The HP-COMPAQ Merger

“A hi-tech giant or another merger fiasco”

By:Amrita Singh A1802009198 Roll No:-11 Section: F Group: B MBA-IB

EXECUTIVE SUMMARY
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. 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 income 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 deal’s 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, Compaq’s 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 PC’s, they have several areas where their products overlap. 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.

Hewlett-Packard: The Company Pre-Merger
In 1938, two Stanford graduates in electrical engineering, William Hewlett and David Packard, started their own business in a garage behind Packard’s Palo Alto home. One year later, Hewlett and Packard formalized their business into a partnership called Hewlett-Packard. HP was incorporated in 1947 and began offering stock for public trading 10 years later. Annual net revenue for the company grew from $5.5 million in 1951 to $3 billion in 1980. By 1997, annual net revenue exceeded $42 billion and HP had become the world’s second largest computer supplier. The company, which originally produced audio oscillators, introduced its first computer in 1966. In 1972, the company pioneered the era of personal computing by introducing the first scientific, hand-held calculator. Hewlett-Packard introduced its first personal computer in 1980. Five years later, HP introduced the LaserJet printer, which would become the company’s most successful product ever.

The HP Way
In 1956, Bill Hewlett, Dave Packard, and a handful of other HP executives gathered at the Mission Inn in Sonoma, California, to create a set of values and principles to guide their company. The six objectives that this small group subsequently created not only helped shape “a new kind of company,”4 but ultimately became the foundation for what came to be known as “the HP way.” These six objectives, which later became seven, are: 1. Recognize that profit is the best measure of a company’s contribution to society and the ultimate source of corporate strength;
2. Continually improve the value of the products and services offered to customers;

3. Seek new opportunities for growth but focus efforts on fields in which the company can

make a contribution; 4. Provide employment opportunities that include the chance to share in the company’s success;

5. Maintain an organizational environment that fosters individual motivation,initiative and creativity; 6. Demonstrate good citizenship by making contributions to the community; 7. Emphasize growth as a requirement for survival.

Leadership at HP
Upon HP’s incorporation in 1947, David Packard was named president, with William Hewlett as vice president. In 1964, Dave Packard was elected CEO and chairman of the board, while Bill Hewlett assumed the position of president. When Packard was appointed U.S. Deputy Secretary of Defense in 1971, he left HP and Hewlett became CEO. Packard resigned from his government position after just one year, however, and returned to HP to serve as chairman of the board. Hewlett retained his positions of president and CEO. In 1977, John Young, an engineer at HP, replaced Hewlett as president of the company. When Hewlett finally retired the following year, Young also assumed the role of CEO. Upon Young’s retirement in 1992, Lewis E. Platt, an HP employee since 1966 and head of the company’s computer systems organization, succeeded Young in both positions. Carleton S. Fiorina replaced Platt as president and CEO in of HP in 1999.

Carleton S. (Carly) Fiorina
Carly Fiorina, 47, graduated from Stanford University with a bachelor’s degree in medieval history and philosophy. She went on to earn a master’s degree in business administration from the University of Maryland at College Park, as well as a Master of Science degree from the Massachusetts Institute of Technology. Before joining HP, Fiorina spent a combined total of almost 20 years at AT&T and Lucent Technologies. At Lucent, she was instrumental in expanding the company’s international

business as well as in planning both its initial public offering and its later break-off from AT&T.At both companies, Fiorina held a number of senior leadership positions. When she became chairman and CEO of HP in 1999, Carly Fiorina became the first woman to lead so large a company, and consequently, one of the nation’s most prominent female executives. Perhaps more important to HP’s future, however, Fiorina became the first outsider to take charge of the 62-year-old company.

Changes under Fiorina
Although HP was a model company in many ways, Fiorina believed that it had become somewhat inbred and sluggish over the years.7 After taking the helm at the Silicon Valley company, she immediately went to work revitalizing the company and kick-starting growth. As Fiorina later explained, “We set out on a process to preserve what was best about HP and reinvent the rest.” Fiorina traveled more than 250,000 miles during her first year, visiting HP facilities worldwide and urging employees to step up the pace. She went to work overhauling the company’s structure, consolidating operating units, and shearing away layers of bureaucracy. She pushed for more focus in the lucrative area of services. She also engineered a new marketing campaign featuring a simplified “hp” logo that dropped the founders’ names. Overall, Fiorina worked hard to modernize HP’s culture and to achieve her vision of the company’s future.

