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An Analytical Study of Merger: HP and Compaq
A Project Report Submitted to Utkal University in the Partial Fulfillment of Degree of Master of Finance & Control.
(2009 – 11)
Submitted by Dillip Khuntia
Roll No. – 33706V093011
3370V093021 Roll No. – 3370V093021
Under the Guidance of
Prof. Samson Moharana
Director, MFC, P.G. Department of Commerce Utkal University
MASTER OF FINANCE & CONTROL
P.G. DEPARTMENT OF COMMERCE
UTKAL UNIVERSITY BHUBANESWAR
WE do hereby declare that the project entitled “An Compaq” Analytical Study of Merger: HP and Compaq” is submitted to Utkal University for the partial fulfillment of degree of Control, Master of Finance and Control Utkal University. The project is an authentic piece of work done by us under the guidance of Prof. Samson Moharana, Director, MFC, P.G. Prof. Moharana Department of Commerce, Utkal University and it has neither been neither submitted for award of any other degree to any other University, Academy, Institution nor published in any magazine or anywhere else in part or full to best of our knowledge.
PLACE: BHUBANESWAR DATE:
KHUNTIA) (DILLIP KHUNTIA)
PATTNAIK) (DIANA PATTNAIK)
The satisfaction that accompanies the successful completion of any task would be incomplete without mentioning people who made it possible, whose encouragement and consistent guidance crowned my efforts with success. We would like to express our heartfelt indebtedness and deep sense of gratitude to our faculty guide Prof. Samson Moharana, Director, Control, Master of Finance & Control, for sharing his knowledge and giving us guidance and generous co-operation. We are also thankful to our other faculty members and our friends for their continuous support and encouragement.
PLACE: BHUBANESWAR DATE:
KHUNTIA) (DILLIP KHUNTIA)
PATTNAIK) (DIANA PATTNAIK)
The project has reached the standard of fulfilling the requirements of the regulation relating to the degree of Master of Finance and Control. PLACE: BHUBANESWAR DATE: Moharana) (Prof. Prof.Prof. Dept. Samson Moharana Director. P. Samson Moharana) Prof.G. Department of Commerce Utkal University Certificate This to certify that the project entitled “An Analytical Compaq” Study of Merger: HP and Compaq” is a record of bonafide research work carried out by Dillip Khuntia and Diana Pattnaik under my supervision and guidance. No part of this project has been submitted to any other institution for the award of any other degree. It embodies result of their original contribution. I wish them all success in their future endeavours.G. . MFC P. of Commerce Utkal University.
The cultural background of both companies is quite different and integration will take a long time. facilities and jobs. the merger passed shareholder and regulatory approval with the end result being one company.5 billion dollars by the year 2004 amounts to only 3 % of the combined costs of both companies. the chairwoman and CEO of HP. while HP was trying to grow internally. Apart from servers and PC’s. Both companies were still adjusting to acquisitions they have made in the past and both were adjusting to new leadership (Fiorina and Capellas).T acquisitions are not successful. Employee morale is a threat to a successful merger as there has been numerous layoffs -15. this is not the case with the HP/Compaq merger. Compaq has been unable to grow despite previously buying Digital. and an operating income of almost $4 billion. both companies in the past have struggled to resolve conflicts between direct and indirect sales channels. The merger deal also means that there are many overlaps in products. most botched tech mergers involved companies that were trying to buy their way into new businesses they knew little about. 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 deal’s risk as it is generally known that technology mergers rarely work. they have several areas where their . Compaq’s culture on the other hand is based on rapid decision making. The merger was led by Carly Fiorina.EXECUTIVE SUMMERY The world’s 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. services. distribution channels. The claimed annual cost savings of about $2. The new HP has annual sales of approximately $90 billion which is comparable to IBM. From a positive perspective. Overall. technologies. In addition. Over an 8 month period ending in May 2002.000 employees. Prior to 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 focused logic behind the merge considering that most I. without much success. 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. many analysts were critical of the merger from the beginning since both Compaq and HP were struggling companies before the merger. The culture at HP is based on consensus.
products overlap. it is observed that.g: they are both are involved in making data -storage equipment and both make hand held computing devices. . e. The justification provided by HP senior management suggests that a merger will enable them to compete with two of their biggest competitors. In conclusion. both companies also bring different strengths to the table. In addition. Compaq has done a better job in regard to engineering an entire line and HP has been strong in consumer products. the merger initially was opposed by many but with the strong determination of Fiorina it was finalized and this merger may seems that it is a wrong move but the results were favorable. Today HP after merging with Compaq which was one of its the strongest competitor is now leading the industry. IBM and Dell.
3 Target Valuation 4.1Merger and Acquisition 2.3 Recent Trend in Merger and Acquisition CHAPTER THREE: THE INDUSTRY AND COMPANY PROFILE 3.4 Limitation 1.5Chapterisation CHAPTER TWO: MERGER AND ACQUISITION 2.3 The Company Profile CHAPTER FOUR: MERGER OF HP AND COMPAQ 4.1 The Industry Profile 3.1 Rationale of Merger 4.2 The Indian Scenario 3.1 Introduction 1.3 Research Methodology 1.2 Objective 1.4 Due Diligence 18 20 22 26 14 14 15 5 5 9 2 2 2 3 3 i ii iii iv .CONTENT Declaration Acknowledgement Certificate Executive Summery CHAPTER ONE: INTRODUCTION 1.2 Rationale of Merger and Acquisition 2.2 Target Selection 4.
2 Does the Merger Make Economic Sense 6.8 Conclusion BIBLIOGRAPHY 33 33 33 34 35 37 37 38 39 29 30 .1 Does the Merger Make Business Sense 6.1 Problems during Merger 5.6 Interpretation 6.2 Post-Merger Integration CHAPTER SIX: EVALUATION OF MERGER 6.7 Lesson from the Case 6.3 Advantage of Merger 6.4 Opposition to the Merger 6.5 HP Today 6.CHAPTER FIVE: PROBLEMS AND POST-MERGER INTEGRATION 5.
