HP-Compaq Merger - Analysis

-Group 9 -Shrikanth K (51) -Surya Rao (55) -Nilangsu Mahanty (87)

-PVR Bharadwaja (88)
-Simeen Mirza (113)

Compaq pre-merger
 Compaq – Founded in 1982

 Primary strength - Innovation
 Compaq’s primary business divisions –
 Access, commercial and consumer PCs  Enterprise computing: servers and storage products  Global services

 Market leader in PCs, with more international sales

than US  Market leader in fault tolerant computing and industry standard servers

Compaq pre-merger
 Compaq had successfully created a direct model 


 

in PCs #2 in the PC business, stronger on the commercial side Continuously weakening performance made Compaq directors impatient Dell became strong competitor through cost efficiency Compaq missed the online bus and its made-toorder system through its retail outlets failed to take off due to bad inventory management

Compaq pre-merger
 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

HP had 85.8 bn  Ranked 13th among Fortune 500 .Hewlett Packard – pre-merger  Started in 1938 by two Stanford graduates – William Hewlett and David Packard.000 employees and revenues of $48. HP incorporated in 1947  HP introduced its first PC in 1980 and the LaserJet (company’s most successful product) in 1985  In 2000.

Growing problems at HP  HP was not adapting to technological innovation     fast enough Margins were going down IPG (HP’s Imaging and Printing Group) was the leader in its market segment but did not rank anywhere among top 3 in servers. storage or services Printing line was facing competition from Lexmark and Epson which were selling lower-quality inexpensive printers Needed to build strong complementary business .

Fiorina tries to rejuvenate HP  Carly Fiorina joined in 1999 hoping to excite a complacent HP  Cut salaries. laid off employees  Wanted to make high end computers HP’s focus  According to her. UNIX servers were the biggest areas of growth . home and business PCs.

675 mn Market share in laptops Market share in PCs for for quarter 2 (volume quarter 2 (volume share) share) 12.9% 11.5% Compaq HP .4% Market share in midrange UNIX servers $134 mn $512mn Revenue Compaq HP Company 4% 30.1% 6.6% 4.3% $488 mn $3.Pre-merger statistics for Compaq and HP Company Market share in high end servers Revenue Compaq HP Company 3% 11.

HP’s position before merger  By 2001.  Turning the company around required more than just strategy from within . 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.

Falling stock prices prior to merger Back .

and shipping. while at the same time preserving much of the two companies’ revenues. .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.

Market Benefits  Merger will creates immediate end to end leadership  Compaq was a clear #2 in the PC business and stronger on the commercial side than HP. Together they would be #1 in market share in 2001  The merger would also greatly expand the numbers of the company’s service professionals. but HP was stronger on the consumer side.  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 . 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.

a weakness for Compaq. while Compaq was strong in low-end industry standard (Intel) servers.Operational benefits of Merger  HP and Compaq have highly complimentary R&D capabilities  HP was strong in mid and high-end UNIX servers.000 employees saving around $1. a weakness for HP  Top management has experience with complex organizational changes  Merger would result in work force reduction by around 15.5 billion per year .

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 .

hence merging with Compaq is a strategic misfit.Considerations for Merger  HP’s strategy is to move to higher margin less      commodity like business. Larger PC position resulting from the merger is likely to increase risk and dilute shareholders interest in imaging and printing Lower growth prospects on invested capital Market position in key attractive segments remain same Services remain highly weighed to lower margin segment No precedent for success in big technology transactions .

former CPQ shareholders 18. 2001 Hewlett Packard Carly Fiorina Michael Capellas From HWP to HPQ Stock 0.former HWP shareholders 36% .6% before merger 8.4% after merger Purchase Reverse Triangular Merger .6325 HPQ shares to each Compaq Shareholder 64% .Summary of Deal Announcement Date Name of the merged entity Chairman and CEO President Ticker symbol change Form of payment Exchange Ratio Ownership in merged company Ownership of Hewlett and Packard Families Accounting Method Merger method September 4.

Reverse Triangular merger  A subsidiary Heloise Merger Corporation was created solely to facilitate the merger  Result : A tax free reorganization in which HP would control all of Compaq’s assets through a wholly owned subsidiary Compaq Hewlett Packard Compaq Shareholders Stock (Cash for fractional shares) Stock Heliose Merger Corp .