HP : Organization Life Cycle:

HP-BCG MATRIX:

The Company Timeline
1938: William Hewlett and David Packard, both graduates of the electrical engineering program at Stanford University, start their own business in the garage behind Packard’s rented house in Palo Alto, CA. 1939: Hewlett and Packard formalize their business into a partnership called Hewlett-Packard Co. (HP) 1947: HP is incorporated. Revenue: $851,287. Employees: 111. 1957: HP stock is offered for public trading. 1962: HP makes Fortune magazine's list of the top 500 U.S. companies for the first time, entering at number 460. 1964: David Packard is elected chairman of the board and William Hewlett is elected president of the company. Revenue: $126 million. Employees: 7,092.

1966: HP forms Hewlett-Packard Laboratories, which becomes one of the world’s leading electronics research centers.
1972: HP introduces the first scientific, hand-held calculator and also enters the business computer market with its minicomputer. In 2000, Forbes ASAP will name the calculator one of 20 "all time products" that have changed the world. 1977: John Young replaces Hewlett as president of HP, and also becomes CEO in 1978. 1980: HP introduces Employees: 57,196. 1982: Compaq Computer Corporation (which will merge with HP 20 years later) is formed in Houston, Texas. The company is started by three former Texas Instruments executives—Rod Canion, Jim Harris and Bill Murto. On November 4, Compaq introduces its first product, the first portable PC to run 100 percent compatible IBM software. 1985: HP introduces its LaserJet computer printer, which will become the company’s most successful product ever. Compaq is listed on the New York Stock Exchange. 1989: HP celebrates its 50th anniversary and is in the top 50 on Fortune 500 listing. HP Revenue: $11.9 billion. HP employees: 95,000. 1992: Lewis E. Platt succeeds John Young as president of HP. its first personal computer. Revenue: $3 billion.

1993: Compaq introduces its first all-in-one Compaq PC, the Presario family. 1995: Dave Packard publishes The HP Way, a book that chronicles the rise of HP and gives insight into the business practices, culture and management style that helped make it a success. HP revenue: $31.5 billion. HP employees: 105,200. 1996: HP becomes one of the 30 stocks that comprise the Dow Jones Industrial Average. 1998: Compaq acquires Digital Equipment Corporation for $9.6 billion—at the time the largest acquisition in computer industry history. 1999: HP's board of directors announces its decision to spin off a new company from the existing HP organization. Agilent Technologies consists of HP's former measurement, components, chemical analysis and medical businesses. HP retains its computing, printing and imaging businesses. Agilent has its initial public offering of common stock on November 18, 1999. HP retains 84.1 percent of common stock. It is Silicon Valley's largest-ever IPO.

In July, Lew Platt retires, and HP names Carleton (Carly) S. Fiorina as President and CEO. In November, HP begins a new brand campaign based on a single concept: invent. Print and television ads focus on the company's history of invention and innovation. The company also introduces a new logo. Michael Capellas is named CEO of Compaq. 2001: In March, HP creates a new business organization, HP Services. The role of the new organization includes consulting, outsourcing, support, education and solutions deployment. On September 4, HP and Compaq announce a merger agreement to create an $87 billion global technology leader. HP revenue: 45.2 billion. HP employees: 88,000.

COMPAQ – PRE-MERGER:
Compaq Computer Corporation is an American personal computer company founded in 1982. Once the largest supplier of personal computing systems in the world,[1] Compaq existed as an independent corporation until 2002, when it was acquired for $25 billion by Hewlett-Packard. The company was formed by Rod Canion, Jim Harris and Bill Murto — former Texas Instruments senior managers. The name "COMPAQ" was derived from "Compatibility and Quality", as at its formation Compaq produced some of the first IBM PC compatible computers. Prior to its takeover the company was headquartered in northwest unincorporated Harris County, Texas, United States.  Compaq had successfully created a direct model in PCs  Continuously weakening performance made Compaq directors impatient  Dell became strong competitor through cost efficiency
 Compaq missed the online bus and its made-to-order system through its retail outlets

failed to take off due to bad inventory management.  To bring Compaq to the online market, Capellas (CEO) bought Digital Equipment (AltaVista)  Acquisition was incohesive resulting in 15000 layoffs and loss in 1998  New management lacked the cutting edge to maintain stability

 Bad investments  Got caught in a cycle of cost cutting and layoffs  Firm was too small and poorly run to maintain its wide array of products and services