To evaluate the merger of HP with Compaq. the organization that understands its core values is much more likely to reach the kind of growth and success that nearly all businesses seek. and eliminate inefficiency. the following are laid down as the objective of this study I. build on complementary strengths. or “M&A” as they are known in the trade. The vast majority of these efforts are driven by business factors. Mergers and acquisitions. But because they involve human beings.1 INTRODUCTION From the smallest businesses to the world’s largest corporate titans.1. 1. The due diligence of the merger is also taken into consideration for this project. they have the potential to grow markets. For valuation purpose some of the data are collected from . serve as a prime example of how intangible aspects such as corporate culture can hold sway over billions of dollars and thousands of careers. the search for synergy often leads people to seek new markets and new partners. When done well. II. The various problems faced by both the companies are also taken into preview for this project. it is impossible to predict their success on a balance sheet solely through tangible factors such as infrastructure. they succeed or fail more often because of cultural factors than for any other reason. To study the rationale of mergers.2 OBJECTIVE On the above premise. As a result. 1.3 RESEARCH METHODOLOGY The scope this project is confined to the study of the merger of HP with Compaq and evaluation of its success. The data used in this project is secondary in nature and consist of various articles published in various journals and newspapers. What ultimately matters in an acquisition is what happens in the hearts and minds of the people who remain with the new organization and what culture these formerly distinct entities choose to build while moving forward. but according to numerous experts. This also includes the study of the pre-merger and post-merger integration and due diligence involved therein. the annual reports of both the entities and data collected from various website in internet. or market share. head count.
The rationale of merger and acquisition and the recent trend in mergers and acquisition are laid down here. The information collected is limited by the authenticity and accuracy of the information as these are mostly collected from secondary source. where rationale of merger between HP and Compaq.various sites of the stock exchanges like the web site of Bombay Stock Exchange Limited and National Stock Exchange Limited. The case is discussed in chapter four. 2. Chapter two deals with the conceptual study of merger and acquisition.5 CHAPTERISATION The project is about the analysis and evaluation of merger between HP and Compaq. objectives and research methodology adopted. . 1. 1. 1. Chapter one deals with the introduction to the project report. The time of study is very short. target selection and valuation is discussed. Chapter three deals with the industry profile and company profile of both the companies HP and Compaq. The limitation to the study is also laid down. The chapters describing various facet of this case are. The ultimate chapter deals with the evaluation of the merger. The data collected from the websites are limited and certain information is not available in the website which is essential for this project. starting with importance. lesson from the case and conclusion. The next chapter explains the problems during the merger and post merger integration.4 LIMITATION Some of the limitations that are faced during this study are.
Merger & Acquisition .
The following motives are considered to improve financial performance: 2.1. 2.2 RATIONALE OF MERGER AND ACQUISITION The dominant rationale used to explain M&A activity is that acquiring firms seek improved financial performance. This theory expects that there is really "something out there which creates the merged entity to maximize the shareholders value".2. A combination of firms with different cash flow positions and investment scenario may produce the synergic effect and achieve lower cost of capital. synergy is the ability of a merged company to create more shareholders value than standalone entity. the combined debt capacity of the combined firm may be greater than the individual firms. . If the cash flows of the two entities are not perfectly correlated. the financial synergy can be expected thus reducing risk.1 MERGER AND ACQUISITION In the simplest way. It occurs as a result of the lower cost of internal financing versus external. Merger can be defined as how a "Marriage" is whereas an Acquisition can be referred to as an "Adoption" of a child. SYNERGY Synergic effect occurs when two substances or factors combine to produce a greater effect together than the sum of those together operating independently. there is tendency to relocate the capital to the acquired firm and the investment opportunity of the latter increases. would lead the suppliers to trust the firm. or help a growing company in a given industry grow rapidly without having to create another business entity. The perceived reduction of the instability of the cash flow. corporate finance and management dealing with the buying. To put in other words. FINANCIAL SYNERGY The resultant feature of corporate merger or acquisition on the cost of capital of the combined or acquiring firm is called as financial synergy. selling and combining of different companies that can aid. finance.2. The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate strategy. It means when the rate of cash flow of the acquirer firm is greater than that of the acquired firm.
Synergy takes the form of revenue enhancement and cost reduction. administrative. GROWTH Increasing a company's growth is the most common reason behind merger. When two companies in the same industry merge. .2. the combined revenue tends to decline to the extent. they have opened the possibilities of actively promoting universal banking. 57. 2. Second.000 tones and will have 27 manufacturing facilities worldwide. With this acquisition. so that the initial lost value is recovered in due course through synergy. particularly when it comes to sales and marketing.1% controlling stake in the Singapore-based Berger International Ltd for a consideration of Rs.2. The merger of ICICI with ICICI Bank and the reverse merger of IDBI Bank with IDBI served multiple objectives. and/or research and development costs. In September 2002. this goal is typically achieved through economies of scale. As for revenue synergies. For the merger to benefit the shareholders there must be ample opportunities for the cost reduction. the institutions were strengthened financially. Empirical studies show that the faster growth rates are achieved through external growth by means of mergers and acquisitions. higher prices due to less competition.6 crore. First. Growth can be achieved through investing in capital projects internally or externally by buying out the assets of outside companies. Asian Paints India Ltd. The primary reason for the merger was to enter into the South-East Asian market that BIL offered. Speaking of cutting down costs. or staking a larger market share. the activities of the individual firms are insufficient to exploit these. they overlap with one another and some of the customers may also become alienated. Asian paints would have a combined capacity of about 100. these are achieved through product crossselling. they helped to avoid the complex processes of restructuring the weaker of the units and to foster financial stability. Finally.OPERATING SYNERGY Economies of scale and economies of scope exist in the industry and before the merger. announced its decision to acquire 50. operating.