21 17.4% 8/28/2001 8/29/2001 8/30/2001 8/31/2001 23.3% -6.41 10.7% -3.3% 12.13 CPQ Percentage Change 0.70 18.69 12.TRADING PERFORMANCE IN THE WAKE OF THE ANNOUNCEMENT Date HWP Closing HWP Price (in $) Percentage Change 24.21 -2.3% .8% -18.5% -2.08 10.4% -1.59 -10.6% 2.08 11.7% CPQ Closing Price (in $) 13.61 23.7% -0.35 10.8% 2.1% 9/4/2001 9/5/2001 9/6/2001 9/7/2001 18.32 13.87 18.35 -3.0% -0.6% -2.40 23.4% -2.95 -1.

995 billion implied by the final exchange ratio .596 HPQ shares per Compaq share Compaq’s Valuation by the $20.995 billion market pre-merger announcement Compaq’s Valuation by HP as $24.5356 HPQ shares per Compaq share 0. 2001 Exchange ratio implied by the 12 month market performance of HP and Compaq stocks 0.6325 HPQ shares per Compaq share 0.Deal Valuation The final Exchange Ratio Exchange ratio implied by the market as on 31 Aug.

1 .9 16.573 0.3 13.3 10.596 Premium paid by HP (in %) 18..7 8.2 6.) Acquisition Premium  Acquisition Premium is the difference between the worth of a Compaq share as valued by HP and the market valuation of a Compaq share  The Premium will depend on the length of the period considered while determining the market valuation of PeriodCompaq ending Aug 31 Average Exchange Implied Acquisition 2001 Aug 31.544 0.Deal Valuation (Contd.557 0.584 0.535 0. 2001 10 day average 30 day average 3 month average 6 month average 12 month average ratio 0.

Valuing the Merger was a challenge because…. .  Recession : The largely negative outlook for the economy overall and the tech sector in particular circa 2001  Volatile trading activity : NASDAQ suffered a 30% drop in the 12 months preceding the merger announcement  Valuation multiples for comparable companies and recent comparable transactions were broadly distributed.

5 billion pre-tax cost savings in year 2004  NPV of Cost savings estimated at $5 to $9/share of the combined entity The result is based on the following estimations :  P/E multiples ranged from 15x to 25x  Weighted cost of equity of HP-Compaq – 15%  Effective tax rate of the combined entity – 26%  Pre-tax profit decline of close to $500 million in 2004 resulting from overall revenue loss of approximately $4.1 billion for the combined entity  Weighted average contribution margin of 12% .Valuation of Synergies  $2.

72 0.68 Compaq’s share price at the time of announcement : $12.72 NA Market Multiples 69.33 Synergies valued at $5-$9 per share !! . Market Multiples Deal Multiples EV/EBITDA P/E 82.07 NA EV/Sales 0.35 Price paid for Synergies as per market valuation : $ 2.60 Value of Synergies > Price of Synergies HP’s Valuation of a Compaq share at the time of deal announcement : $14.Deal Multiples vs.

000 shares of Compaq Common Stock are subject to issuance pursuant to outstanding options to purchase Compaq Common Stock .538.000 shares of Compaq Common Stock were issued and held by Compaq in its treasury • Stock Options : As of the close of business on August 14. 2001:  1.Compaq capital structure  Compaq capital structure  The authorized capital stock of Compaq consisted of:  3.2001  ESOP :279.000.000 shares of Compaq Common Stock.000 shares of Compaq Common Stock were issued and outstanding  59.000.000.753.000.01 per share  10.000. par value $0. par value $0.000 shares of preferred stock.01 per share  At the close of business on June 30.

Merger Team Structure .

customers • Both companies are in similar businesses: Combine Product road maps Sales force Integration • Deliver on the short-term synergies in six to 12 months – They don't need two Unix or NT development teams – 15.000 Jobs Eliminated – HP:6000 – Compaq: 8500 – Problems with sackings: Even talent packs their bags • Achieving the integration will be tied to peoples compensation packages Operations management integration Human resource integration INTRANET .Post Merger integration • Merger Integration Team Size: 1200 • Big Bang concept: • Communicate merger to Channel partners.

3B annually Restructured direct material procurement to save $450M annually Redesigned products & re-qualifying components to save $300M • • • • • Consolidated multiple mfg sites achieving $120M in annualized savings Achieved manufacturing savings of $200M annually Reduced supply chain headcount by 2.700 Realized logistics savings of $100M+ annually Indirect Procurement negotiated annual savings of $220M .Operational Efficiencies • • • Achieved merger-related cost savings of more than $1.

Post Merger integration .

