HP & Compaq Merge

7/29/2019 HP & Compaq Merge

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S o p i o E l i z b a r a s h v i l i

N i k o l o z L o r t k i p a n i d z e

M a r i t a G e n e b a s h v i l i

T a t u l i O k r i a s h v i l iS a l o m e Z h v a n i a

HPCOMPAQ

Merger


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TABLE OF CONTENTSExecutive Summary.............................................................................................................................................. 3

Industry Highlight ................................................................................................................................................. 4

Competitors IBM ........................................................................................................................................... 4

Competitors Dell ........................................................................................................................................... 4

History Highlight ................................................................................................................................................... 5

Hewlett-Packard: The COMPANY PRE-Merger ..................................................................................... 5

The Company Timeline .................................................................................................................................. 5

COMPAQ The Company PRE-MERGER: ................................................................................................ 6

POTENTIAL IMPACT OF MERGER: ............................................................................................................ 7

Life Cycle Pre-Merge of HP and COMPAQ .................................................................................................... 8

Reasons for the Merger ....................................................................................................................................... 8

Reasons against Merger...................................................................................................................................... 9

Positive Aspects ............................................................................................................................................. 10

Negative Aspects ........................................................................................................................................... 11

Summary of Benefits .................................................................................................................................... 12

Market Benefits ......................................................................................................................................... 12

Operational benefits of Merger ........................................................................................................... 13

Financial Benefits ..................................................................................................................................... 13

SUMMARY OF THE DEAL ........................................................................................................................... 13

Porters Five Forces............................................................................................................................................ 14

Threat of New Entrants (Barriers to Entry): (Moderate) .............................................................. 14

Bargaining Power of Buyers: (Low) ....................................................................................................... 14

Bargaining Power of Suppliers: (High) ................................................................................................. 14

Threat of Substitutes: (Moderate) .......................................................................................................... 14

Rivalry: (High) ................................................................................................................................................ 14

Implementation Strategy Highlight ............................................................................................................ 15

Marketing ......................................................................................................................................................... 15

Operations ........................................................................................................................................................ 15

Technology ....................................................................................................................................................... 15

Buying ................................................................................................................................................................ 15

Infrastructure ................................................................................................................................................. 16

SWOT Analysis .................................................................................................................................................... 16

Financial Highlights........................................................................................................................................... 17

Recommendations ............................................................................................................................................. 20


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Executive Summary

The worlds largest corporate Information Technology merger began in September 2001when 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 shareholderand regulatory approval with the end result being one company. The new HP has annualsales of approximately$90 billion which is comparable to IBM, and an operating income ofalmost $4 billion. The merger was led by Carly Fiorina, the chairwoman and CEO of HP. Thepresident of the new HP was Michael Capellas who was the former chairman and CEO ofthe 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 Compaqand HP were struggling companies before the merger. The common question that has beenraised by analysts is: Do two struggling companies make a better merged company? Someanalysts have indicated that the merger is a gamble and that it is difficult to see any focusedlogic behind the merge considering that most I.T acquisitions are not successful. Prior tothe 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 toacquisitions they have made in the past and both were adjusting to new leadership (Fiorinaand Capellas). The merger deal also means that there are many overlaps in products,technologies, distribution channels, services, facilities and jobs. Employee morale is athreat to a successful merger as there have been numerous layoffs -15,000 employees. Theclaimed annual cost savings of about $2.5 billion dollars by the year 2004 amounts to only3 % of the combined costs of both companies. Gartner Group research has indicated thatthe merged company has failed to do a good enough job of presenting the benefits of anacquisition of this scale to justify the deals risk as it is generally known that technologymergers rarely work. In addition, both companies in the past have struggled to resolveconflicts 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 isbased on consensus; Compaqs culture on the other hand is based on rapid decisionmaking.From a positive perspective, most botched tech mergers involved companies that weretrying to buy their way into new businesses they knew little about, this is not the case withthe HP/Compaq merger. Apart from servers and PCs, they have several areas where theirproducts overlap. e.g.: they are both are involved in making data -storage equipment andboth make handheld computing devices. In addition, both companies also bring differentstrengths to the table. Compaq has done a better job in regard to engineering an entire lineand HP has been strong in consumer products. The justification provided by HP seniormanagement suggests that a merger will enable them to compete 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 bitterinfighting which will cause the new HP to lose direction and good personnel. This is greatnews for competitors such as IBM and Sun as both of them will be able to pick off themarket while the new HP is distracted by the merger. The new HP may be a threat to IBMbut not any time soon. It could take several years to determine if the largest merger in I.Thistory will be a successor a complete flop.