Vertical mergers can enable a company to capture sources of supplies. whenever a merger is proposed. overcoming entry barriers and improving market share. There are three sources by which market power can be achieved. MARKET POWER One of the main motives of a merger is to increase the share of a firm in the market. Hence comparison between their efficiencies versus their effects of increased concentration must be made. Consequently. CORPORATE TAX SAVINGS Although tax savings may not be a primary motivation for a combination. the regulatory agencies may conclude that a merger is likely to be anti-competitive. For example. 2. One important reason that companies combine is to eliminate competition. Even if the merger is not for the stated purpose of eliminating competition. hence the firm gets an opportunity to set prices at levels that are not sustainable in a more competitive market. It reduces competition. Note that horizontal mergers are not the only type of mergers that can yield more market power.2. for example. Acquiring a competitor is an excellent way to improve a firm's position in the marketplace. It means to increase the size of the firm and also leading to the monopoly power. It is of great concern to the government because it might lead to concentration or monopoly. and is done to better serve the consumer. This is why industry regulators routinely limit and even disallow horizontal and vertical mergers if there is even a hint of too much market power concentrating in the hands of only a few companies. Canadian National's attempt to merge with Burlington Northern Santa Fe was blocked because of concerns that the combination would prompt a series of mergers and acquisitions whose net effect would be to leave the continent with only two transcontinental railroads. it can sweeten the deal. Unfortunately. combining for this purpose is per se illegal under the antitrust acts as a predatory practice in restraint of trade.3. it is generally not acceptable to state this as the purpose of such activity. a major part of the resulting press release often deals with how this combination of firms is not anti-competitive. They are product differentiation. When a purchase of either the assets or common stock of a company takes .4. and allows the acquiring firm to use the target's resources and expertise.2. Although eliminating competition may result in merger and acquisition activity. that are of paramount importance to its competitors.2. Horizontal mergers take place with a motive to attain market power.
D. This is a very common reason for acquisitions. or they may be intangible resources such as trade secrets. the target firm's shareholders will usually experience a taxable gain. Canadian National purchased Wisconsin Central to enter the U. Closely related to these issues are product line issues.place. etc. For example. However. These resources may be tangible resources such a plant and equipment. merger and acquisition activities of Nortek/Peachtree Companies are primarily product line related.6. This differs from goodwill in that goodwill is never tax deductible. Both firms and individuals purchase an asset for its utility. further tax savings may accrue to the owners of the target company. rail market.2. S. CSK Automotive purchased All-Car to have access to the Central Wisconsin automotive parts market. or a geographical region. the tender offer less the stock's purchase price represents a gain to the target company's shareholders. leases. 2.2. balance. 2. Consequently. MARKET/BUSINESS/PRODUCT LINE ISSUES Often mergers occur simply because one firm is in a market that another wants to enter. For example. All of the target firm's experience and resources (the employees' expertise. copyrights. Similarly. Sentry Insurance acquired John Deere Insurance Group to enter the market for insuring implement dealers. and transportation. . fill out or diversify its product lines. patents. a business line. . or they may be talents of the target company's employees. This difference can then be charged off to depreciation with resultant tax savings. business relationships. A firm may wish to expand. The acquiring company can write up the target company's assets by the amount that the market value exceeds the net book value of the target company's assets. Monsanto acquired G. the acquiring company may reap tax savings depending on the market value of the target company's assets when compared to the purchase price. Searle because Monsanto wanted to acquire the pharmaceuticals and consumer chemicals (Aspartame) businesses. market entry or expansion is a powerful reason for a merger.) are available by buying the targeted firm. etc. One reason given for the mergers in the petroleum industry is that companies wish to acquire the leases of their competitors. ACQUIRE NEEDED RESOURCES One firm may simply wish to purchase the resources of another firm or to combine the resources of the two firms.5. Depending on the method of corporate combination. Whether the market is a new product.
The other factors propelling this trend were the emphasis on short term earnings growth and the strict regulatory structure of public sector enterprises.1 GLOBAL MERGER AND ACQUISITION TRENDS FOR 2006 AND 2007 2007 and 2006 were marked by a spate of mergers and acquisitions all over the globe in both developing and developed countries. The real estate sector and the energy sector witnessed much of this type of activity. Private equity firms were working overnight for augmenting proprietary deal flows.2. DIVERSIFICATION Diversification is another frequently cited reason for mergers. When various economies are not correlated. Thus international mergers reduce systematic and unsystematic risk.3.7. . Actually. The explanation to this merger and acquisition trend as observed in 2006 and 2007 lay in the robust growth recorded by the Private Equity Funds. Brazil. and China. 2. International mergers provide diversification both geographically and also by product line.2 MORE ON PRIVATE EQUITY DRIVEN INTERNATIONAL MERGER AND ACQUISITION TRENDS Private equity transactions had been the buzzword for the world economy in 2007 and 2006. which catered to the public to private sector transition of companies. inherent in being dependent on a single economy. then the international mergers reduce the earning risk.3. there was a decline in the number of public sector undertakings along with a hike in the number of private sector enterprises.3 RECENT TREND IN MERGERS AND ACQUISITION 2. it was THE reason during the conglomerate merger wave. North America. This merger and acquisition trend towards increased privatization of public sector holdings was observed in Europe. This was due to the fact that many public sector organizations worldwide were either acquired by large private sector enterprises or merged with them. The idea was to circumvent regulatory restrictions on horizontal and vertical mergers by going outside a company's industry into new markets and to achieve growth there. The general trend was that. 2. Europe in that period hosted a strong investment market.2.
The observed trend was that a majority of the funds wanted to secure offshore partners for distribution. This was more than twice the comparable figure for 2005. For Europe the general prediction was that of a high transactional demand related to private equity analysts observed that certain European markets were characterized by different financial advantages and tax structures. This kind of cross-border transactions entailed a careful planning for tax obligations arising out of fund repatriation. and Europe as retail sector investments.3 MORE ON MERGER AND ACQUISITION TRENDS Global leveraged buyouts figures for 2006 were above US$ 800 billion. Equity investment in Brazil turned attractive with the program called Novo Mercado. Brazilian pension funds turned out to be a prime investment force. There the powerful trend towards mergers and acquisitions involving private equity dealings comprised a lot of policy and regional diversity. Israel. In the US. In particular Britain exhibited a strong market for public to private investments. contract manufacturing or joint ventures. This was primarily aimed at tapping China's heightened domestic consumer demand. Their bankruptcy code got a revision. However. Japan.3. As these types of funds usually possessed a time frame of 3 to 5 years for putting the new invested capital to work. . private equity funds succeeded in raising more than $200 billion in this period for international merger and acquisition dealings. Western European nations possessed well oiled legal machinery and conducive investment climates.China was a unique case in point. A great amount of equity capital flowed into China from US. In North America domestic dealings in M&A executed by private equity investors of USA displayed a robust international component. they were expected by the analysts to power heightened merger and acquisition activities across major global markets for the coming decade. even then it was not a significant component of twhe world equity and debt market. The elected government was supportive of a free market structure. Focus shifted to the northern and western regions of China as costs escalated for the commercial hubs alongside the eastern seacoast. 2. It constituted around 20 % of US international mergers and acquisitions.
