayoffsandpoor
performance wouldsend
themoodofemployeesof
boththecompaniesfurther
south
IsitReallyaMergerofEquals?
Management/CEO
HP
CEO = Fiorina
14/20 senior executives
6 = HP
unknown
64%
shared
HP brand retained
Board composition
Compensation
Share of ownership
Layoffs
Brands
Form of transaction
Corporate name name = Hewlett-Packard
Headquarters location
HQ = Palo Alto
Compaq
COO = Capellas
6/20 senior executives
5 = CPQ
unknown
36%
shared
Compaq brand retained
Tax-deferred, all stock
SocialTermsandtheMergerofEquals
Comparativelylowacquisitionpremiumshouldbeviewedaspartof
thelargerdealstructure,billedasamergerofequals
Almostallwillvoteforthedeal
MostlikelyitwastosavefacefortheCompaqmanagementteam
andtopreserveforthemapartialplaceatthetableinmanagingthe
newfirm
Challenges
Challengesof
integratingglobal
operations
International
natureof
business
Executionof
distribution
model
Development
andtransitionof
newProductMix
Challenges
Exposureto
increased
competitive
pressures
Weakeconomy
mayinhibitmerger
atcriticalstage
Currentandfuture
weakeningof
creditrating
Customer/Market
Uncertainties
Regulatory
approval/
restrictions
FixedRatioof
0.635
Challenges
Competition AsHPand
Compaqsmoothouttheir
merger,theindustry and
theircompetitors moveon
tobiggerandbetterthings
Blendingin Themerged
companyneedstobea
hybridenterprise
Convincingcustomers
Customerswantaclear
migrationpath,especial
withregardstodiscontinued
offerings
Meshingcultures HP:
deliberative,thorough
decisionmakingCompaq:
fastdecisionmakingand
marketingCompetition
WhatshouldbeCommunication
StrategiesofHP?
Demonstratethe
ValueofActing
Now
Ensuringeffective
corporate
communications
Identificationof
keystakeholder
groups
ReducetheCostof
Action
Showcasethe
RisksofWaiting
StakeholderRelatedFailureFactorsin
thisDeal
Failuretosecurethegoodwill
ofarangeofstakeholder
groupscommontoboth
companies.(shareholdersvs.
otherstakeholders,e.g.
regulatorybodies)
Tofocusonthecorporate
objectivesisdifficultifpeople
areworriedabouttheirown
position
Unavoidablebecausethereis
necessarilysomeuncertainty
aboutthefinalshapeofthe
organization
SuggestedCommunicationinaM&A
Process
Identificationof
keystakeholder
groups
Formsandchannelsavailableforcommunicating
Reactionsneedtobetrackedthroughoutthemergerprocess.
Developinga
unifiedcorporate
identity
Throughdetailedanalysisoftheinternalenvironmentsofbothcompaniesanda
consciousdecisiontobuildonthestrengthsofeach.
Ensuringeffective
corporate
communications
Monitoringtheresults
Identifyingtheemergenceofpotentiallydamagingissues
Monitoringperceptionspre,during,andpostmerger
Revealingconflictingmessagesemanatingfromthetwocompanies
Evaluatingthefinancialbenefitsanddrawbacksofthemerger
WhataretheStakeholdersReactions
ExpectedinthisDeal?
Customerdissatisfaction
Employersattritionissues
Impactontheindividualor
groupworkingincompany
&onworkculture
SeparationAnxiety
Differencesin
compensationpackages
anddesignation
Egoclashesbetweenthe
topmanagement
Companywiderumors
Employeesloosefaithin
theirorganizationandtend
tobecomedemotivated
WhataretheStakeholdersReactions
ExpectedinthisDeal?
Stresslevelexperiencedby
theCEOsoftentravels
throughthechainof
command,affecting
subordinatesaswell
ProcessofM&Ahasagreat
impactontheworkculture
duringthosedealprocess
daysasitdisturbswhole
organizationofthecompany
Fearoftransferand
retrenchment
Lossofpositioninthe
hierarchicallevel
Stepchildtreatmentfor
targetemployees
Eachcompanyhasitsownset
ofvalueswhichmayconflict
withthoseofacquired
company
Lossofidentity,Lackof
information&anxiety,Talent
islost,Familyrepercussions
ManagingReactions!