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Industry Highlight

Computer industry is one of the fastest-developing industries in business history.Competition has always been fierce and stays until now. Technological breakthroughsmake market dynamically changing thus each company has to be up to date in order tohandle the severe competition and stay successful. Hewlett-Packard and Compaq had theopportunity to create one of the most successful enterprise-computing firms in history, butall mergers face challenges and issues that must be overcome to achieve synergy ofcombined partner strengths. It is clear that a HP-Compaq merger strategy must bedeployed, managed, and evolved in the key areas of customer facing processes to create aseamless solution discovery and provisioning experience.The key to predicting strategies for their successful merger is in understanding the "four S"quadrant of Servers, Services, Software, and Storage, as the key components of process inan enterprise solution design. Process integration of servers, software, storage, andservices will be the key to building market share in Fortune 5000 firms and the growing

B2Bi (Business to Business integration) market.This methodology can be applied to analyzing how a HP-Compaq merger strengthens thecombined companies' position against IBM, Sun, and Dell in enterprise and consumermarkets. Together the HP-Compaq entity could garner almost forty percent of enterprisemarkets, where the biggest competitors are IBM, Dell, and Sun.HP and Compaq often competed head-to-head in enterprise and consumer markets.However, HP's desire for a stronger professional service offering to compete with IBM,makes Compaq a logical choice. Compaq, which had a global services division of almost40,000 employees, wass moving strategically towards IT business solutions in the keymarkets, where together with HP, they can compete effectively against IBM, Dell, and Sun.

COMPETITORS IBM

IBM has a very strong R&D and marketing, which aids the company to popularize its brandand products. IBM is the company, which gave the rise to PC industry by implementingMicrosoft Windows Operational System (OS). IBMs point of difference is its strongcustomer assistance, which helps the company to gain customer loyalty.

COMPETITORS DELL

Dells competitive advantage is that it offers its customers direct business model, soconsumers can customize the product the way they want via Dell.com. This feature givesDell the ability to lower the inventory costs and make new technology introductions fasterthan its competitors, so Dell suits quickly to rapid market changes. So Dell gained numberone position with its global PC market share in 2001.


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History Highlight

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 Packards Palo Alto home. One yearlater, 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 yearslater. Annual net revenue for the company grew from $5.5 million in 1951 to $3 billion in1980. By 1997, annual net revenue exceeded $42 billion and HP had become the worldssecond largest computer supplier.The company, which originally produced audio oscillators, introduced its first computer in1966. In 1972, the company pioneered the era of personal computing by introducing thefirst scientific, hand-held calculator. Hewlett-Packard introduced its first personalcomputer in 1980. Five years later, HP introduced the LaserJet printer, which wouldbecome the companys most successful product ever.

THE COMPANY TIMELINE

1938: William Hewlett and David Packard, both graduates of the electrical engineeringprogram at Stanford University, start their own business in the garage behind Packardsrented 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 electedpresident of the company. Revenue: $126 million. Employees: 7,092.1966: HP forms Hewlett-Packard Laboratories, which becomes one of the worlds leadingelectronics research centers.1972: HP introduces the first scientific, hand-held calculator and also enters the businesscomputer market with its minicomputer. In 2000, Forbes ASAP will name the calculatorone 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 its first personal computer. Revenue: $3 billion. Employees: 57,196.1982: Compaq Computer Corporation (which will merge with HP 20 years later) is formedin Houston, Texas. The company is started by three former Texas Instruments executivesRod 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 companys mostsuccessful product ever.Compaq is listed on the New York Stock Exchange.