Table – 2.In 2006 North America saw vigorous leveraged buyout activities.26 3958. of Deals 3 4 6 4 4 39 Value in USD million 22732. Evolution of total M&A deals by target region (2000-2006) 16000 EU (Deals) 14000 EU (Value) US (Deals) US (Value) Asia (Deals) Asia (Value) 1800 1600 12000 1400 10000 1200 2000 Number 8000 of deals 6000 Aggregate 1000 value of deals (€ billion) 800 600 4000 400 2000 200 0 2000 2001 2002 2003 2004 2005 2006 0 14 March 2008 WORKS workshop.29 2651.67 III. Europe witnessed a fairly heightened activity in the arena of leveraged buyouts.38 3.84 4. which amounted to half of the world activity in that field. and Germany were the biggest European buyout markets in 2006. Leuven 9 . Netherlands.54 1483.90 5.02 7.1 Mergers & Acquisition Deals in India for first financial quarter 2010 Sector Telecom Pharmaceutical BFSI Metal and Mining Energy Other sectors No. while Asia had a relatively slow increase.19 11.15 1320 1919.00 Share in per cent 67. France.
III. Worldwide M&A 45000 4500 40000 4000 35000 30000 Number of deals 3500 3000 25000 2500 20000 2000 15000 10000 1500 1000 5000 500 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 0 Number of deals Value in bn euro 14 March 2008 WORKS workshop. Leuven Value in billion euros 8 .
Industry Profile & Company Profile .
a profession versatile enough to adapt to new demands and stable enough to support new innovations and developments. support. 3 Indian software companies – TCS. IT Software Industries include IT Software. In IT-enabled services (ITES). IT professionals design. . IT Industries includes. 3. India has emerged as the most preferred destination for business process outsourcing (BPO). Infosys. New developments such as creating infrastructure for mobile technologies will continue to ensure the vitality and viability of the industry. From the exuberant growth of its early years to the uncertainty of recent times. India has built up valuable brand equity in the global markets. CSC consolidating their positions and the companies like Cognizant. Companies are focusing on organic as well as inorganic growth. IT includes IT and Telecommunication. IT Hardware and Software Industries. and manage computer software. develop. the IT industry is adapting to a changing market. and networks. Indian IT companies are prowling for potential acquisitions both in the domestic as well as foreign markets. While the wild optimism that surrounded the IT industry a few years back has been deflated.2 THE INDIA SCENARIO In information technology (IT). a key driver of growth for the software industry and the services sector.3. hardware. Wipro have all crossed the billion dollar mark. Patni doing brisk business. The IT industry is passing through a phase of mergers and consolidations in India largely in line with global trends. Accenture.1 THE INDUSTRY PROFILE Information technology (IT) is a broad field that covers all aspects of managing and processing information. And as the industry responds to new business needs. the IT industry has stabilized—with job growth rates now rising steadily—and continues to change in order to meet the needs of the business world. Competition in the Indian IT arena is increasing leaps and bounds with global giants like IBM. IT Services and IT enabled services. Kanbay. IT infrastructure means the physical Infrastructure build by a firm or a builder and sold to an IT Industries for its own use or the Infrastructure build by an IT Industry for its own use. it will continue to evolve into a mature profession.
1947. printer SWOT ANALYSIS OF HP Strengths: • • Server Compaq-Server category and overall storage HP-High-end storage .1 HEWLETT-PACKARD PACKARD Bill Hewlett and Dave Packard graduated in electrical engineering from Stanford University in 1935. and went public on November 6. Frederick Terman at Stanford during the Great Depression.3. The pace of growth knew no bounds as HP's net revenue went up to 42 billion dollars in 1997. The company is also known for the laser-printer which it introduced in the year 1985. Hewlett and Packard tossed a coin to decide w whether the company they founded would be called Hewlett Hewlett-Packard or Packard-Hewlett Packard Hewlett won the coin toss but named their electronics manufacturing enterprise the "Hewlett "Hewlett-Packard Company". Terman was considered a mentor to them in forming Hewlett .3 THE COMPANY PROFILE 3.3. Starting with manufacturing audio oscillators. HP incorporated on August 18. In 1939. the company made its first computer in the year 1966 and it was by 1972 that it introduced the concept of personal computing by a calculator first which was further calculator advanced into a personal computer in the year 1980. Hewlett-Packard. The company originated in a garage in nearby Palo Alto during a fellowship they had with a past professor. The company has been prospering ever since as its profits grew from five and half million dollars in 1951 to about 3 billion dollars in 1981. 1957. Packard and Hewlett established Hewlett Packard (HP) in Packard's garage with an Hewlett-Packard initial capital investment of US$538.
It had the charm of being called the largest manufacturers of personal computing devices worldwide. Dell and new entrants erode more market share 3. The company introduced its first computer in the year 1983 after at a price of 2995 dollars. three senior managers from semiconductor manufacturer Texas Instruments. House of Pies.• Strong brand recognition Weaknesses: • • • Developing a direct distribution model Consulting and outsourcing (low market share) Compaq-Printers (low market share) Opportunities: • • • • Merger could improve economics and innovation Economies of scale Strengthen leadership in storage Market growth in IT services Threats: • • Dell increases pressure in the low-end server market IBM.000 to form the company. The company was formed by two senior managers at Texas Instruments. Jim Harris and Bill Murto. The original Compaq PC was first sketched out on a placemat by the founders while dining in a local Houston restaurant. Each invested $1. The name of the company had come from-"Compatibility and Quality".3. Their first venture capital came from Ben Rosen and Sevin Rosen Funds.2 COMPAQ The company is better known as Compaq Computer Corporation. Compaq was founded in February 1982 by Rod Canion. In .