Organizationmusteffectively
developandimplement
assistanceprogramfordisplaced
employees
Communicationfromthe
executiveteamwithemployeesin
thepreacquisitionphaseneeds
tobeconsistentsothatanxiety
levelsamongthepersonnelcan
bekeptatlowlevel
Needfordevelopingand
executingeffectiveemployee
communication,particularly
conveyingtheemployeesthat
howthetransactionwillimpact
organizationalmembers
Communicationbetweenthe
membersoftransferorand
transfereeCompanyshouldbe
open,honestandstrategic
W
A
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T
E
R
A
N
D
F
A
M
I
L
Y
C
A
R
L
Y
A
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D
H
P
TradingHistoryofCompaqandHPStock(in$)
(surroundingSept4,2001,AnnouncementDate)
8/27/2001
HWP
Closing
Price
25.02
8/28/2001
24.61
1.6
13.32
0.4
15.57
16.86%
8/29/2001
23.95
2.7
13.13
1.4
15.15
15.37%
8/30/2001
23.4
2.3
12.69
3.4
14.80
16.63%
8/31/2001
23.21
0.8
12.35
2.7
14.68
18.87%
9/4/2001
18.87
18.7
11.08
10.3
11.94
7.72%
9/5/2001
18.21
3.5
10.41
6.0
11.52
10.64%
9/6/2001
17.7
2.8
10.35
0.6
11.20
8.17%
9/7/2001
18.08
2.1
10.59
2.3
11.44
7.98%
9/10/2001
17.89
1.1
10.35
2.3
11.32
9.33%
9/17/2001
16.02
10.5
8.75
15.5
10.13
15.80%
Date
HWP
CPQ
CPQ
Percentage Closing Percentage
Change
Price
Change
0.4
13.27
2.8
Implied
CPQ
Price
15.83
Implied
Premium
for CPQ
19.26%
FinancialInformationonPeers
(DataPresentedat2001YearEnd)
Company Name
SIC
Sales
Sales 3-yr
CAGR
(in $000)
(% )
Gross
Profit
Margin
(%)
EBIT
Margin
(% )
(% )
Est. 2002
EPS
Growth*
(% )
P/E
Beta
D/E
ROA
ROE
ROI
(% )
(% )
(% )
3571
5,363
3.4
24.9
6.2
5,441
39.8
nm
nm
1.31
0.08
0.6
0.9
0.9
3576
22,293
38.1
55
0.1
140,671
70.6
46.0
nm
1.82
2.9
3.7
3.7
3571
33,554
2.5
25.3
1.4
16,592
34.6
94.0
nm
1.49
0.05
2.4
5.1
4.8
Dell Inc
3571
31,168
19.5
18.4
7.3
71,666
5.2
23.0
57.3
2.21
0.11
9.2
26.5
23.9
7373
37,646
4.6
34.2
1.5
15,183
42.2
nm
nm
1.12
1.33
8.3
44.8
17.4
Gateway Inc
3571
5,938
7.4
21.1
3.5
2,605
55.3
nm
nm
2.04
33.9
74.1
57.5
Hewlett-Packard Co
3570
45,226
1.3
28.6
4.5
32,651
63.3
52.6
1.48
0.27
1.9
4.5
3.5
3570
60,104
3.0
29.3
1.5
24,550
15.4
nm
nm
1.15
0.78
4.9
21.0
9.9
IBM Corp
7371
85,866
1.7
41.9
10.8
208,371
43
2.0
25.8
1.24
0.68
8.7
32.7
19.5
3571
38,354
1.7
27.6
1.3
13,830
46.8
nm
nm
1.69
2.83
6.2
54.8
13.5
3571
1,854
15.7
41
16.7
272
62.9
nm
nm
0.98
nm
38.5
nm
186.9
3571
18,250
23.1
51.9
10.1
51,197
65.4
nm
52.4
1.82
0.14
5.4
9.3
8.1
Unisys Corp
7373
6,018
5.8
30
4.5
4,002
14.3
54.0
nm
1.2
0.35
0.9
2.4
1.7
30,126
3.2
33
0.6
45,156
35.6
35.8
47
1.5
0.55
5.6
11.2
18.6
Averages
InformationonRecentComputerRelatedTransactions
(CompletedTransactions;Acquisitionof100%Interest)
Ann Date
Target Name
Acquirer Name
Compaq Computer
$9,063
0.69
34.67
15.45
Ascend Comm.