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1989: HP celebrates its 50th anniversary and is in the top 50 on Fortune 500 listing. HPRevenue: $11.9 billion. HP employees: 95,000.1992: Lewis E. Platt succeeds John Young as president of HP.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 givesinsight into the business practices, culture and management style that helped make it asuccess. 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 billionat the time thelargest acquisition in computer industry history.1999: HP's board of directors announces its decision to spin off a new company from theexisting HP organization. Agilent Technologies consists of HP's former measurement,components, chemical analysis and medical businesses. HP retains its computing, printingand imaging businesses. Agilent has its initial public offering of common stock onNovember 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 andtelevision ads focus on the company's history of invention and innovation. The companyalso 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 neworganization includes consulting, outsourcing, support, education and solutionsdeployment.On September 4, HP and Compaq announce a merger agreement to create an $87 billionglobal technology leader. HP revenue: 45.2 billion. HP employees: 88,000.

COMPAQ THE COMPANY PRE-MERGER:

Compaq Computer Corporation is an American personal computer company founded in1982. Once the largest supplier of personal computing systems in the world, it had thecharm of being called the largest manufacturers of personal computing devices worldwide.

The company was formed by Rod Canion, Jim Harris and Bill Murto former TexasInstruments senior managers. The name "COMPAQ" was derived from

"Compatibility and Quality", as at its formation Compaq produced some of the firstIBM PCcompatible computers. The company introduced its first computer in the year 1983 after ata price of 2995 dollars. In spite of being portable, the problem with the computer was thatit seemed to be a suitcase. Nevertheless, there were huge commercial benefits from thecomputer as it sold more than 53,000 units in the first year with a revenue generation of111 million dollars.
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Compaq existed as an independent corporation until 2002, when it was acquired for $25billion by Hewlett-Packard.

Prior to its takeover the company was headquartered in northwestunincorporated HarrisCounty, 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 in cohesive 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.

POTENTIAL IMPACT OF MERGER:

Merger would create a full-service technology firm capable of doing everything fromselling 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 twocompanies revenues;

The merger would eliminate one player in an oversupplied PC marketplace; It would also improve HPs market share across the hardware line and double the

size of HPs service unitboth essential steps in being able to compete withindustry-giant IBM;

Fiorina argued the merger would create a full-service technology firm capable ofdoing everything from selling PCs and printers to setting up complex networks.
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Life Cycle Pre-Merge of HP and COMPAQ

Reasons for the Merger

A very simple question that arises here is that, if HP was progressing at such a tremendouspace - what was the reason that the company had to merge with Compaq? Carly Fiorina,

who became the CEO of HP in the year 1999, had a key role to play in the merger that tookplace in 2001. She was the first woman to have taken over as CEO of such a big companyand the first outsider too. Her basic aim was to modernize the culture of operation of HP.She laid great emphasis on the profitable sides of the business. This shows that she wasvery extravagant in her approach as a CEO. In spite of the growth in the market value ofHP's share from 54.43 to 74.48 dollars, the company was still inefficient. This was becauseit could not meet the targets due to a failure of both company and industry. HP was forcedto cut down on jobs and also be eluded from the privilege of having Price Water HouseCooper's to take care of its audit. So, even the job of Fiorina was under threat. This meantthat improvement in the internal strategies of the company was not going to be sufficientfor the company's success. Ultimately, the company had to certainly plan out something

different. So, it was decided that the company would be acquiring Compaq in a stocktransaction whose net worth was 25 billion dollars. Initially, this merger was not planned.It started with a telephonic conversation between CEO of HP, Fiorina and Chairman andCEO of Compaq, Capellas. The idea behind the conversation was to discuss on a licensingagreement but it continued as a discussion on competitive strategy and finally a merger. Ittook two months for further studies and by September, 2001, the boards of the twocompanies approved of the merger. In spite of the decision coming from the CEO of HP, themerger was strongly opposed in the company. The two CEOs believed that the only way to


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fight the growing competition in terms of prices was to have a merger. But the investorsand the other stakeholders thought that the company would never be able to have theloyalty of the Compaq customers, if products are sold with an HP logo on it. Other than this,there were questions on the synchronization of the organization's members with eachother. This was because of the change in the organization culture as well. Even thoughthese were supposed to serious problems with respect to the merger, the CEO of HP,Fiorina justified the same with the fact that the merger would remove one serious

competitor in the over-supplied PC market of those days. She said that the market share ofthe company is bound to increase with the merger and also the working unit would double.

