HP Compaq Merger Final
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Transcript of HP Compaq Merger Final
HP-Compaq Merger
Presented byAshish Kumar Jain | Indrani Haldar
Needhi Govil| Sandeep Sharma | Vivek Vijayan
Case Analysis
HRM in Mergers & Acquisitions
Introduction to HP
• Well-respected systems vendor• Smaller, but worthy competitor to IBM• Competes mainly in the hardware business with
desktops and servers• Lacking in the services business • Undisputed leader with its line of PC printers
April 10, 2023 The HP-Compaq Merger: Case Analysis
HP logo
Over the Ages….
HP Products
3 Major Business Segments– Imaging and Printing Systems
• 1st in global printer market in 2001– Computing Systems
• 4th in PC and server markets in 2001– Information Technology Services
• 8th in global services market in 2001
April 10, 2023 The HP-Compaq Merger: Case Analysis
Introduction to Compaq
• Compaq sales leveled off with added competition from Dell
• Compaq was best known for its personal computer offerings
• After paying $5.4 billion to finance a merger with Digital Equipment, Compaq eliminated overlap by cutting thousands of jobs worldwide
April 10, 2023 The HP-Compaq Merger: Case Analysis
The HP way
1. Profit, To recognize that profit is the best single measure of our contribution to society and the ultimate source of our corporate strength
2. Customers. To strive for continual improvement in the quality, usefulness, and value of the products and services we offer our customers
3. Field of Interest. To concentrate our efforts, continually seeking new opportunities for growth but limiting our involvement to fields in which we have capability and can make a contribution
4. Growth. To emphasize growth as a measure of strength and a requirement for survival
April 10, 2023 The HP-Compaq Merger: Case Analysis
5. Employees: To provide employment opportunities for HP people that include the opportunity to share in the company's success, which they help make possible
6. Organization: To maintain an organizational environment that fosters individual motivation, initiative and creativity, and a wide latitude of freedom in working toward established objectives and goals
7. Citizenship: To meet the obligations of good citizenship by making contributions to the community and to the institutions in our society which generate the environment in which we operate
page 8April 10, 2023 The HP-Compaq Merger: Case Analysis
The HP way
HP Pre-Merger
• Experienced revenue growth but share price still declined
• Faced recession in 2001• Pay cuts and layoffs• Stock price continued to fall• Began to consider acquisitions
April 10, 2023 The HP-Compaq Merger: Case Analysis
Financial Crisis faced by HP
HP Compaq Deal Overview
In September2001 HP announces the Merger with Compaq
Creates an $87 billion global technology leader, with the industry's most complete set of IT products and services for both businesses and consumers
New HP would be the #1 global player in servers, imaging & printing, and access devices (PCs & hand-helds), as well as Top 3 player in IT services, storage and management software
The combination furthers each company's commitment to open, market-unifying systems and architectures and aggressive direct and channel distribution models
April 10, 2023 The HP-Compaq Merger: Case Analysis
Combined company can create substantial shareowner value through significant cost structure improvements and access to new growth opportunities
Transaction expected to be substantially accretive to pro forma EPS in first full year of combined operations
The merger is expected to generate cost synergies of approximately $2.0 billion in fiscal 2003, the first full year of operations
Fully realized synergies are expected to reach a run rate of approximately $2.5 billion by mid-fiscal 2004
New HP would have operations in more than 160 countries and over 145,000 employees.
page 12April 10, 2023 The HP-Compaq Merger: Case Analysis
HP Compaq Deal Overview
HP Compaq Fact Sheet
Transaction Summary:
Structure: Stock-for-stock merger
Exchange Ratio: 0.6325 of an HP share
per Compaq share
Current Value: Approximately $25 billion
Ownership: HP shareholders 64%;
Compaq shareholders 36%
Accounting: Purchase
Expected Closing: First half of 2002
Key Facts (last 4 qtrs)
HP Compaq Pro Forma Combined
Total Revenues $47.0 billion $40.4 billion $87.4 billion
Assets $32.4 billion $23.9 billion $56.4 billion
Operating Earnings $2.1 billion $1.9 billion $3.9 billion
Leadership: Board of Directors: 5 Compaq directors
to join HP Board
Chairman and Chief Executive Officer: Carly Fiorina
President: Michael Capellas
Chief Financial Officer: Robert Wayman
Imaging & Printing: Vyomesh Joshi
Access Devices: Duane Zitzner
IT Infrastructure: Peter Blackmore
Services: Ann Livermore
Shareholder Opposition
Hewlett’s Rationale• Exaggerated importance of the scale of the
computer business• The merger will expose HP to brutal low profit PC
business• Dilute the value of the lucrative printing business
Packard’s Rationale• The new strategies counter the company’s core
values
April 10, 2023 The HP-Compaq Merger: Case Analysis
Value proposition for the Shareholders
Unique Opportunity: Bolsters enterprise’s position, Accelerates improvement, delivers key benefitsStronger Company: Increased profitability & OPM, Complementary R&D, Improved Project FinancialsCompelling Economics: 13% accretion to HP’s earnings, $2.5 Bn annual synergies, value created by combination outweighs premiumAbility to Execute: focus on value creation, experienced leadership
Resulting business portfolio is worse than existing HP portfolio
Acquisition will not solve HP’s Strategic problems
Integration-risk substantial
Financial impact on HP stakeholders in unattractive
April 10, 2023 The HP-Compaq Merger: Case Analysis
Management’s Reasons For Merger
1. Improved Economics and Innovation
2. Complementary Leadership in Key Markets
3. Strengthened Business Provides Critical Mass in Key Growth Market
