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Quebec HPQ Merger. (2001) PDF
Quebec HPQ Merger. (2001) PDF
Executive Summary.
The worlds largest corporate Information Technology merger began in September 2001 when HP announced that they would acquire Compaq in an all
stock purchase valued at $25 billion. Over an 8 month period ending in May 2002, the merger passed shareholder and regulatory approval with the end result
being one company. The new HP has annual sales of approximately $90 billion which is comparable to IBM, and an operating incom e of almost $4 billion.
The merger was led by Carly Fiorina, the chairwoman and CEO of HP. The president of the new HP was Michael Capellas who was the former chairman and
CEO of the old HP and who has recently resigned and is now the CEO of World Com.
Overall, many analysts were critical of the merger from the beginning since both Compaq and HP were struggling companies before the merger. The
common question that has been raised by analysts is: Do two struggling companies make a better merged company? Some analysts have indicated that the
merger is a gamble and that it is difficult to see any focussed logic behind the merge considering that most I.T acquisitions are not successful. Prior to the
merger, Compaq has been unable to grow despite previously buying Digital, while HP was trying to grow internally, without much success. Both companies
were still adjusting to acquisitions they have made in the past and both were adjusting to new leadership (Fiorina and Capellas). The merger deal also means
that there are many overlaps in products, technologies, distribution channels, services, facilities and jobs. Employee morale is a threat to a successful merger as
there has been numerous layoffs -15,000 employees. The claimed annual cost savings of about $2.5 billion dollars by the year 2004 amounts to only 3 % of
the combined costs of both companies. Gartner Group research has indicated that the merged company has failed to do a good enough job of presenting the
benefits of an acquisition of this scale to justify the deals risk as it is generally known that technology mergers rarely work. In addition, both companies in the
past have struggled to resolve conflicts between direct and indirect sales channels. The cultural background of both companies is quite different and integration
will take a long time. The culture at HP is based on consensus, Compaqs culture on the other hand is based on rapid decision making.
From a positive perspective, most botched tech mergers involved companies that were trying to buy their way into new businesses they knew little about,
this is not the case with the HP/Compaq merger. Apart from servers and PCs, they have several areas where their products overla p. e.g: they are both are
involved in making data -storage equipment and both make hand held computing devices. In addition, both companies also bring different strengths to the
table. Compaq has done a better job in regard to engineering an entire line and HP has been strong in consumer products. The justification provided by HP
senior management suggests that a merger will enable them to com pete with two of their biggest competitors, IBM and Dell.
In conclusion, it is viewed by many analysts that there will be at least 2 more years of bitter infighting which will cause the new HP to lose direction and
good personnel. This is great news for competitors such as IBM and Sun as both of them will be able to pick off the market while the new HP is distracted by
the merger. The new HP may be a threat to IBM but not anytime soon. It could take several years to determine if the largest merger in I.T history will be a
success or a complete flop.
Presentation Outline
n
PRE MERGE
n
n
MERGE
n
HP
Compaq
HP+COMPAQ
POST MERGE
n
Presented by:
Leo B.
Hugo P.
Hongqi H.
NEW HP
Pre-merge
Compaq: in The Life Cycle
Intro
Growth
Maturity
Decline
Pre-merge
Compaq: Products
n
Pre-merge
Compaq: BCG Matrix
Pocket Computers
On-line storage
and IT services
Storage
Servers
PC s :
Laptops
Desktop
Pre-merge
Compaq: Competitors
n
IBM
n
Sun Microystems
n
PCs
HP
n
Servers
Dell
n
Palm
n
Pocket computers
6
Pre-merge
Hewlett-Packard
Known as a box vendor, a one-stop shop
for business applications:
n Unix servers
n E-commerce application software
n Hosted services
n Network management
n Integration services
n PCs, printers, ink cartridges
7
Pre-merge
HP : Competitors
n
IBM
- Servers, PCs, storage and IT services
Dell
- PCs
Canon
- Printers, fax, copiers, optical equipment
Compaq
- Pcs, Servers, Pocket computers
8
Pre-merge
HP : Organization Life Cycle
Intro
Growth
Maturity
Decline
Pre-merge
HP : BCG Matrix
Pocket
Computer
Servers
PCs
Computer repair
Printer supplies
- ink cartridges
- photo paper
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10
Pre-merge
HP : Leadership - Fiorina
Categories
Grade
STRATEGY
EXECUTION
CULTURE
C+
ORGANIZATION D
INNOVATION
B+
DEAL-MAKING
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STRATEGY
For decades, HP was a collection of independent businesses, each selling a
particular kind of product. Fiorina was hired to execute an "e-services"
strategy that would meld these pieces into one powerful, profitable whole. HP
could sell everything from handheld gizmos to back-office servers, with the
high- margin software and consulting to make it all work.