Reasons against Merger

The last remaining board member from the founding families, Walter B. Hewlett wentpublic with his opposition to the Compaq deal. He mentioned several key reasons for thisdecision, a few of which are summarized below:

It would increase HP's exposure to the PC market, which he felt was neither growing norprofitable;

HP was paying too much for Compaq; It would dilute shareholders' interests in the more valuable portions of HP's business:

printers and imaging services;

It could cause customers to delay purchases of HP products or buy from competitors dueto uncertainty;

There could be considerable disruption among employees during integration whichcould lead to loss of talent and market share;

Possible benefits to HP since the announcement have declined due to negative outlooksfor Compaq;

In addition to these points, Mr. Hewlett specifically pointed out the fact that he does notbelieve that this merger will aid HP in creating shareholder value nor does he felt this wasworth the risk.

Also the son of HP co-founder Dave Packard said he would vote the 1.3% stake hecontrolled against the Compaq deal the day after childhood friend Walter Hewlettannounced his opposition. His big problem with the deal: It would require 15,000 layoffs.


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Strategic Analysis of the Case

POSITIVE ASPECTS

A CEO will always consider such a merger to be an occasion to take a competitiveadvantage over its rivals like IBM as in this case and also be of some interest to the

shareholders as well. The following are the strategies that are related to this mergerbetween HP and Compaq:

Having an eye over shareholders' value: If one sees this merger from the eyes of Fiorina, itwould be certain that the shareholders have a lot to gain from it. The reason for the same isthe increment in the control of the market. So, even of the conditions were not suitablefrom the financial perspective, this truth would certainly make a lot of profits for thecompany in the future.

Development of Markets: Two organizations get involved in mergers as they want to expandtheir market both on the domestic and the international level. Integration with a domestic

company doesn't need much effort but when a company merges internationally as in thiscase, a challenging task is on head. A thorough situation scanning is significant beforeputting your feet in International arena. Here, the competitor for HP was Compaq to a largedegree, so this merger certainly required a lot of thinking. Organizations merge with theinternational companies in order to set up their brands first and let people know aboutwhat they are capable of and also what they eye in the future. This is the reason that afterthis merger the products of Compaq would also have the logo of HP. Once the market iswell-known, then HP would not have to suffer the branding created by Compaq. Theywould be able to draw all the customers of Compaq as well.

Propagated Efficiencies: Any company by acquiring another or by merging makes an

attempt to add to its efficiencies by increasing the operations and also having control overit to the maximum extent. We can see that HP would now have an increased set ofemployees. The only factor is that they would have to be controlled properly as they are ofdifferent organizational cultures.

Allowances to use more resources: An improvised organization of monetary resources,intellectual capital and raw materials offers a competitive advantage to the companies.When such companies merge, many of the intellects come together and work towards acommon mission to excel with financial profits to the company. Here, one can't deny thefact that even the top brains of Compaq would be taking part in forming the strategies ofthe company in the future.

Management of risks: If we particularly take an example of this case, HP and Compaqentering into this merger can decrease the risk level they would have diversified businessopportunities. The options for making choice of the supply chain also increase. Now eventhough HP is a pioneer in inkjet orienting, it would not have to use the Product basedFacility layout which is more expensive. It can manage the risk of taking process basedfacility layout and make things cheaper. Manufacturing and Processing can now be done invarious nations according to the cost viability as the major issue.


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Listing potential: Even though Wall Street and all the investors of the company are againstthe merger, when IPOs are offered, a development will definitely be there because of theflourishing earnings and turnover value which HP would be making with this merger.

Necessary political regulations: When organizations take a leap into other nations, theyneed to consider the different regulations in that country which administer the policies ofthe place. As HP is already a pioneer in all the countries that Compaq used to do its

business, this would not be of much difficulty for the company. The company would onlyneed to make certain minor regulations with the political parties of some countries whereCompaq was flourishing more than HP.

Better Opportunities: When companies merge with another company, later they can put upfor sale as per as the needs of the company. This could also be done partially. If HP feelsthat it would not need much of warehouse space it can sell the same at increased profits. Itdepends on whether the company would now be regarded a s a make to stock or a make toorder company.

Extra products, services, and facilities: Services get copyrights which enhances the level of

trade. Additional Warehouse services and distribution channels offer business values. HereHP can use all such values integrated with Compaq so as to increase its prospects.