Compaq: in The Life Cycle

COMPAQ-BCG MATRIX

Pre-merger statistics for Compaq and HP:

COMPANY

MARKET

SHARE

IN

REVENUE

HIGH END SERVERS Compaq HP 3% 11.4% $134 mn $512mn

COMPANY

MARKET SERVERS

SHARE

IN

REVENUE

MID-RANGE

UNIX

Compaq HP

4% 30.3%

$488 mn $3,675 mn

COMPANY

MARKET

SHARE

IN MARKET SHARE IN PCS QUARTER 2 (VOLUME SHARE) 11.6% 6.9%

LAPTOPS FOR QUARTER FOR 2 (VOLUME SHARE) Compaq HP 12.1% 6.9%

HP’S POSITION BEFORE MERGER:
In the late 1990s, the PC industry slipped into its worst-ever recessionary phase, resulting in losses of US$ 1.2 billion and 31,000 layoffs by September 2001. According to analysts, with the computer industry commoditizing and consolidating very fast, mergers had become inevitable. The HP-Compaq merger thus did not come as a major surprise to industry observers. The details of the merger were revealed in an HP press release issued soon after the merger was announced. The new company was to retain the HP name and would have revenues of US$ 87.4 billion -

almost

equivalent

to

the

industry

leader

IBM

(US$

88.396

billion

in

2000).

Under the terms of the deal, Compaq shareholders would receive 0.6325 share of the new company for each share of Compaq. HP shareholders would own approximately 64% and Compaq shareholders 36% of the merged company. Fiorina was to remain Chairman and CEO of the new company while Capellas was to become the President

 By 2001, as the industry stumbled, meeting growth targets became difficult for HP and it

was forced to cut jobs and scrap plans.  As a result HP stock price dropped drastically.
 Turning the company around required more than just strategy from within.

FALLING STOCK PRICES PRIOR TO MERGER:

POTENTIAL IMPACT OF MERGER:
 Merger would create a full-service technology firm capable of doing everything from selling PCs and printers to setting up complex networks  Merger would eliminate redundant product groups and costs in marketing, advertising, and shipping, while at the same time preserving much of the two companies’ revenues.
 The merger would eliminate one player in an oversupplied PC marketplace.

 It would also improve HP’s market share across the hardware line and double the size of HP’s service unit—both essential steps in being able to compete with industry-giant IBM.
 Fiorina argued, the merger would create a full-service technology firm

capable of doing everything from selling PCs and printers to setting up complex networks.

BENEFITS OF MERGER:
1. Market Benefits
 Merger will creates immediate end to end leadership
 Compaq was a clear in the PC business and stronger on the commercial side than HP, but

HP was stronger on the consumer side. Together they would be in market share in 2001  The merger would also greatly expand the numbers of the company’s service professionals. As a result, HP would have the largest market share in all hardware market segments and become the number three in market share in services.  Improves access to the market with Compaq’s direct capability and low cost structure  The much bigger company would have scale advantages: gaining bargaining power with suppliers; and scope advantage: gaining share of wallet in major accounts .

2. Operational benefits of Merger

 HP and Compaq have highly complimentary R&D capabilities o HP was strong in mid and high-end UNIX servers, a weakness for Compaq; while Compaq was strong in low-end industry standard (Intel) servers, a weakness for HP  Top management has experience with complex organizational changes  Merger would result in work force reduction by around 15,000 employees saving around $1.5 billion per year

3. Financial Benefits
 Merger will result in substantial increase in profit margin and liquidity.  2.5 billion is the estimated value of annual synergies.  Provides the combined entity with better ability to reinvest.

SUMMARY OF THE DEAL
Announcement Date Name of the merged entity Chairman and CEO President Ticker symbol change Form of payment Exchange Ratio September 4, 2001 Hewlett Packard Carly Fiorina Michael Capellas From HWP to HPQ Stock 0.6325 HPQ shares to each Compaq Shareholder

Ownership in merged company

64% - former HWP shareholders 36% - former CPQ shareholders

Ownership of Hewlett and Packard Families Accounting Method Merger method

18.6% before merger 8.4% after merger Purchase Reverse Triangular Merger

THE MEGA-MERGER:
On September 04, 2001, two leading players in the global computer industry - Hewlett-Packard Company (HP) and Compaq Computer Corporation (Compaq) - announced their merger. HP was to buy Compaq for US$ 24 billion in stock in the biggest ever deal in the history of the computer industry. The merged entity would have operations in more than 160 countries with over 145,000 employees, and would offer the industry's most complete set of products and services. However, the stock markets reacted negatively to the merger announcement with shares of both companies collapsing - in just two days, HP and Compaq share prices declined by 21.5% and 15.7% respectively. Together, the pair lost US$ 13 billion in market capitalization in a couple of days. In the next two weeks, HP's stock went down by another 17%, amidst a lot of negative comments about the merger from analysts and the company's competitors. Industry analysts wondered what benefits HP, a global market leader in the high margin printers business, would reap in acquiring a personal computer (PC) manufacturer like Compaq at a time when PCs were fast emerging as low-margin commodity products.