Grade: B
The "e-services" plan looks good on paper and may be the right long-term path
for the company. But so far, HP is as dependent as ever on its last remaining
gold mine: the $20 billion printing business, which has subsidized losses at the
rest of the $48 billion company for the past three quarters, say analysts.
EXECUTION
When Fiorina arrived, HP was two companies: a world-class maker of printers
and imaging gear and a mediocre computer company. She set out to pump up
sales and profits in the ailing computer business by becoming stronger in
software, storage, and consulting.
Grade: C
HP is still the same two companies. While it remains the king of printers, the
economic downturn has hurt efforts to improve profits in the computer
business. It has gained market share in Unix servers, but there has been
negligible progress in storage and software. Also, consulting remains small
compared with rivals.
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Merger
HP and Compaq
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n
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Merger
HPQ : Pros and Cons
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The Positives:
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n
n
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COST SAVINGS
FINANCIAL BULK
CROSS-SELLING & TECHNOLOGY
BUYING POWER INCREASING
The Negatives:
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n
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EXECUTION CHALLENGES
PCs BUSINESS OVERLAPING
COMPETITIVE POSITION
MORALE
Business Week Magazine
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Merger
HPQ : Objectives
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n
n
n
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Post-merger
Opportunities
Threats
Economic downturn
Organizational
Employee morale
Confront
Exploit
Innovation
market share
Avoid
Search
Overlapping
management
Integration
Customer loyalty
Culture conflict
cost savings
Stable growth
Strengths
Overlapping
product lines
Weaknesses
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Post-merger
HPQ : PRODUCT LINES & COMPETITORS
PRODUCTS
PCs (-)
PRINTERS (+)
LOW-END SERVERS
HIGH-END SERVERS (-)
LOW LEVEL SERVICES
STORAGE (+)
SOFTWARE (-)
MAIN
MARKET
COMPETITORS
SHARE (%)
19%
15%
37%
LAG
62%
LEAD
LAG
DELL ( + )
CANON, LEXMARK
IBM (+)
IBM (+), SUN
IBM (HIGH LEVEL)
EMC, SONY
MS, CA, IBM
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The new HP will feature Compaq's corporate PCs, low-end servers, and its
iPAQ handhelds, along with HP printers and UNIX servers. Consumer PCs
from both sides will also remain, though HP's business PCs and Jornada
handhelds will not.
Fiorina: We'll continue to organically grow, particularly the outsourcing and
consulting ends of the business. We'll be looking for strategic opportunities for
acquisition.
Capellas: We believe we can be brutally competitive in the individual product
segments. But we can also integrate hardware and software into solutions.
The company must cut costs to the bone to beat Dell in PCs while pouring
money into research and development and consulting to take on IBM and
others on the high end
Although HP enjoys the biggest share of the PC market now, the combined
company's share is expected to remain flat, while Dell grows 30% a year.
Sensing a possible vulnerability as HP merges with Compaq, Dell recently
reached an agreement with Lexmark International to have printers and ink
cartridges manufactured under the Dell name.
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Post-merger
HPQ : PRODUCTS GROWTH
45
MARKET SHARE /
RANK
40
35
INDUSTRYWIDE
ANNUAL GROWTH
RATE
30
25
15
INDUSTRYWIDE
GROSS PROFIT
MARGINS
10
HP/COMPAQ
20
5
0
PRINTERS
PCS
SERVERS
STORAGE
SERVICES
17
Post-merger
HPQ: Product Life Cycle
pcs
Printers
Storage
s erver
Service
software
Notebook
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FOR PCs:
HP needs flawless execution and cost-cutting--especially with more- focused
rivals such as Dell and Sun fighting for every deal in this down economy
cost leadership
Capellas: First and foremost you've got services growth, the fastest-growing
segment of the whole IT market. Managed services and outsourcing is growing
fastest. The customer service side is growing slower but is very profitable.
A more focused HP might also make more of its franchise printer operation.
HP has built a thriving business in photo printers and all- in-one printer-copierfax gizmos. These categories brought in 32% of HP's $5 billion in printer sales
in its most recent quarter. Since photos require more ink than plain documents,
the photo printers drive sales of highly profitable ink cartridges.
And while PC sales help the top line, profits from the printer-supplies unit
held up the bottom line.
HP develops and markets products in a broad range of printing and imaging
categories. We lead the market in inkjet printers, all- in-one devices, laser
printers, wide- format plotters, scanners, print servers and ink.