NEGATIVE ASPECTS

There are a number of mergers and acquisitions that fail before they actually start tofunction. In the critical phase of implementation itself, the companies come to know that itwould not be beneficial if they continue as a merger. This can occur in this merger between

HP and Compaq due to the following reasons.

Conversations are not implemented: Because of unlike cultures, ambitions and risk profiles;many of the deals are cancelled. As per as the reactions of the owners of HP, this seems tobe extremely likely. So, motivation amongst the employees is an extremely importantconsideration in this case. This requires an extra effort by the CEO, Fiorina. This could alsohelp her maintain her position in the company.

Legal Contemplations: Anti-competitive deals are often limited by the rules presiding overthe competition rules in a country. This leads to out of order functioning of one companyand they try to separate from each other. A lot of unnecessary marketing failures get

attached to these conditions. If this happens in this case, then all that money which went inpublicizing the venture would go to be a waste. Moreover, even more would be required tore-promote as a single entity. Even the packaging where the entire inventory from Compaqhad the logo of HP would have to be re-done, thus hampering the finance even further.

Compatibility problems: Every company runs on different platforms and ideas.Compatibility problems often occur because of synchronization issues. In IT companiessuch as HP and Compaq, many problems can take place because both the companies have


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worked on different strategies in the past. Now, it might not seem necessary for the HPmanagement to make changes as per as those from Compaq. Thus such problems havebecome of greatest concern these days.

Fiscal catastrophes: Both the companies after signing an agreement hope to have somereturn on the money they have put in to make this merger happen and also desireprofitability and turnovers. If due to any reason, they are not able to attain that position,

then they develop a abhorrence sense towards each other and also start charging eachother for the failure.

Human Resource Differences: Problems as a result of cultural dissimilarities, hospitality andhostility issues, and also other behavior related issues can take apart the origin of themerger.

Lack of Determination: When organizations involve, they have plans in their minds, theyhave a vision set; but because of a variety of problems as mentioned above, development ofthe combined company to accomplish its mission is delayed. Merged companies set the goaland when the goal is not accomplished due to some faults of any of the two; then both of

them develop a certain degree of hatred for each other. Also clashes can occur because ofbias reactions.

Risk management failure: Companies that are involved in mergers and acquisitions, becomeover confident that they are going to make a profit out of this decision. This can be seen aswith Fiorina. In fact she can fight the whole world for that. When their self-confidence turnsout into over-confidence then they fail. Adequate risk management methods should beadopted which would take care of the effects if the decision takes a downturn. These riskpolicies should rule fiscal, productions, marketing, manufacturing, and inventory and HRrisks associated with the merger.

SUMMARY OF BENEFITS

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 marketshare in 2001;

The merger would also greatly expand the numbers of the companys serviceprofessionals. As a result, HP would have the largest market share in all hardwaremarket segments and become the number three in market share in services;


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Improves access to the market with Compaqs direct capability and low coststructure;

The much bigger company would have scale advantages: gaining bargaining powerwith suppliers; and scope advantage: gaining share of wallet in major accounts.

Operational benefits of Merger

HP and Compaq have highly complementary R&D capabilities 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

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 September 4, 2001

Name of the merged entity Hewlett Packard

Chairman and CEO Carly Fiorina

President Michael Capellas

Ticker symbol change From HWP to HPQ

Form of payment Stock

Exchange Ratio 0.6325 HPQ shares to each CompaqShareholder

Ownership in merged company 64% - former HWP shareholders36% - former CPQ shareholders

Ownership of Hewlett and Packard

Families18.6% before merger8.4% after merger

Accounting Method Purchase

Merger method Reverse Triangular Merger


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Porters Five Forces

THREAT OF NEW ENTRANTS (BARRIERS TO ENTRY): (MODERATE)

PC market developing computing equipmento Economies of scale;o Low capital requirements;

Product differentiationo Rapid moving industry;o Technology constantly improving;

Moderate customer switching costso Transferring files;o Standardization of most computer components;

Access to distribution channelso High for direct-to-customer;o Internet & computer retailers;

Expected retaliation from existing firms.BARGAINING POWER OF BUYERS: (LOW)

Switching costs are high; Low number of suppliers; Suppliers operate with high fixed costs.

BARGAINING POWER OF SUPPLIERS: (HIGH)

High number of customers who are fragmented; A few larger suppliers (Foxconn, Intel, Hitachi); Difficulty re-producing specialized technology.

