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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.

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. most botched tech mergers involved companies that were trying to buy their way into new businesses they knew little about. Compaq has done a better job in regard to engineering an entire line and HP has been strong in consumer products.From a positive perspective. e. they have several areas where their products overlap. 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. IBM and Dell. In conclusion. Apart from servers and PC’s. The justification provided by HP senior management suggests that a merger will enable them to com pete with two of their biggest competitors. both companies also bring different strengths to the table. The new HP may be a threat to IBM but not anytime soon. this is not the case with the HP/Compaq merger.T history will be a success or a complete flop. .g: they are both are involved in making data -storage equipment and both make hand held computing devices. In addition. It could take several years to determine if the largest merger in I.

2.” These six objectives. which originally produced audio oscillators. two Stanford graduates in electrical engineering. By 1997. which would become the company’s most successful product ever. Continually improve the value of the products and services offered to customers. The HP Way In 1956. William Hewlett and David Packard. One year later. started their own business in a garage behind Packard’s Palo Alto home. Hewlett and Packard formalized their business into a partnership called Hewlett-Packard. 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. The company. Five years later.Hewlett-Packard: The Company Pre-Merger In 1938. . which later became seven. Hewlett-Packard introduced its first personal computer in 1980. 3. Bill Hewlett. Seek new opportunities for growth but focus efforts on fields in which the company can make a contribution. Recognize that profit is the best measure of a company’s contribution to society and the ultimate source of corporate strength. introduced its first computer in 1966. and a handful of other HP executives gathered at the Mission Inn in Sonoma. annual net revenue exceeded $42 billion and HP had become the world’s second largest computer supplier. the company pioneered the era of personal computing by introducing the first scientific. HP introduced the LaserJet printer. Annual net revenue for the company grew from $5. are: 1.”4 but ultimately became the foundation for what came to be known as “the HP way. Dave Packard. 4. Provide employment opportunities that include the chance to share in the company’s success.5 million in 1951 to $3 billion in 1980. In 1972. HP was incorporated in 1947 and began offering stock for public trading 10 years later. hand-held calculator. California.

replaced Hewlett as president of the company. Deputy Secretary of Defense in 1971. Emphasize growth as a requirement for survival. Hewlett retained his positions of president and CEO. Packard resigned from his government position after just one year.initiative and creativity. Carleton S. 7. Fiorina spent a combined total of almost 20 years at AT&T and Lucent Technologies. Young also assumed the role of CEO. an HP employee since 1966 and head of the company’s computer systems organization. John Young. Lewis E. David Packard was named president. an engineer at HP. Carleton S. Before joining HP. When Packard was appointed U. Dave Packard was elected CEO and chairman of the board. In 1977. as well as a Master of Science degree from the Massachusetts Institute of Technology. Demonstrate good citizenship by making contributions to the community. When Hewlett finally retired the following year. 6. Maintain an organizational environment that fosters individual motivation. Platt. 47. he left HP and Hewlett became CEO. while Bill Hewlett assumed the position of president. however. She went on to earn a master’s degree in business administration from the University of Maryland at College Park. succeeded Young in both positions. graduated from Stanford University with a bachelor’s degree in medieval history and philosophy. with William Hewlett as vice president. she was instrumental in expanding the company’s international . (Carly) Fiorina Carly Fiorina. Leadership at HP Upon HP’s incorporation in 1947. In 1964. Fiorina replaced Platt as president and CEO in of HP in 1999. At Lucent. Upon Young’s retirement in 1992.S. and returned to HP to serve as chairman of the board.5.

one of the nation’s most prominent female executives. however. Fiorina became the first outsider to take charge of the 62-year-old company.7 After taking the helm at the Silicon Valley company. Carly Fiorina became the first woman to lead so large a company.000 miles during her first year. and consequently. consolidating operating units. She went to work overhauling the company’s structure. and shearing away layers of bureaucracy. Fiorina believed that it had become somewhat inbred and sluggish over the years. When she became chairman and CEO of HP in 1999.business as well as in planning both its initial public offering and its later break-off from AT&T. “We set out on a process to preserve what was best about HP and reinvent the rest. she immediately went to work revitalizing the company and kick-starting growth. Perhaps more important to HP’s future.” Fiorina traveled more than 250.At both companies. 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. Fiorina held a number of senior leadership positions. Fiorina worked hard to modernize HP’s culture and to achieve her vision of the company’s future. Changes under Fiorina Although HP was a model company in many ways. HP : Organization Life Cycle: . visiting HP facilities worldwide and urging employees to step up the pace. Overall. As Fiorina later explained.

