Presented by

Jaseel.K.P (EPGPKC05011) Joseph Manavalan (EPGPKC05012)

Minu Joy V (EPGPKC05016) Krishnakumar.R ((EPGPKC05013)
 a. Is there a rationale sound? How would this help shape the industry structure?
Which part of the industry structure would this acquisition help / not help?
Lets do a SWOT analysis on the merger to answer the above questions
Strengths
1. HP is strong in high end servers while Compaq is a world leader in storage
systems.
2. Both HP and Compaq are big brand companies with a large clientele and brand
loyalty and a hefty market share in IT industry.
3. Both of them have good R&D departments and have been able to consistently
come up with innovative products
4. Financially both companies are in a very strong position to support the merger.
Weakness
1. There is no organic growth happening in HP and Compaq doesn’t have enough
presence in Unix Market.
2. HP shares declined by about 22.9% after the information on merger came out in
public indicating that people were against the merger.
3. Walter Hewlett not supporting the merger indicated that there was some opposition
against the merger in HP management itself.
4. Compaq followed direct distribution model while HP was not following the same
and incase of a merger the merged company was not sure which plan to move
forward with.
Opportunities
1. Combining Compaq’s storage systems and HP’s high end servers, the merger
company can become a dominant leader in servers and exploit “storage area
networks” in storage market.
2. They can reduce costs. Projected annual pretax cost savings of 2.5 billion dollars
and 13% increase in earnings
3. They can provide comprehensive array of products for enterprise customers.
4. Allocate combined R&D for growth in enterprise computing business to be a world
market leader
Threats
1. Share prices can drop further after the merger as both Hewlett and Packard family
are resisting the merger.
2. Technology life in IT industry is short and this can be a serious threat.
3. The Revenue loss in merger is projected to be 4.1 billion but as per industry experts
it will be much more.
4. There is severe economic downturn and industry margins are decreasing due to
strong competition from other players in the industry.
5. Diluting HP’s high margin printing and imaging business to Compaq’s low margin
PC business doesn’t seem to be a great proposal.
6. Both companies have different culture and values and merging them might prove to
be a disaster.

Considering the above a merger seems to be disastrous for HP.

The merger if it goes on would help HP-COMPAQ to become a dominant leader in
servers and also storage area network with their combined expertise. They would be
able to provide end to end solutions and services in both the domains.
The Part of industry that the acquisition would help would be IT services sector where
they can provide a wider spectrum of products and services to a large clientele.
 b. What is the value of Compaq? What is the synergy valuation?

Value of combined firm

pretax cost savings 2.5 billion

wacc 14%
effective tax rate 26%

Our assumptions
Reinvestment Rate 30%
Perpetual growth rate 2%
Return on capital 26%

PV(HP-COMPAQ) 71,234.98 million

compaq owns 36% of shares
PV(Compaq)=0.36 * PV(HP-COMPAQ) 25644.5928 million

Value of Compaq before acquisition

Reinvestment rate (assumption) -3.70%
Perpetual growth rate (assumption) 0%
PV(compaq) 17,948.12 million

There for valuation range of Compaq

minimum 17,948 million -
maximum 25644.59 million