THREAT OF SUBSTITUTES: (MODERATE)

Switching costs for consumers would be high; Frequent product introductions and continuous improvements in price.

RIVALRY: (HIGH)

High Fixed costs; Barriers for exit are high; Constant changes to products and price; Two big players hold the top two market share spots in the computer hardware

industry; IBM; Dell.


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Implementation Strategy Highlight

MARKETING

Hp and Compaq would now have common channels after their merging. So, the benefits inthis concern is that even those materials which were initially of high cost for HP would nowbe available at a cheaper price. The end users are also likely to increase. Now, the companycan reframe its competitive strategy where the greatest concern can be given to all timerivals IBM. The advantages of this merger in the field of marketing can be seen in the caseof shared branding, sales and service. Even the distribution procedure is likely to beenhanced with Compaq playing its part. Now, the company can look forward to crossselling, subsidization and also a reduced cost.

OPERATIONS

The foremost advantage in this area is that in the location of raw material. Even theprocessing style would be same making the products and services synchronized with theideas and also in making a decent operational strategy. As the philosophical andmechanical control would also be in common, the operational strategy would now be tobecome the top most in the market. In this respect, the two companies would now have co-production, design and also location of staff. So, the operational strategy of HP would nowbe to use the process based facility layout and function with the mentioned shared values.

TECHNOLOGY

The technical strategy of the company can also be designed in common now. There is adisadvantage from the perspective of the differentiation that HP had in the field of inkjetprinters but the advantages are also plentiful. With a common product and processtechnology, the technological strategy of the merged company would promote highlyeconomical functioning. This can be done through a common research and developmentand designing team.

BUYING

The buying strategy of the company would also follow a common mechanism. Here, theraw materials, machinery, and power would be common hence decreasing the cost onceagain. This can be done through a centralized mechanism with a lead purchaser keepingcommon policies in mind. Now Hp would have to think with a similar attitude for bothinkjet printers as well as personal computers. This is because the parameters formanufacturing would also run on equal grounds.


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INFRASTRUCTURE

This is the most important part of the strategies that would be made after the merger. Thecompanies would have common shareholders for providing the requisite infrastructure.The capital source, management style, and legislation would also be in common. So, theinfrastructure strategies would have to take these things into account. This can be done byhaving a common accounting system. HP does have an option to have a separate accountingsystem for the products that it manufactures but that would only arouse an internalcompetition. So, the infrastructural benefits can be made through a common accounting,legal and human resource system. This would ensure that the investment relations of thecompany would improve. None of the Compaq investors would hesitate in making aninvestment if HP follows a common strategy.

HP would now have to ensure another fact that with this merger they would be able toprove competitors to the present target and those of competitors like IBM as well. Even theoperations and the output market needs to be above what exists at present. The companyneeds to ensure that the corporate strategy that it uses is efficient enough to help such afuture. The degree of diversification needs to be managed thoroughly as well. This isbecause; the products from the two companies have performed exceptionally well in thepast. So, the most optimum degree of diversification is required under the context so thatthe company is able to meet the demands of the customers. This has been challenged by theowners of HP but needs to be carried by the CEO Fiorina.

SWOT Analysis

Strengths:

Compaq-Server category and overallstorage;

HP-High-end storage;Strong brand recognition.

Weaknesses:

Developing a direct distribution model;Consulting and outsourcing (low

market share);Compaq-Printers (low market share).

Opportunities:

Merger could improve economics andinnovation - Economies of scale;

Strengthen leadership in storage;Market growth in IT services.

Threats:

Dell increases pressure in the low-endserver market;

IBM, Dell and new entrants erode moremarket share.


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0.9%

-1%

3%

4%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

2001 2002 2003 2004

Profit Margin

Financial Highlights

Revenue enhancement, cost reduction, vertical or horizontal operational strategies, growthof the industry, need of product and service diversification these are only few of reasonswhy mergers and acquisitions have become indivisible part of last decades businessenvironment.Analyzing most hotly discussed mergers of 2000-2010 if becomes obvious that there hasbeen no straight forward opinion about merger success. Despite ambiguous researchresults companies still continue to engage in M&A procedures as they find hard to goagainst motivations forces behind M&A.In order to analyze financial outcomes of HP-Compaq merger we have to take a look toprofitability and efficiency ratios of companies in both, pre and post-merger dimensions.