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

1999: HP's board of directors announces its decision to spin off a new company from the existing HP organization. HP employees: 95.196. . HP employees: 105. its first personal computer. culture and management style that helped make it a success. Agilent has its initial public offering of common stock on November 18. 1996: HP becomes one of the 30 stocks that comprise the Dow Jones Industrial Average. 1998: Compaq acquires Digital Equipment Corporation for $9. 1995: Dave Packard publishes The HP Way.200. printing and imaging businesses. 1989: HP celebrates its 50th anniversary and is in the top 50 on Fortune 500 listing. It is Silicon Valley's largest-ever IPO. chemical analysis and medical businesses. 1972: HP introduces the first scientific. the Presario family.000. which will become the company’s most successful product ever. 1977: John Young replaces Hewlett as president of HP. 1980: HP introduces Employees: 57.1 percent of common stock. Forbes ASAP will name the calculator one of 20 "all time products" that have changed the world. which becomes one of the world’s leading electronics research centers. Jim Harris and Bill Murto. 1993: Compaq introduces its first all-in-one Compaq PC. Compaq introduces its first product. The company is started by three former Texas Instruments executives—Rod Canion. HP revenue: $31. components. the first portable PC to run 100 percent compatible IBM software. 1982: Compaq Computer Corporation (which will merge with HP 20 years later) is formed in Houston. hand-held calculator and also enters the business computer market with its minicomputer. a book that chronicles the rise of HP and gives insight into the business practices. 1985: HP introduces its LaserJet computer printer. Platt succeeds John Young as president of HP.6 billion—at the time the largest acquisition in computer industry history. Texas.9 billion.5 billion.1966: HP forms Hewlett-Packard Laboratories. 1992: Lewis E. Compaq is listed on the New York Stock Exchange. and also becomes CEO in 1978. On November 4. HP retains 84. In 2000. HP retains its computing. Agilent Technologies consists of HP's former measurement. HP Revenue: $11. Revenue: $3 billion. 1999.

000. COMPAQ – PRE-MERGER: Compaq Computer Corporation is an American personal computer company founded in 1982. HP employees: 88.In July. HP Services. Once the largest supplier of personal computing systems in the world. education and solutions deployment. as at its formation Compaq produced some of the first IBM PC compatible computers. The company also introduces a new logo. HP creates a new business organization.[1] Compaq existed as an independent corporation until 2002. Print and television ads focus on the company's history of invention and innovation. 2001: In March. The role of the new organization includes consulting. 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 . On September 4. Texas. Lew Platt retires. HP revenue: 45. In November. and HP names Carleton (Carly) S. Fiorina as President and CEO. when it was acquired for $25 billion by Hewlett-Packard. support. United States.2 billion. The company was formed by Rod Canion. Jim Harris and Bill Murto — former Texas Instruments senior managers.  To bring Compaq to the online market. Prior to its takeover the company was headquartered in northwest unincorporated Harris County. HP and Compaq announce a merger agreement to create an $87 billion global technology leader. The name "COMPAQ" was derived from "Compatibility and Quality". HP begins a new brand campaign based on a single concept: invent. Michael Capellas is named CEO of Compaq. outsourcing.  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.

 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. with the computer industry commoditizing and consolidating very fast.9% LAPTOPS FOR QUARTER FOR 2 (VOLUME SHARE) Compaq HP 12. The details of the merger were revealed in an HP press release issued soon after the merger was announced.2 billion and 31.4 billion - .6% 6. resulting in losses of US$ 1. the PC industry slipped into its worst-ever recessionary phase. The new company was to retain the HP name and would have revenues of US$ 87. According to analysts.1% 6.9% HP’S POSITION BEFORE MERGER: In the late 1990s.675 mn COMPANY MARKET SHARE IN MARKET SHARE IN PCS QUARTER 2 (VOLUME SHARE) 11.3% $488 mn $3. The HP-Compaq merger thus did not come as a major surprise to industry observers.000 layoffs by September 2001. mergers had become inevitable.

FALLING STOCK PRICES PRIOR TO MERGER: . as the industry stumbled. meeting growth targets became difficult for HP and it was forced to cut jobs and scrap plans. HP shareholders would own approximately 64% and Compaq shareholders 36% of the merged company. Under the terms of the deal.  Turning the company around required more than just strategy from within.almost equivalent to the industry leader IBM (US$ 88. Compaq shareholders would receive 0.  As a result HP stock price dropped drastically.396 billion in 2000).6325 share of the new company for each share of Compaq. Fiorina was to remain Chairman and CEO of the new company while Capellas was to become the President  By 2001.

and scope advantage: gaining share of wallet in major accounts .  Fiorina argued. 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.  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. 2.  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 shipping. advertising. Operational benefits of Merger . while at the same time preserving much of the two companies’ revenues.  The merger would eliminate one player in an oversupplied PC marketplace. the merger would create a full-service technology firm capable of doing everything from selling PCs and printers to setting up complex networks. HP would have the largest market share in all hardware market segments and become the number three in market share in services. 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.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.