Manage the high level relationships with global enterprise customers .Strategic Integration  Out-compete Dell: The new HP needed a highly competitive direct sales model .50% of retail shelf space was occupied by HP & Compaq .With help of Compaq consultants managed 40 big .Direct sales model benefited from Compaq direct sales model  Out-compete IBM .

Over the same period. HP's total shareholder returns were up 46 percent. . five years after the merger announcement. an illustration of how mergers can destroy value  Fact :  In mid-July 2007.Shareholder value  Myth:  A strategically poor integration will be reflected by the stock market’s pushing the combined company's stock price down . rival IBM was down 23 percent. the Standard & Poor's IT index had sunk 9 percent. and even Dell was up only 2 percent.

S&P 500 : last 5 years Link .HP vs.

HP vs. IBM : last 5 years .

Dell : last 5 years .HP vs.

Sun : last 5 years .HP vs.

HP vs. Canon : last 5 years .

8 % of .2 % from 18.1 percent of the world PC market  Even in the US. cannot fight Dell’s direct-sales model with their retail (indirect) plus direct model  Fact :  HP’s PC business has steadily improved and is bringing competition to Dell that Dell has not seen for the past 5 or 10 years  Dell's PC shipments worldwide share fell to 15. a particularly sharp decline given that the overall market grew 10.PC business  Myth:  HP.2 % last year. even after combining with Compaq.2 and 26. HP and Dell have 24.9 percent  Hewlett-Packard holds 19.

Printer business  Myth:  HP is pursuing only market share in printers instead of ROI  Fact :  In HP’s printer business. and more profitability. ―good‖ share consists of devices that deliver color. lots of output. single-function printers to competitors. photos. HP has extended that business.  The company also refused to respond to Dell pricecutting intended to weaken HP's market share in printers . and perform multiple functions. Those characteristics lead to more pages printed. leaving low-end.

4 8.2 13 2007 Revenue (Mn US $) 3824 3424 1620 2007 Share (%) 30.3 4.1 1270 554 10.2 -2.9 27.5 20.6 Dell Fujitsu/Siemen s 1526 542 11.6 4.3 .0 5.1 Growth (%) 6.Server business  Myth:  Pursuing more market share in PCs will divert resources and distract attention from its strengths in printers and servers Vendor : Fact IBM HP Sun 2007 Revenue (Mn US $) 4069 3707 1711 2007 Share (%) 31 28.8 13.

Market shares and operating margins .

Revenues and earnings from operations 100000 90000 80000 70000 60000 50000 40000 30000 20000 10000 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Revenue Earnings from operations 2000 1000 0 -1000 -2000 7000 6000 5000 4000 3000 .

.Achieved benefits for customers  HP now offers a one-stop shopping experience for global corporate customers—  The company has the ability to procure everything from PDAs to commercial printers and servers from the same source  The economies of scale have helped HP focus on its legacy of manufacturing innovation  It can build and deliver precisely the product that customers need and want to buy.

and lowering costs for both parties. Further.Achieved benefits for customers  Ease of doing business  The supply chain strategy allows a single point of collaboration with HP.  Enhanced supply and demand visibility  This visibility improves participants’ ability to predict demand. simplifying suppliers’ interaction with HP. and logistical efficiencies into their own supply chains. It also enables suppliers to build purchasing. increasing business collaboration. it enables suppliers to pass associated discounts onto customers such as HP  Elimination of non-value-added steps. manufacturing. and costs . such as administration.

storage  Printers & printing consumables  Scanners  IT Solutions  Compaq  Desktops  Notebooks . blade servers.The Rationalized Product Portfolio  HP branded:  Notebooks  Desktops. workstations  Servers (complete range from high-end to low-end).

Mergent Online. 2004 Hoopes. The Merger of HP and Compaq.com Burgelman.. The Hewlett-Packard and Compaq Merger: A Case Study in Business Communication..nasdaq.com Strategic Analysis: The Integration of Hewlett-Packard and Compaq. Marriott School of Management Supply Chain Management for the adaptive enterprise. Darden Business Publishing. Aug 2005 . and Webb McKinney. HP’s Internal Document www. Tiffany Adams and Renee Poutous Compaq and Hewlett-Packard. Robert A. Anna D. www.mergent.References  Buchanan. Managing the Strategic Dynamics of Acquisition Integration: Lessons from HP and Compaq.       Case (A) and (B). Charlotte L.

Rationale  Shrikanth K – Deal financials  Surya Prashant S N Rao .Integration  Nilangsu Mahanty – Evaluation of merger But finally.Contributions  Simeen Mirza –Premerger Scenario  Pingali Bharadwaja V R .. . everybody worked on everything.

Thank You .

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