2001. 2002. the new ticker symbol became "HPQ". Nevertheless. HP became a major player in desktops.spite of being portable. Prior to this. The merger occurred after a proxy fight with Bill Hewlett's son Walter. Following this strategy. and Digital Equipment Corporation in 1998. after passing a shareholder vote. After the merger with Compaq. 3. HP officially merged with Compaq. and servers for many different markets.) . plans had been in place to consolidate the companies' product teams and product lines.4 HP AND COMPAQ On September 3. In May. the problem with the computer was that it seemed to be a suitcase. there were huge commercial benefits from the computer as it sold more than 53. a combination of the two previous symbols. HP announced that an agreement had been reached with Compaq to merge the two companies. "HWP" and "CPQ". who objected to the merger. to show the significance of the alliance and also key letters from the two companies Hewlett-Packard and Compaq (the latter company being famous for its "Q" logo on all of its products. Compaq itself had bought Tandem Computers in 1997 (which had been started by ex-HP employees).000 units in the first year with a revenue generation of 111 million dollars. laptops.
Merger Of HewlettHewlett-Packard With Compaq .
43 to 74. Her basic aim was to modernize the culture of operation of HP. HP was forced to cut down on jobs and also be eluded from the privilege of having Price Water House Cooper's to take care of its audit. She laid great emphasis on the profitable sides of the business. So. The reason for the same is the increment in the control of the market.1 RATIONALE OF MERGER Carly Fiorina. This meant that improvement in the internal strategies of the company was not going to be sufficient for the company's success.48 dollars. the company was still inefficient. A thorough situation scanning is significant before putting your feet in International arena. even the job of Fiorina was under threat. this truth would certainly make a lot of profits for the company in the future. Ultimately. so this merger certainly required a lot of thinking.4. it would be certain that the shareholders have a lot to gain from it. the merger can be considered to be an occasion to take a competitive advantage over its rivals like IBM as in this case and also be of some interest to the shareholders as well. In spite of the growth in the market value of HP's share from 54. Apart from these reasons there are other driving factors that contributed to this merger are described below. Here. Organizations merge with the international companies in order to set up their brands first and let people . Integration with a domestic company doesn't need much effort but when a company merges internationally as in this case. the company had to certainly plan out something different. had a key role to play in the merger that took place in 2001. it was decided that the company would be acquiring Compaq in a stock transaction whose net worth was 25 billion dollars. She was the first woman to have taken over as CEO of such a big company and the first outsider too. who became the CEO of HP in the year 1999. So. If one sees this merger from the eyes of Fiorina. This shows that she was very extravagant in her approach as a CEO. even of the conditions were not suitable from the financial perspective. a challenging task is on head. Two organizations get involved in mergers as they want to expand their market both on the domestic and the international level. This was because it could not meet the targets due to a failure of both company and industry. So. the competitor for HP was Compaq to a large degree. For HP.
one can also . When companies merge with another company.2 TARGET SELECTION 4. one can't deny the fact that even the top brains of Compaq would be taking part in forming the strategies of the company in the future. The only factor is that they would have to be controlled properly as they are of different organizational cultures.know about what they are capable of and also what they eye in the future. Here HP can use all such values integrated with Compaq so as to increase its prospects. capabilities would improve and so would the sales and also the company's strategic differentiation would be better than the existing competitors. Other than this. leadership qualities would improve. An improvised organization of monetary resources. Any company by acquiring another or by merging makes an attempt to add to its efficiencies by increasing the operations and also having control over it to the maximum extent. This could also be done partially. If HP feels that it would not need much of warehouse space it can sell the same at increased profits. It depends on whether the company would now be regarded a s a make to stock or a make to order company.2. This is the reason that after this merger the products of Compaq would also have the logo of HP. 4. many of the intellects come together and work towards a common mission to excel with financial profits to the company. When such companies merge. Once the market is well-known. The reason for the same was that now the value creation would be fresh. Here. then HP would not have to suffer the branding created by Compaq. Services get copyrights which enhances the level of trade. They would be able to draw all the customers of Compaq as well. We can see that HP would now have an increased set of employees. intellectual capital and raw materials offers a competitive advantage to the companies.1 UNIQUE OPPORTUNITY The position of the enterprise is bound to better with the merger. Additional Warehouse services and distribution channels offer business values. later they can put up for sale as per as the needs of the company.
Along with that the experience of leading a diversified employee structure would also be there. one could also see an opportunity in reinvesting.access the capabilities of Compaq directly hence reducing the cost structure in becoming the largest in the industry. the chances of value creation would also be huge.9 billion. Expectations From Merger Of HP And Compaq The merger of HP with Compaq will create superior customer value by expanding its product range and together HP and Compaq can focus on R & D in a greater extend.5 billion per .000 employees saving around $1. Adds up to world-class innovation and quality through the merger of two of the leading IT companies of the world.000 employees. Improves access to the market with Compaq’s direct capability and low cost structure.45. Work force reduction by around 15.4 billion and annual operating earnings of $3. Larger PC position resulting from the merger likely to increase risk and dilute shareholders interest.2.2. The company can also see a better opportunity in its research and development. annual revenues of $87. Expand the numbers of the company’s service professionals. The second best benefit that the merger will emerge is cost benefit by generating cost synergies reaching approximately $2.3 COMPELLING ECONOMICS The expected accumulation in IIP gains would be 13% in the first financial year. This would go to as much as 2 and a half billion dollars of annual synergy. 4.4 ABILITY TO EXECUTE As there would be integration in the planning procedures of the company.2 STRONGER COMPANY The profitability is bound to increase in the enterprise.4 billion. The company could also conduct a better segmentation of the market to forecast its revenues generation. Operations in more than 160 countries and over 1. 4.5 bn annually. Drive a significantly improved cost structure.2. approximate assets of $56. 4. The financial conditions of the company with respect to its EBIT and net cash are also on the incremental side. Finally. access and services sectors in high degrees.
