HP Compaq Merger

Submitted By:Group 7, Section-C

Neelam Obulesu Nanganuru Peyush Prasoon Kumar Prathamesh Rahul Panwar

PGP/14/152 PGP/14/156 PGP/14/160 PGP/14/163 PGP/14/164 PGP/14/168

Strategic Intent (HP)

Need to build strong complementary business lines while maintaining its strength in imaging and printing

Particular attention to improving the company's position in enterprise computing and services

Need to become the next IBM - Analogy based strategy

Industry Analysis

External Environment Analysis

Technological
Component manufacturers recognizing the need to build strong complementary business lines Fast growing trend of implementing end-to-end solutions thereby cutting costs

Economic
Terror attacks causing instability and stock price drops Importance of distribution efficiencies

Social
Shift in consumer buying behavior Customers looking for strong relationships with fewer technology vendors Customers seeking vendors providing wider spectrum of products and services

Reasons for a Change

Increasingly competitive business environment The company did not rank among the top three competitors in personal computers, servers, storage, or services HP's computation services businesses noticeably lagged the competition
The company did not have a growth strategy for these businesses

HP shipped only 15% of its PCs directly to customers - A very cost effective distribution system The following segments had promising futures
Fault tolerant computing - HP did not have a presence Industry standard servers - HP's position was not strong

HP's long-term dominance in imaging and printing was continually being challenged by Lexmark and Epson They were selling inexpensive, lower-quality printers in a bid for market share

Options Available to HP

Merger Benefits
For HP
Beat Dell - Become the second largest market share holder in the PC business Customers need for an enterprise solution will be met Expectations of significant improvements in the Enterprise systems and Service segments Compaqs Direct distribution model can be used Printer business requires tighter linkages with Enterprise IT

For Compaq
It is involved in a price war with Dell since 2000. HP can help strengthen its position PC exposure will fall from 48% to 33% of revenue Risk diversified by printer business Positive operating margins could once again be achieved by economies of scale

Benefits from synergy

Reinforcing of Enterprise computing and IT-services businesses - two areas in which each company had strength Compaq was the more significant player in enterprise systems, but neither was dominant across the board The combination would be a major force in enterprise computing and perhaps among the top three in services Customers looking to maintain strong relationships with fewer technology vendors The new company will be better positioned to provide its clientele with a wider spectrum of products and services The new company would be a dominant leader in servers Leverage the fast-growing trend of "storage area networks" in the storage market Complementary server and storage lines Reduce comprehensive array of products for enterprise customers Allocate R&D for growth in its enterprise-computing business more effectively Management projected pretax cost savings of $2.5 billion by mid-2004

Synergy

Proxy War
Opposition by the Hewlett and Packard families' foundations and trusts
owned 18.6% of the total 18.7 % internal shares

Institutional shareholders control 57% of HP voting rights Walter B. Hewlett, son of HP co-founder initially approved in the board decision but later went against it

Arguments and Counter Arguments by Helter and HP

HP position on Merger Walter Helters position on merger
 Resulting business portfolio is worse than existing HP portfolio  Acquisition will not solve HPs strategic problems

HP response to Helter s opposition

 Presents a static and narrow view of the industry  Selectively ignores synergies in several critical analyses

1 2 3 4

IT industry undergoing rapid change which HP must address Compaq merger is the uniquely compelling strategic alternative

Combination address industry  Financial impact on dynamics, customer shareholders Is un attractive requirements, create stronger company and financially  Integration risk is substantial compelling Management is expereinced and focsed on execution, intergration planning ahead of  Very difficult to mesh cultures schedule

 Exaggerates the impact of potential revenue loss

 Displays simplistic antimerger bias, ignoring empirical evidence of successful mergers 11

HP Compaq Merger Deal Design

Ownership Consideration Form of Payment - Stock Exchange Ratio 0.6325 shares of HWP for each share of CPQ Ownership in merged company 64% HP, 36% Compaq No. of HP shares issued(millions) 1,068 Ratio of former CPQ shareholders to HWP shareholders 1 to 1.8

Price Market value per HWP share at 31/8/2001 - $23.21 Market value per CPQ share at 31/8/2001 - $12.35 Value of each CPQ share implied by exchange ratio $14.68 Implied premium paid for CPQ shares 18.9%

Tax and Accounting Accounting method Purchase Tax considerations Taxfree reorganization Reorganization structure Merger of Equals Merger Method Reverse triangular merger

Trading History of HP & Compaq Stock($)

30 25 20 15 10 5 0 27/8/2001 28/8/2001 29/8/2001 30/8/2001 31/8/2001 4/9/2001 5/9/2001 6/9/2001 7/9/2001 10/9/2001 17/9/2001

HWPclosing price CPQ closing price

Synergies expected: $2 billion in fiscal 2003 Annualized cost saving of $2.5 billion by mid fiscal 2004

Compaq triangulation
Valuation Method Net sales Multiple(0.5X to 1.5X) DCF(Stand Alone) Cash flow Multiple(6X to 26X) Latest Mkt. Price($12.00 to $12.40/share) LTM Mkt. Price($12 to $20/share) High($) 50.3 20.8 31.8 21.1 34.1 Low($) 16.8 15.9 7.3 20.4 20.4 Difference($) 33.5 4.9 24.5 0.7 13.6

HP Compaq Merger Deal Design

Reverse-Triangular Merger
Compaq
HewlettPackard HewlettPackard

Stock ( and cash for fractional shares) Heloise Merger Compaq share holders Corp. Stock Merger Sub
Adoption of Process for Garden and lawns

Result Compaq
Surviving corporation

 Tax free re-organisation  HP would control substantially all assets through wholly owned subsidiary, limiting HPs exposure to Compaqs liabilities  Although a shareholder vote of the target was required, a minority freeze-out could be accomplished, if necessary

 At least 80% of the consideration was paid with HP voting stock  Transaction would limit HPs ability to sell or spin off assets immediately before the transaction

Upon completion of merger, holders of Compaq common stock will be entitled to receive 0.6325 of a HP stock. HP shareholders will continue to own their existing shares of HP

HP Compaq Post Merger

The dumbest deal of the decade Michael Dell Initially, the company failed to realize the potential In 2005, after 3 years of merger, Fiorina, CEO of HP was ousted from HP-Compaq Mark Hurd, within from HPQ was given the reins. He turn around the company by reinvigorating the HP- Compaq businesses. Ultimately the Urge to merge was right. Although the logic of merger was correct, executing it was difficult Burgelman Strategic integration faltered though short term mile stones are reached

Performance of HPQ post merger

Lessons Learnt
Leadership matters. Merger isn t the problem Insufficient attention paid to strategic activities during integration made it difficult to realize the potential post-merger Concepts
Reverse triangulation merger Valuation triangulation diagram

References
Case: The Merger of Hewlett Packard and Compaq (A) : Strategy and Valuation Case: The Merger of Hewlett Packard and Compaq (B) : Deal Design Case : Hewlett Packard and Compaq Merger , Mariott school of Management www.bloomberg.com http://en.wikipedia.org/wiki/Compaq#Post-Merger http://www.huffingtonpost.com/ben-rosen/the-mergerthat-worked-co_b_95873.html http://www.gsb.stanford.edu/news/research/urgetomerge. html