If we compare Gross profit margin of HP and COMPAQ with Gross profit of the companyformed as a result of the merger itself, one can come up to obvious finding: market wherecompanies operate is competitive enough to keep direct costs at very competitive level. It isclear that even after such powerful merger as HP-COMPAQ companies were not able to getsynergy effect at their direct production materials (bargaining power over suppliers) anddirect labor (bargaining power over professional labor force market) level. On the other

had companies were able toachieve economies of scale inoperating expenses. After initialdeterioration of Operating Profitmargin (-1% in 2002) (which canbe considered as normal at thebeginning of post-merger period,company started to recover itsprofitability starting from 2003and achieved 5% operatingmargin in 2004.

Positive outcomes of the givenmerger can be accessed based on

the Profit Margin time series analyses. Starting from 2001 (COMPAQ Profit Margin 2000was equal to 1.3%) through 2004 company managed to increase its profitability from zeroto 4%. Considering the difficulties caused by the merging of two companies cultures andfinancial operations company managed to recover from negative profit and to add 4%equal economic value to company shareholders pocket in 2004.

Ratio Analyses HP COMPAQ Merger Merger Merger Merger

Year 2000 2000 2001 2002 2003 2004

Gross Profit Margin 28% 24% 26% 25% 26% 24%

Operating ProfitMargin 8% 6% 3% -1% 4% 5%


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Positive synergy can be observed analyzing the Fixed Asset Turnover ratio of the Post-Merger HP. Understanding the necessity of growth that is notalways equivalent to takingaway market share from competitors, creating economic profits, and providing returns toshareholders HP and COMPAQ still decided to unite their Assets and to strive for leadingplace on the market. By affectively using united fixed assets companies managed tomaintain and increase turnover of production plant and equipment (in year 2000 10.9 and11.8 fixed asset turnover was reported by HP and COMPAQ).

Efficient usage of total assets preserving fixed cost stability is evident from companysReturn on Assets employed. After the merger HP achieved increased profits bymaintainingstable financial leverage (stable fixed costs).

Return On Equity (ROE) has always been the best measure of Merger success. Chartpresented below compares ROEs of HP and COMPAQ before merger and continues withPost-Merger company ROE performance. We see that after 2002 negative performancecompany overwhelmed pre-merger profitability and started to generate two times morevalue for existing shareholders.

3%

-3%

7%

9%

-4%

-2%

0%

2%

4%

6%

8%

10%

2001 2002 2003 2004

Fixed Asset Turnover

3%

-3%

7%

9%

-4%

-2%

0%

2%

4%

6%

8%

10%

2001 2002 2003 2004

Return On Assets


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Observing profitability and efficiency ratios above, it can be stated that HP_COMPAQmerger was more that welcome from shareholders perspective.

5% 5%

3%

-3%

7%

9%

-4%

-2%

0%

2%

4%

6%

8%

10%

2000 HP 2000 CQ 2001 2002 2003 2004

Return On Equity


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Recommendations

Recommendations

The majority of mergers and acquisitions fail in one or more strategic goals. Often the expectedsynergy is wishful thinking, management and strategy not being applied consistently from thestart, or an unexpected technology shift or business downturn affecting one or more key

operating units in the new entity. The key element of success will be in minimizing product andservice overlap.

HP-Compaq will evolve through this period by focusing on three key elements.

Understanding and adjusting to the rapidly evolving and shifting marketsdomestically and internationally as the second Internet boom, B2Bi takes off.

HP-Compaq will need to understand which technologies to accelerate, and whichones to drop, to avoid the "drag" that is fatal against the pace of Moore's law, and againststronger competitors like IBM.

The synergy of the "four S" components will need to extend into the technologysolution discovery process, account management, and value creation for HP-Compaqcustomers.

HP-Compaq has the benefit of clearly knowing and addressing these issues from the start. Keypoints in Strategy Evolved for HP-Compaq:

o HP-Compaq will need customer-designed solutions to compete against company likeDell.

o Global deployment will be key to the success against dual threats of IBM and Dell.o Extending value to customers - The optimum HP-Compaq entity evolves into a fluid

organization where customers, connected by products, services, and software, nowsucceed through a transparent discovery of business solutions and partners across theglobe. Connecting with suppliers, partners, and customers naturally will sweep themthrough HP-Compaq solutions.