Improve HP’s market share. The above are some of the driving forces that resulted into the merger of HP and Compaq into HPQ.1 DEAL VALUATION Structure Exchange ratio Current value Ownership Accounting Expected closing Stock-for-merger 0. also had enterprise businesses that it had built up through earlier acquisitions of its own. HP was stronger on the consumer side. it can be seen that the motives that made these companies to agree for merger is for same product line and shareholder value addition. Together they would be No 1 in market share in 2001.3 TARGET VALUATION Figure – 4. Compaq was strong in low-end industry standard (Intel) servers. 4.year.6325 ofan HP share per Compac share Approx $ 25 bn HP shareholders 64%. If the total case is being analyzed. Apart from these reasons value creation and improved cost structure is also motives behind this merger. Compaq: best known for its PCs. STRENGTHS OF COMPAQ Compaq –No 2 in the PC business and stronger on the commercial side than HP. Compac 36% Purchase First half of 2002 .
9 1.995 HPQ 87.9 (PREMIUM) =$ 23.104 Figure – 4.21 10.1 88.3 EXCHANGE RATIO BASED ON MPS Exchange Ratio (based on MPS) SHARES ISSUED TO COMPAC TOTAL SHARES IN HPQ = MPS OF TARGET CO+ MPS OF ACQUIRING CO $ 12.2 FINANCIAL HILIGHTS Particular Total revenues Assets Operating earnings Number of employees Market capitalization(as on 31st august.21 =$ 14.4 23.4 56.35+ %18.500 45.109 COMPAC 40.58.Figure – 4.0 32.76bn 30.100 20.600 66.0 1.68/$23.9 70.4 2.4 4.23bn .2001) HP 47.
of shares after merger =30.4 EPS CALCULATIONS Particulars HP EPS before 0.47 bn shares x $23.23bn £= 10.5 = $ 664 bn COST FOR HP ( in $ bn) • Cost for HP = PVHPQ – PVCompaq •No.89+ 210.Figure – 4.76 bn •Total no.19 bn •PVHPQ = 451.35 = $210.76 = 0. = 10.21 = $ 451. of shares to Compaq Corp.33 .89 bn • PVCompaq = 17.19 + 1.21 merger EPS of HPQ after 0.355 COMPAC 0.02 bn shares x $12.31 merger COST & BENEFIT ANALYSIS (present value -$bn) • PVHP = 19.
53bn If we look at the deal valuation.995 for HP and Compaq respectively. The analysis of the valuation shows 8% to 46% over exchange ratios implied by average prices for the 10 trading days prior to announcement.(PVHP + PVCompaq) =$ 664 bn . which is more than the cumulative present value of both the companies.72 – 210.53bn BENEFIT FOR HP & COMPAQ Benefit for HP = PVHPQ .4 bn and combined firm HPQ has annual revenue of $ 87.19 bn.104. From the cost and benefit analysis.72 Cost for HP Ltd. The EPS of HP and Compaq before merger is . while Compaq has annual revenue of $ 40. The market capitalization of both the companies is 45.21 and . But when they merged the present value of merged company HPQ is about $664 bn.89 bn.89 bn + $210. Similarly the present value of Compaq is about $210.19 = $ 25.355 x 664 bn = 235. it can be observed that the exchange ratio of HP share with Compaq is 0. = 235.5 bn Benefit for Compaq = Cost for HP = $ 25. The total revenue of $47 bn is earned by HP.6325 and the current value is about $25 bn.33 and the EPS of HPQ is about .31.30.19 bn) = $ 1. whereas the market capitalization of HPQ is about 66.4 bn.23 = 0. the ownership is distributed in 64:36 ratios. . with a median premium of 23%. 7% to 58% over exchange ratios implied by average prices for the 20 trading days prior to announcement.109 and 20. it is observed that the present value of HP is about $495.($ 451. with a median premium of 23%.
the relative risk to all parties involved. Due diligence is typically done before major decisions are made or shortly after they are announced to the public. Although the term was popularized in the 1980s. such as her CFO.4 DUE DILIGENCE Due diligence is one of the methods used to study. or sufficient. o Products and services.12% to 29% over exchange ratios implied by average prices for the 1 trading days prior to announcement with a median premium of 15%. Both the companies seem to have pegged their valuation based on the growth of IT industry. there is no other industry that has a growth prospective that IT industry has it is obvious that the companies value them at a higher rate. What is due. and evaluate business opportunities. o Ownership and structure of entity. o Management team. it is used when evaluating all types of business combinations or affiliation agreements Fiorina’s ability to convince internal skeptics. 4. The scope of due diligence determines the length and cost of the procedure and typically varies with factors such as the size and complexity of the organization or businesses that are under scrutiny. At a minimum. After all. the activity has been a part of business transactions for years. Dan Plunkett. Secondly. o Organizational culture Due diligence is universally conducted as part of the analysis for mergers and acquisitions. o Information systems and technology. o Assets and liabilities. an experienced external consultant and longtime . including market share by category. increasingly. the size of the deal. the growth of banking and financial sector and increased use of IT by them also contribute to the valuation. investigate. if available). The revolution in IT industry and increased use of IT and IT-related products can be considered as a factor of such valuation. due diligence typically analyzes the following: o Historical activity (prior five years’ worth. diligence varies with every situation. and time and budget constraints. was helped by the thoroughness of her approach.
much more willing to take risks. He said that because they had an “outside enemy to fight” the two teams started very early on to work together as one team. and considered less before they took action. responsibility. But as we looked into the two cultures. Compaq was perceived as much more customer and competitor focused than HP. and planning—a more careful culture. discussed less. including the proxy fight. the Compaq people admitted that they certainly had room to grow in that area. the HP that bought Compaq no longer fit the old perception—it was much closer to Compaq in that regard.personal advisor of Fiorina observed: “Carly is very systematic. and that HP was not quite as bad as people perceived it as far as delivery and sense of accountability. as a culture of consideration. They debated less.” Plunkett said: HP saw itself. aim. shoot. There were some other quite interesting findings. It can seen that was largely due to the progress that HP had made in the couple of years before the Compaq acquisition came about. and much more in touch with the customer and the competition. In fact. And HP saw itself as quite different from that. at least among the leadership of the organization. as a kind of rallying call. For instance. She is a very planning leader. It was a culture that had become much more accountability-oriented. both on a large scale and on the tactical level. how they would fit together and what would be needed to make these teams work effectively as one team. Compaq saw itself more as a culture of “ready. thoughtfulness. and the evidence supported that view. the two sets of leadership. there was a perception that Compaq held their people more accountable than HP. much more aggressive. Plunkett also observed that top management used the challenges the acquisition faced. We got involved directly with the due diligence of understanding the two cultures.” They were much quicker to act. .