Though the merger helped HP in achieving economies of scale in the PC business, it faced fierce competition from Dell Computers (Dell),2 a low-cost, direct-marketer of PCs. The merger also did not help HP to compete with IBM, which not only sold PCs but was also a market leader in the high-margin consulting and service businesses. In June 2005, HP's shares hovered around US$ 23 per share, below the price just before the merger was announced. This indicated that the merger had failed to create shareholder value. In contrast, the share price of US-based Lexmark, HP's major competitor and the second largest company in the printers business, rose by 60%, while Dell's share price moved up by 90% in the same period. With the PC and other hardware businesses of HP making miniscule profits, analysts opined that the company's printer business should be spun off into a stand-alone company Commenting on the dilemma faced by HP, George Day (Day), Professor of Marketing at Wharton School of Business, University of Pennsylvania, said, "HP is trying to be cost competitive with Dell and be the same kind of integrated-solutions provider that IBM has become. If that doesn't work - if it's clear IBM has too big a lead - then HP, which has this hugely profitable printer business, has to think about breaking up."

DOES THE MERGER MAKE THE BUSINESS SENSE:

Soon after the HP-Compaq merger deal was approved by the HP's board and its shareholders in March 2002, industry analysts termed the deal as a strategic blunder. Critics ridiculed Fiorina by saying that one bad PC business merged with another bad PC business does not make a good PC company. Many analysts felt that the synergies HP foresaw would not materialize easily. They said that the merged company would have to cut costs drastically in order to beat Dell in PCs,while constantly investing money in research and development and consulting to compete with IBM and Sun -Microsystems. In the high-end server markets, IBM and Sun Microsystems were constantly introducing new products. Since more than half of the new HP's sales came from low-margin PCs, analysts expressed concerns that it would not have enough cash to invest in R&D in order to compete in the high-end market. Critics of the merger cited a long list of problems with the deal. Some opponents of the deal believed that rather than accelerating growth, merging the two companies would simply create a bigger company with bigger problems. As one analyst explained, “This is not a case of 1 + 1 = 2. More like 1 + 1 = 1.5.”

DOES THE MERGER MAKES AN ECONOMIC SENSE:
A few HP divisions that were big revenue earners were not able to contribute correspondingly to profits. An analysis of the company's business segment revenues in the fiscal 2004 revealed that the Enterprise Storage & Servers and the Personal Systems divisions, the erstwhile Compaq strongholds, brought in revenues of US$ 39.774 billion, comprising approximately 50% of HP's total revenues . However, the operating profits from both these divisions combined were US$ 383 million, less than 1% of the divisions' revenues. Moreover, the total contribution of these two divisions in the overall operating profits of HP of US$ 5.473 billion was just 7%. Another major business of the erstwhile Compaq, HP services which generated revenues of US$ 13.778 billion, witnessed a fall in operating profits from US$ 1.362 billion in fiscal 2003 to US$ 1.263 billion in fiscal 2004.

HP's own imaging and printing was the only business division that posted respectable operating profits of US$ 3.847 billion.

HPQ : PRODUCTS GROWTH:

HPQ-BCG MATRIX:

Revenues and earnings from operations:

CHALLENGES AHEAD
Due to her inability to revive the performance of hardware businesses, HP's board asked Fiorina to step down as the company's Chairman and CEO on February 09, 2005. The day Fiorina resigned; the shares of HP increased by 6.9 percent on the New York Stock Exchange. Commenting on this, Robert Cihra, an analyst with Fulcrum Global Partners said, "The stock is up a bit on the fact that nobody liked Carly's leadership all that much. The Street had lost all faith in her and the market's hope is that anyone will be better."

QUESTION TO BE DISCUSSED
1. Why HP-Compaq merger is considered to be failed one inspite of their unison till date?

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