In the middle phase of the merger, the combined entity must be able to hold its own againstmarket leaders in all competing sectors. A key challenge to address will be not losing 18 monthsof "integration time" while the next generation of products is introduced to the market. HP-Compaq will need to simultaneously evolve and integrate.

Additionally, the competitive landscape will have changed significantly, and HP-Compaq will becompeting in traditional Fortune 5000 markets, enterprise B2B and consumer products. IBM

will be a key competitor in all three markets. HP-Compaq will need to be seen as one contiguouscorporate entity. Servers are key hardware strengths for HP-Compaq, as is their businesssoftware. Storage needs will continue to grow exponentially, as will data management andnetwork services.

HP-Compaq can build market share in service using two complementary but differentapproaches.


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* The first approach is to ensure integration opportunities for server-software solutions byincluding features, which quickly extend the reach of HP-Compaq's customers to theirsuppliers, partners, and customers. As B2Bi creates immediate value for businesses with easilyextensible business architectures, new solutions will require extensive analysis of businessproblems to solve and opportunities to manage.

* The second approach uses a Managed Services Approach to monitor, optimize, and evolve HP-

Compaq solutions that reside on customer premises, but extend partially through HP-Compaqdata centers. Distributed and extensible business solutions can be architected and evolved byHP-Compaq engineers in controlled environments, and seamlessly deployed to customers afterthorough testing.

Key points in Strategy Managed for HP-Compaq:

* Fortune 500 / Global 2000 - This is the target market for HP- Compaq going head-to-headwith IBM. Strategy managed will have to include combining direct sales force of HP withCompaq Global Services as an integrated presentation from the start. IBM is the key competitor

here, and will require a strong account management approach.

* B2Bi - The sleeper in the next wave of e-business applications is B2Bi or Business-to-Businessintegration over the Internet. This represents untapped value for servers, software, andservices, where it is almost a free-for-all in today's untamed world of Web services. Quickpositioning here allows HP-Compaq to create offerings connecting the 100,000 SME firms thatare one step removed from the Fortune 500.

* Consumer markets - This is where HP-Compaq has both opportunity and challenge. Togetherthey are the best-known nationwide brand in both retail and discount venues. However, Dell'sdirect sales now command the lead in total market size, with IBM also faring quite well. Theoverlap of products is the danger, and this could cause disruption in both the minds of

consumers and retailers alike. The best solution, from the perspective of the Value Framework,is to aid discovery, negotiation, and transactions through an online direct sales approachrivaling Dell and IBM, while continuing to command a combined 50% market share in theconsumer markets.

* Strategy - The difficult challenge for HP-Compaq will be to carve the world into customers,products, and services, and move those wedges through a three to five year time-line thatoptimizes the internal development of the combined entity in the rapidly evolving globalecosystem of networked business solutions.

Strategy Deployed

Redundant or non-competitive product and service offerings must be identified quickly andeliminated, or refocused into core value competency activities. Integrated solutions acrosshardware, software, and enterprises are where HP-Compaq has the greatest potential to excel.Both firms possess technical strength, product maturity, and customer knowledge required forbuilding market share in enterprise business solutions.


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Key points in Strategy Deployed for HP-Compaq:

* Servers - The server is a key component in a value model as it is the nexus for software,network connections, and business applications for the customer and its partners. Garneringmarketshare here is key for the combined HP-Compaq entity.

* Services - This is the Holy Grail in enterprise IT markets going forwards, as it drives discoveryof new products, and is driven by placement of servers and software. It can be 20% of total

revenues, and 25% of profit. It ensures constant customer contact.

* Software - HP has been strong in software, and reasonably successful bundling it on servers.However, a combined HP-Compaq entity is a more visible threat to IBM, will respond in kind.Evolution of application platforms will be key to selling suites of business applications.Ironically, competition from Oracle could help IBM here.

* Storage - The fastest growing segment in network services is network storage and datamanagement. This is a replenishment and dynamic transaction in the value framework, and alsodrives incremental sales of products and services.

* Strategy - Initial strategy must focus on synergy of the "four S" participants inside the HP-

Compaq entity before value extension towards the customer can occur.

HP & Compaq Merge

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