Problems & Post – Merger Integration .
Some of the problems of this merger are. As per as the reactions of the owners of HP. This could also help her maintain her position in the company. the owners oppose the deal. thus hampering the finance even further. If this happens in this case. So. In IT companies such as HP and Compaq.1.2 LEGAL CONTEMPLATIONS Anti-competitive deals are often limited by the rules presiding over the competition rules in a country. This leads to out of order functioning of one company and they try to separate from each other. These problems are explained below in detail. This can occur in this merger between HP and Compaq due to the following reasons. Compatibility problems often occur because of synchronization issues. Fiorina. 5.3 COMPATIBILITY PROBLEMS Every company runs on different platforms and ideas. then all that money which went in publicizing the venture would go to be a waste. motivation amongst the employees is an extremely important consideration in this case. A lot of unnecessary marketing failures get attached to these conditions.2 CONVERSATIONS ARE NOT IMPLEMENTED Because of unlike cultures.1 PROBLEMS DURING MERGER There are a number of mergers and acquisitions that fail before they actually start to function. many problems can take place because both the companies have worked on different strategies in the past. this seems to be extremely likely. ambitions and risk profiles.1. the companies come to know that it would not be beneficial if they continue as a merger. merger of two companies which are not doing well at that particular time. Moreover. it might not seem necessary for the HP management to make changes as per as those from Compaq. 5. Even the packaging where the entire inventory from Compaq had the logo of HP would have to be re-done. Thus such problems have become of greatest concern these days.5. This requires an extra effort by the CEO. Now. In the critical phase of implementation itself.1. . 5. many of the deals are cancelled. even more would be required to re-promote as a single entity.
2 POST MERGER INTEGRATION The new HP developed a white paper giving complete details of its post-merger product strategy. and also other behavior related issues can take apart the origin of the merger. 5. 5. but because of a variety of problems as mentioned above. development of the combined company to accomplish its mission is delayed. . marketing. This can be seen as with Fiorina.5 HUMAN RESOURCE DIFFERENCES Problems as a result of cultural dissimilarities. These risk policies should rule fiscal. 5.1. manufacturing.4 FISCAL CATASTROPHES Both the companies after signing an agreement hope to have some return on the money they have put in to make this merger happen and also desire profitability and turnovers. become over confident that they are going to make a profit out of this decision. productions. Merged companies set the goal and when the goal is not accomplished due to some faults of any of the two. they are not able to attain that position.1.1. In fact she can fight the whole world for that. they have a vision set. they have plans in their minds. The merged entity supported Compaq's brand name for its servers while it continued with HP for workstations.1.5. When their self-confidence turns out into overconfidence then they fail. If due to any reason.6 LACK OF DETERMINATION When organizations involve. The HP and Compaq brand names were retained for desktop PCs and notebooks for both consumers and commercial segments. Also clashes can occur because of bias reactions.7 RISK MANAGEMENT FAILURE Companies that are involved in mergers and acquisitions. 5. then both of them develop a certain degree of hatred for each other. hospitality and hostility issues. The electronic shopping sites of both the companies were also integrated. Adequate risk management methods should be adopted which would take care of the effects if the decision takes a downturn. and inventory and HR risks associated with the merger. then they develop a abhorrence sense towards each other and also start charging each other for the failure.
' designed to explain the merged entity's new organizational structure and allow employees overcome concerns about their new co-workers. the new HP initially focused on two areas . HP's Senior VP of HR. She put all employees through a training workshop named as 'Fast Start.avoiding culture clashes internally and reducing any problems to the customers. The company devoted a significant amount of time in planning to minimize any instance of culture clashes that usually happened in such mega-mergers. The task of ensuring this was given to Susan Bowick.To make the merger work. . HP also made efforts to strengthen its image as a single unified company.
Evaluation of Merger Between HP and Compaq .
less than 1% of the divisions' revenues.263 billion in fiscal 2004. analysts expressed concerns that it would not have enough cash to invest in R&D in order to compete in the high-end market. while constantly investing money in research and development and consulting to compete with IBM and Sun Microsystems. Many analysts felt that the synergies HP foresaw would not materialize easily. witnessed a fall in operating profits from US$ 1. HP services which generated revenues of US$ 13. IBM and Sun Microsystems were constantly introducing new products. In the high-end server markets. comprising approximately 50% of HP's total revenues.5 by her extravagant ways of expansion. 6. brought in revenues of US$ 39. Another major business of the erstwhile Compaq. Moreover.362 billion in fiscal 2003 to US$ 1. However. They said that the merged order to beat Dell in PCs. .847 billion.473 billion was just 7%. Since more than half of the new HP's sales came from low-margin PCs. Wall Street and all her investors had gone against the company lampooning her ideas with the saying that she has made 1+1=1. Critics ridiculed Fiorina by saying that one bad PC business merged with another bad PC business does not make a good PC company. the erstwhile Compaq strongholds. the total contribution of these two divisions in the overall operating profits of HP of US$ 5. An analysis of the company's business segment revenues in the fiscal 2004 revealed that the Enterprise Storage & Servers and the Personal Systems divisions. it was the strong determination of Fiorina (the CEO of HP) that she was able to stand by her decision.778 billion. the operating profits from both these divisions combined were US$ 383 million.1 DOES THE MERGER MAKE BUSINESS SENSE Soon after the HP-Compaq merger deal was approved by the HP's board and its shareholders in March 2002. 6. HP's own imaging and printing was the only business division that posted respectable operating profit of $3.2 DOES THE MERGER MAKE ECONOMIC SENSE A few HP divisions that were big revenue earners were not able to contribute correspondingly to profits.774 billion. industry analysts termed the deal as a strategic blunder.6.3 ADVANTAGES OF THE MERGER Even though it seemed to be advantageous to very few people in the beginning.