$970
$835
1.2
9.97
Eltrax Systems
$71
$71
1.22
Quantum Corp
$94
$93
RadiSys Corp
$120
S3 Inc
na
na
na
None
Cash, Stock
5.08
10.9 19.1
53.3
33.4
None
Stock
nm
26.16
nm 159.6
149.6
260.5
None
Stock
5.08
nm
nm
nm 168.9
189.6
213.8
None
Stock
$120
1.44
37.63
24.68
34.38 68.7
66.6
75.5 Lockup
Stock
$183
$183
0.32
nm
nm
nm 13.9
21.6
4.5
None
Stock
$809
$811
1.02
nm
166.5
nm
3.3
6.7
52.4
None
Cash
7/27/1999 Mylex
IBM Corp
$261
$258
1.77
nm
nm
nm
20
17.8
108.7
None
Cash
EMC Corp
$1,410
$1,409
0.97
186.2
13.68
74.8 72.8
63.5
31.1 Lockup
Stock
Computer Sciences
$401
$396
0.87
18.51
13.93
Symbol Technologies
$571
$571
1.57
nm
Motorola Inc
$120
$119
3.24
$890
$660
$6,336
32.99
30.18
6.9
24.6
None
Stock
nm
2.21 27.9
40
32.1
None
Stock
33.19
25.42
30.63 2.2
4.2
12.4 Lockup
Stock
1.37
8.74
6.21
20.25
43
40.6
40.9
None
Stock
$4,812
0.55
20.88
11.18
48.17 19.6
27.8
44.5
None
Stock, Liabs
Sanmina Corp
Hewlett-Packard
$25,263
$25,175
0.62
13.51
7.66
nm
18.9
10.2
2.0
None
Stock
Mentor Graphics
$115
$116
1.91
nm
nm
nm
36.7
46.7
111.5
None
Cash
Averages
$2,921
$2,793
1.49
40.36
28.72
31.61 43.3
49.3
67.9
$3,022
$2,886
1.52
22.14
30.23
26.21 41.2
48.2
70.6
InformationonRecentJumboDeals
(TransactionValue>$25Billion)
Deal Multiples
Target
Name
Ann Date
Acquirer Name
Trans
Value
Equity
Value*
(%)
Equity Value
Equity Value / Equity Value
4 wks Defensive
Equity Value / EBIT
1 day prior 1 wk prior
/ Net Sales
Target Cash Flow
/ Net Inc
prior Tactics
($mil)
($mil)
WorldCom
$41,907
$37,407
2.45
4/6/1998
Citicorp
33.46
13.17
68.26
102.99
100.99 94.29
Consideration
O ffered
None
Stock, Liabs
Stock
T ravelers Group
$72,558
$72,185
2.03
12.4
10.91
19.72
7.9
10.4
19
None
4/13/1998 BankAmerica
NationsBank
$61,633
$61,415
2.54
11.38
9.8
18.81
0.3
2.8
None
Stock
BANC ONE
$29,616
$29,421
2.86
12.96
np
19.26
26.5
38
34.1
Lockup
Stock
5/7/1998
Daimler-Benz AG
$40,466
$40,467
0.65
7.26
4.89
14.31
48.8
54.3
45.7
None
SBC Communications
$62,593
$62,554
3.84
16.5
9.83
27.78
np
np
np
None
Stock
6/24/1998 T ele-Communications
AT &T
$53,592
$60,192
7.9
196.07
30.55
Nm
np
np
np
None
Stock, Other
7/28/1998 GT E
Bell Atlantic
$53,415
$53,451
2.19
10.95
6.11
23.52
2.7
2.7
4.9
Lockup
Stock
8/11/1998 Amoco
British Petroleum Co
$48,174
$47,902
1.4
14.57
8.16
22.84
np
np
np
Lockup
12/1/1998 Mobil
Exxon Corp
Chrysler
5/11/1998 Ameritech
ARCO
$78,946
$78,907
1.25
4.82
np
27.31
26.3
34.7
32.2
Lockup
Stock
$60,287
$60,212
12.9
65.45
34.77
89.74
40.6
50.2
71.5
None
Cash, Ord Sh
BP Amoco
$27,224
$27,224
2.52
nm
107.61
nm
27.2
29.9
54.4
None
AT &T Corp
$49,279
$44,768
15.53
nm
47.48
31.31
12.1
13
22.8
None
6/14/1999 US WEST
$56,307
$46,298
3.69
15.3
8.74
31.47
32.5
50.1
49.8
None
Stock, Liabs
9/7/1999
CBS
Viacom Inc
$39,434
$39,434
5.78
62.5
31.88
579.92
0.1
8.5
None
Stock T ype B
11/4/1999 Warner-Lambert
Pfizer Inc
$89,168
$99,710
7.71
38.61
33.86
57.53
25.3
29.7
40.8
None
Stock
Monsanto
$26,486
$26,521
3.7
31.02
np
37.3
1.1
5.5 13.5
Lockup
Stock
America Online
$164,746 $164,800
6.03
27.31
15.18
84.08
70.9
55.8
70.2
None
Stock
5/2/2000