2001 Hewlett Packard Carly Fiorina Michael Capellas From HWP to HPQ Stock 0. a weakness for Compaq. Financial Benefits  Merger will result in substantial increase in profit margin and liquidity.5 billion is the estimated value of annual synergies. 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. while Compaq was strong in low-end industry standard (Intel) servers. HP and Compaq have highly complimentary R&D capabilities o HP was strong in mid and high-end UNIX servers.5 billion per year 3.000 employees saving around $1.6325 HPQ shares to each Compaq Shareholder . a weakness for HP  Top management has experience with complex organizational changes  Merger would result in work force reduction by around 15.  Provides the combined entity with better ability to reinvest.  2.

former CPQ shareholders Ownership of Hewlett and Packard Families Accounting Method Merger method 18. and would offer the industry's most complete set of products and services. amidst a lot of negative comments about the merger from analysts and the company's competitors. The merged entity would have operations in more than 160 countries with over 145. .6% before merger 8. In the next two weeks.7% respectively.in just two days.announced their merger. the stock markets reacted negatively to the merger announcement with shares of both companies collapsing . HP was to buy Compaq for US$ 24 billion in stock in the biggest ever deal in the history of the computer industry. the pair lost US$ 13 billion in market capitalization in a couple of days. a global market leader in the high margin printers business.former HWP shareholders 36% .Hewlett-Packard Company (HP) and Compaq Computer Corporation (Compaq) . two leading players in the global computer industry .5% and 15. would reap in acquiring a personal computer (PC) manufacturer like Compaq at a time when PCs were fast emerging as low-margin commodity products. 2001.000 employees. HP and Compaq share prices declined by 21.Ownership in merged company 64% . However.4% after merger Purchase Reverse Triangular Merger THE MEGA-MERGER: On September 04. Industry analysts wondered what benefits HP. Together. HP's stock went down by another 17%.

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

Some opponents of the deal believed that rather than accelerating growth.263 billion in fiscal 2004. Since more than half of the new HP's sales came from low-margin PCs. Moreover.778 billion.774 billion. less than 1% of the divisions' revenues.” DOES THE MERGER MAKES AN ECONOMIC SENSE: A few HP divisions that were big revenue earners were not able to contribute correspondingly to profits.Soon after the HP-Compaq merger deal was approved by the HP's board and its shareholders in March 2002. HP services which generated revenues of US$ 13.473 billion was just 7%. IBM and Sun Microsystems were constantly introducing new products. brought in revenues of US$ 39. Critics ridiculed Fiorina by saying that one bad PC business merged with another bad PC business does not make a good PC company.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.5. Critics of the merger cited a long list of problems with the deal. More like 1 + 1 = 1. analysts expressed concerns that it would not have enough cash to invest in R&D in order to compete in the high-end market. In the high-end server markets. An analysis of the company's business segment revenues in the fiscal 2004 revealed that the Enterprise Storage & Servers and the Personal Systems divisions. They said that the merged company would have to cut costs drastically in order to beat Dell in PCs. As one analyst explained. comprising approximately 50% of HP's total revenues . witnessed a fall in operating profits from US$ 1. merging the two companies would simply create a bigger company with bigger problems. the total contribution of these two divisions in the overall operating profits of HP of US$ 5. However.362 billion in fiscal 2003 to US$ 1. the operating profits from both these divisions combined were US$ 383 million. industry analysts termed the deal as a strategic blunder. the erstwhile Compaq strongholds. . “This is not a case of 1 + 1 = 2. Another major business of the erstwhile Compaq.

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: .

HP's board asked Fiorina to step down as the company's Chairman and CEO on February 09.CHALLENGES AHEAD Due to her inability to revive the performance of hardware businesses. The Street had lost all faith in her and the market's hope is that anyone will be better. 2005. the shares of HP increased by 6. an analyst with Fulcrum Global Partners said. Commenting on this. The day Fiorina resigned. Why HP-Compaq merger is considered to be failed one inspite of their unison till date? . Robert Cihra. "The stock is up a bit on the fact that nobody liked Carly's leadership all that much.9 percent on the New York Stock Exchange." QUESTION TO BE DISCUSSED 1.