6. not only would it have a larger share in the market but also the units of production would double. The requisite change in material for imaging and printing also would not exist. This would mean that the company would grow tremendously in volume. the quality is not guaranteed to improve. Generally when the market doesn't support such mergers. This merger would have no effect on the low end servers as Dell would be there in the lead and high-end servers either where IBM and Sun would have the lead. integration would only add on to the difficulties. Being prone to such risky conditions. When HP could not manage its organization properly. improvement and modification. Finally.Fiorina had put it this way that after the company's merger. Her dream of competing with the giants in the field. This merger had the capability of providing exactly the same.4. This is a practical application of Agency problem that arises because of change in financial strategies of the company owners and the management. the company would also have to vary its . it was only CEO Fiorina who was in favor of going with the merger. 6. It would be even more difficult under the conditions because of the existing competitions between HP and Compaq. IBM would also come true. The company would also be eluded from the advantages of outsourcing because of the surplus labor it would have.4 OPPOSITION TO THE MERGER In fact. The price of the PCS would not come down to be affordable by all. She was of the view that much of the redundancy in the two companies would decrease as the internal costs on promotion. She said that the company requires being consistent with creativity. marketing and shipping would come down with the merger. the merger would not equal IBM under any condition as thought by Fiorina. don't do well as is the case here. Another important reason in this context is that HP's prime interest in Imaging and Printing would not exist anymore as a result diluting the interest of the stockholders. In fact the company owners also feel that there would be a lower margin and ROI. The position of the company as a larger supplier of PCs would certainly increase the amount of risk and involve a lot of investment as well.1 HUGE INTEGRATED RISKS There have been no examples of success with such huge mergers. So. The market position in high-end servers and services would still remain in spite of the merger.
Fiorina and on the other side was the strong opposition from the company owners. In fact this might not seem to be a very profitable merger for Compaq as well in the future. As the company would have a greater contribution to the revenue and HP being diluted at the same time. 6.7% growth over prior year .2 FINANCIAL IMPACT This is mostly because the market reactions are negative. So. Economic wise Management.4. and Organizational Management which could be considered to analyze the issue. the position of Compaq was totally different from HP.329 million (2008) • 14. This high risk profile of Fiorina was a little unacceptable for the owners of the company in light of its prospects. There were a number of options like Change Management. The basic problem that the owners of the company had with this merger was that it would hamper the core values of HP.costs causing greater trouble for the owner. On the other hand.5% growth over prior year Net Income: $8. this practical Agency problem was very famous considering the fact that it contained two of the most powerful hardware companies in the world. This would mean that drawing money from the equity market would also be difficult for HP.5 HP TODAY • • • Total Revenue: $118. But this case study can be solved best by a strategy wise analysis. on side there was this strong determination of the CEO. So. as far as this merger between HP and Compaq is concerned. 6. This opposition continued from the market including all the investors of the company. the problems are bound to develop.364 million (2008) 13. The biggest factor of all is that to integrate the culture existing in the two companies would be a very difficult job. They felt that it is better to preserve wealth rather than to risk it with extravagant risk taking.
Canon • Storage market • EMC. HP (2008) • IT services • • 2nd largest player (EDS acquisition in 2008) Competitors: Accenture. 7% Lenovo (2008) Leading global server market • 30% market share in 2008 • Leading blade servers segment • 47% HP. 26% IBM (2008) • Leading global printers market • • 40% market share in 2008 Competitors: Xerox. IBM • Branding • 12 in Top 100 best global brands (Interbrand. 2008) .HP Market Share • Leading global PC market for shipments • • • 2006 – Took market leadership from Dell 18% HP. 11% Acer. 14% Dell.
30% in server. if the present position of HP is analyzed. The over confidence of Fiorina (the CEO of HP) can be considered as a problem for successful merger and post-merger integration.6 INTEPRETATION From the above. . it can be said that the merger has helped the company to grow. the merger proved to be successful. In today’s volatile market. but in long-run. HP is now the second largest player in the IT industry and ranked 12 in top 100 best global brands. which HP holds about 40%.7%. The amount spent in this merger could also be expended in Research and Development. HP has a huge market share of 30% and 47% in case of server and blade server section. but this merger really helped HP to grow and compete with its global competitors. But. Now. Similar is the case in Printers section. but supported by the CEO. it can be observed The key advantages of this merger are the increase in capacity and greater market accessibility. it is also the second largest player in the IT industry.6.7 LESSON FROM THE CASE The HP and Compaq deal is one of the largest M&A deal in IT industry and it was a horizontal merger. which on the other hand can give a good result to HP. HP has a market share of 18%. which gave rise to Agency problem. while its competitors DELL and IBM have lesser market share. This merger also helped HP to be a leader in the market. 40% in printer section.5% and 14. it is observed that HP is a leader in each and every section. which indicates the good performance of the company. with 18% in PC. The growth in total revenue and net income of HP is about 13. where major M&A deals are showing negative growth. In case of market share. 6. In PC. 47% in blade server. though the merger between HP and Compaq did not showed a great result immediately. it can be said that. This merger was opposed by the owner of the company. HP is now leading in each and every section. Along with this the merged company HPQ is leading the market in competition with companies like IBM and DELL. From the above interpretation. From current statistics.
which is constant and steady. there is growth in HPQ. HP is now the second largest player in IT industry and one of the fast growing companies of the world. the basic objective behind the merger is fulfilled. there is capacity generation. it can now said that. it is clear that. on the other hand. value addition to both the entities. whereas. But. there is problem in implementation of strategy. but Fioria’s strong decision for the merger (which was also opposed by the owners of the company) ended with growth to the company.8 CONCLUSION The talk between the CEO’s of both the company for a licensing agreement went for more than eight months and finally resulted with the biggest merger between two global IT players. From the chart give above. . 6.e.Though there were some problems in the merger. In one hand. i. The merger between HP and Compaq has both positive and negative implications.
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