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Post-merger
HPQ : BCG Matrix
High
Software
Notebook
Servers
Low
Service
PCs
Low
Storage
Image
printer
High
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Post-merger
HPQ : Directional Policy Matrix
Diversification
Market Segmentation
Market leadership
innovation
High
Capability
PCs
Maintenance
of
Phased withdrawal;
Position;
merger
Server
Market penetration
printer
Expansion, Productt
Differentiation
Storage
Divest
Low
Notebook
Cash Generation
Imitation;
Service
phased withdrawal
Unattractive
Average
Attractive
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Post-merger
HPQ : Financial Ratio Profile
Profitability
Low
Industry standard
High
Very tight
Industry standard
High Debts
Industry standard
No Debt
Too slow
Industry standard
Too fast
Liquidity
Leverage
Activity
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HPQ
Industry Average
Profitability:
Gross Margin:
Gross Margin 5 yr. Avg.
26.36
28.82
31.33
EBITD 5 yr.Avg.
Operating Margin
5 Yr. Avg.
10.73
7.73
Pre-Tax Margin
5 yr. Avg.
29.87
13.12
9.14
8.07
10.13
5.98
7.04
23.42
29.49
0.91
1.01
Current Ratio:
1.33
Leverage:
LT Debt to Equity:
1.46
0.18
0.45
0.23
Activity:
Receivable Turnover:
7.39
Inventory Turnover:
7.36
Asset Turnover:
1.43
0.63
7.07
32.84
1.32
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Post-merger
HPQ : SPACE CHART
Company Financial Strength
Conservative in
storage market
Company
Competitive
Advantage
HPQ
Industry
Strength
New HP competitive in
server market
Environmental
Stability
22
22
Post-merger
HPQ: Organization Life Cycle
Performance
Maturity
Decline
HP
Development
Introduction
Even though both HP and Compaq were mature companies before the merge,
it can be considered that the merged company is under redevelopment/restructuring, as a result the company has lost some ground as a
Mature company.
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Post-merger
HP: CHALLENGES
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CHOOSING PRODUCTS
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n
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Cut $3b
Keep revenues from shrinking more than
5%
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Workers from HP and Compaq have spent more than 1 million hours planning
their merger. Here's how they're doing.
Their merger faces huge challenges. One top problem may be morale.
The new HP will feature Compaq's corporate PCs, low-end servers, and its
iPAQ handhelds, along with HP printers and UNIX servers. Consumer PCs
from both sides will also remain, though HP's business PCs and Jornada
handhelds will not.
Most of the $2.5 billion in reduced costs will come from eliminating
overlapping corporate functions, from legal and marketing to human resources
and sales management.
The team's biggest task: finding financial synergies. It has been dispatched to
hit two targets: $2.5 billion in cost savings by 2004 and keeping revenues from
shrinking more than 5%, as rivals swoop in to grab customers.
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Post-merger
HPQ : ETOP Profile
Factors
Impact Importance Threat
Economic
8
9
72
Political
6
4
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Social
8
8
96
Tech.
10
9
90
Competitive
9
9
81
Geographic
2
2
4
Total
367
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Enviromental Threat and Opportunity profile (ETOP) for the new HP/Compaq
identifies a very high score of 367. This scoring is based on of the 3
individuals drafting this case study. The Threat value is based on the product
of Impact X Importance. The high score is due primarily to the merger of both
companies. There are political issues arising due to the agressiveness of the
merger. The Social threat is rated high due to an employee morale issue within
the company due to the number of layoffs that have occurred. The Competitive
nature of the hi-tech industry and technological changes also strongly impact
the new HP.
As indicated in this ETOP, the new HP is critically vunerable due to
Economic, Social, Technological and Competitive threats.
25
Post-merger
HPQ : Strategic Profile Design Factors
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Post-merger
HPQ : Strategic Profile Design Factors cont
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Post-merger
Conclusion - HP Strategy
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Capellas: There is very clearly a balance between innovation and being first
to market on one hand, and pure, raw, low cost on the other hand. If you don't
spend any money in R&D you will by definition have a couple of points on the
bottom line, but you'll also never lead in any new product categories, so you
won't get the margins there.-Fiorina: People are declaring the PC business dead because it has had a
couple of rough quarters. That's incredibly shortsighted. It's clear that this is a
critical part of the ability for consumers to do interesting things in their homes.
But the reason for buying isn't going to be to get the hottest box at the lowest
price. You've got things like digital imaging, digital music. It's something that
does something for a consumer. This is what the industry is missing. It's
innovation. That's what Dell can't do.
Compaq has compelling offerings for home/wireless networking and HP has
strength in digital imaging solutions. Maintaining both brands will enable HP
to leverage existing brand awareness and preferences and give customers the
opportunity to continue to buy the brand and products that best meet their
needs.
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