Unilever PLC
$20,895
2.41
15.44
12.95
28.51
42.3
35.7
53.3
None
Cash
Bestfoods
$25,065
JDS Uniphase
$41,144
$35,172
188.09
1056.21
781.6
1395.71
77.2
68.6 106.3
None
Stock
Deutsche T elekom AG
$29,404
$29,104
12.14
nm
nm
nm
25.4
20.3 20.2
None
Citigroup
$30,957
$30,938
2.36
4.85
4.78
20.57
50.8
52.8
45.6
None
9/6/2000
Chase Manhattan
$33,555
$33,716
1.72
10.48
7.45
15.9
14.7
21.5
32.4
Lockup
Stock
10/16/2000 T exaco
Chevron
$42,872
$35,993
0.78
10.25
6.92
15.55
17.7
22.6
17.5
None
Stock
Hewlett-Packard
$25,263
$25,175
0.62
13.51
7.66
nm
18.9
10.2
2.0
None
Stock
$51,364
$50,555
11.72
75.97
56.87
125.21
27.88
29.71 34.57
$51,790
$51,195
4.38
25.63
17.19
51.4
22.34
24.37 27.26
9/4/2001
Compaq Computer
CompaqTriangulationDiagram
Net Sales Mult
DCF
Valuation Method
High
Low
Difference
$50.30
$16.80
$33.50
DCF (Stand-alone)
$20.80
$15.90
$4.90
$31.80
$7.30
$24.50
$21.10
$20.40
$0.70
$34.10
$20.40
$13.60
HewlettPackardTriangulationDiagram
Net Sales Mult
EBIT Mult
DCF
ValuationMethod
NetSalesMultiple(0.5to1.5)
DCF(Standalone)
EBITMultiple(9xto40x)
CashFlowMultiple(6to26)
LatestMkt.Price($22.00to$23/share)
LTMMkt.Price($22to$31/share)
High
$67.50
$42.50
$46.70
$46.20
$44.60
$60.20
Low
Difference
$22.50
$45.00
$34.10
$8.40
$10.50
$36.20
$10.70
$35.50
$42.70
$1.90
$42.70
$17.50
MonthlyStockPrices
Price
Beta
Price
Beta
Ratio of
CPQ to
HWP
Price
Price
Beta
Price
Beta
Ratio of
CPQ to
HWP
Price
Sep-98
31.63
na
26.47
na
1.19
Oct-98
31.63
na
30.13
na
1.05
Sep-00
27.58
1.04
48.50
1.21
0.57
Oct-00
30.41
1.05
46.50
1.24
0.65
Nov-98
32.50
1.07
31.28
1.34
1.04
Nov-00
21.50
1.25
31.63
1.44
0.68
Dec-98
42.00
1.15
34.16
1.35
1.23
Dec-00
15.05
1.28
31.56
1.44
0.48
Jan-99
47.63
1.15
39.19
1.36
1.22
1-Jan
23.71
1.37
36.85
1.46
0.64
Feb-99
35.38
1.36
33.22
1.47
1.06
1-Feb
20.20
1.40
28.85
1.53
0.70
Mar-99
31.69
1.35
33.91
1.45
0.93
1-Mar
18.20
1.40
31.27
1.43
0.58
Apr-99
22.31
1.29
39.44
1.47
0.57
1-Apr
17.50
1.33
28.43
1.34
0.62
May-99
23.69
1.25
47.16
1.35
0.50
1-May
15.99
1.33
29.32
1.34
0.55
Jun-99
23.69
1.15
50.25
1.34
0.47
1-Jun
15.32
1.34
28.60
1.33
0.54
Jul-99
24.06
1.13
52.34
1.30
0.46
1-Jul
14.94
1.40
24.66
1.33
0.61
Aug-99
23.16
1.12
52.69
1.28
0.44
1-Aug
12.35
1.45
23.21
1.32
0.53
Sep-99
22.88
1.06
45.38
1.33
0.50
1-Sep
8.31
1.55
16.05
1.41
0.52
Oct-99
19.13
0.95
37.09
1.21
0.52
1-Oct
8.75
1.54
16.83
1.43
0.52
Nov-99
24.44
0.95
47.44
1.23
0.52
1-Nov
10.15
1.55
21.99
1.47
0.46
Dec-99
27.06
0.97
56.88
1.28
0.48
1-Dec
9.76
1.55
20.54
1.46
0.48
Jan-00
27.25
0.94
54.13
1.28
0.50
2-Jan
12.35
1.48
22.11
1.46
0.56
Feb-00
25.13
0.98
67.25
1.16
0.37
High
47.63
1.55
67.50
1.53
1.23
Mar-00
27.00
0.96
66.44
1.06
0.41
Average
23.60
1.20
39.92
1.32
0.62
Apr-00
29.19
0.91
67.50
1.04
0.43
Low
8.31
0.90
16.05
1.04
0.37
May-00
26.25
0.95
60.09
1.08
0.44
Volatility
18.30%
Jun-00
25.56
0.94
62.44
1.08
0.41
Jul-00
28.06
0.90
54.59
1.11
0.51
Aug-00
34.06
0.94
60.38
1.13
0.56
CPQ
HWP
CPQ
HWP
15.40%
0.6325
DCFValuationofMergerSynergies
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ApplicationofLeadershiptotheM&A
Process