4. Financial Benefits
April 10, 2023 The HP-Compaq Merger: Case Analysis
Reasons Against the Merger
1. HP’s Business Portfolio Will Be Worse
2. The Integration Risk of the Proposed Merger is Substantial
3. Negative Financial Impact on HP Stockholders
4. HP’s Strategic Position Will Not Materially Improve
April 10, 2023 The HP-Compaq Merger: Case Analysis
Strategic dynamics of Acquisition Integration
April 10, 2023 The HP-Compaq Merger: Case Analysis
Process 2: Creating the integration plan
Process 1: Formulating the Integration Logic and Performance
goals
Process 3:Executing Operational Integration
Process 3:Executing Strategic Integration
Short term performance
Long term performance
Changing Environment
Time
• Merger would create potential competitive advantages from integration, greatly improving its product-market position across the computing business
• HP was strong in mid-range and high end UNIX servers, a weakness for Compaq; while Compaq was strong in low end industry standard(Intel) servers, a weakness for HP
• Compaq was clear #2 in the PC business and stronger on the commercial side, but HP was stronger on the consumer side. Together they would be #1 in market share
• HP will become #3 in services
• The merged entity would have scale advantages; gaining bargaining powers with suppliers
• With the stronger portfolio , HP would gain “scope” advantages by selling across the board portfolio
Formulating the Integration Logic and Performance goals
April 10, 2023 The HP-Compaq Merger: Case Analysis
HP SegmentOperating Profit
Margin
Enterprise 9.20%
PCs 3.00%
Services 13.70%
Imaging and Printing (no estimate)
Estimated 2004 Operating margins
projected by HP pre-Merger
HP Segment
2004 Projected Operating
Earnings((million$)
Enterprise 246800.00%
PCs 1068.00%
Services 2678.00%
Imaging and Printing 2482.00%
Estimated 2004 Earnings projected by HP Pre-Merger
Financial performance projections at the time of merger announcement
April 10, 2023 The HP-Compaq Merger: Case Analysis
Selling the Integration logic externally and internally
• Initial response to the intent to merge was mostly negative
• Michael Dell – “ The dumbest deal of the decade….”
• Opposition from Walter Hewlett, David Packard and other family members
• There were financial risks associated with the integration as cost of capital would increase because of greater volatility of PC business
• Mgmt. had to convince HP’s shareholders to vote in favor of logic based on scale and scope, convince U.S. government and the European Commission of the legality of the proposed merger
April 10, 2023 The HP-Compaq Merger: Case Analysis
The Integration plan
• The top executive positions for the combined companies named prior to the announcement of the merger
• Integration team formed to work with the new company’s executive committee to agree on – Short term and long term goals, – Define how the new company would work, – Develop plans for strategic and operational integration
• Integration team to start multi year initiatives to develop– HP’s direct distribution model(to compete with Dell) and – Global solution delivery capability (to compete with IBM)
• Pre merger HP and Compaq offered retention bonuses to selected employees to ensure success of the merger
April 10, 2023 The HP-Compaq Merger: Case Analysis
Executing Operational Integration
• Integration team presented a monthly report to all executive committee members and was reviewed at their meetings
• Short term synergy goal of $2.5 billion $ was exceeded by over $1billion
• Tasks related to people selection, reduction plan, pay systems were implemented on schedule
• Procurement savings plan was also implemented rapidly. $1.1 billion saved in first 6 months in procurement
• Failure to pick up key customer concerns• Failing to revise original assumptions cause of internet
bust because of no clear feedback loop to the preceding part of the process
• HP falling short of its long term goalsApril 10, 2023 The HP-Compaq Merger: Case Analysis
HP Segment
2002OPM
2003 OPM
2004 OPM
2004Estimated
OPM
Enterprise
-2.00%
0.97% 1.14% 9.20%
PCs-
1.70%0.10% 0.85% 3.00%
Services11.10
%9.17%
11.02%
13.70%
Actual Operating profit margin
HP Segment2004
Projected OE(million $)
2004 Actual OE
Enterprise 2468 173
PCs 1068 210
Services 2678 1263
Imaging & Printing
2482 3847
Reduced Earnings
Financial performance results - 2004
April 10, 2023 The HP-Compaq Merger: Case Analysis
Executing strategic integration
• Failed to adjust goals in light of changing environment
• Remaining operational integration tasks related to corporate culture, IT integration
• Competing with Dell- Top management should have driven HP’s direct business model more aggressively to measure against Dell’s projected capabilities by 2004
• Competing with IBM- Top management should have looked to acquire the necessary expertise as part of a more aggressive plan to close the gap with IBM’s capabilities. It needed to develop capabilities to serve global accounts.
April 10, 2023 The HP-Compaq Merger: Case Analysis
Process 2: Creating the integration plan
Process 1: Formulating the Integration Logic and Performance
goals
Process 3:Executing Operational Integration
Process 4:Executing Strategic Integration
Strong
Strong
Strong
Strong
Weak
Weak
• Exceeded short term performance goals
• Failed to revise long term performance goals
• Failed to maintain effective strategic change capability
• Missed long term performance goals
Changing Environment
Time
Role of HR in HP – Compaq merger
• Set up clear, open & regular communication Intranet portal started to disseminate information quickly “Fast start” – face-to-face new team discussion meetings
• People Strategy program Stabilize – new HP foundation Mobilize – high performance workplace Energize – best place to work
• “Clean room” discussions – planning the integration
• Culture included in overall integration
• Linking organization design with overall business strategy
Employee selection process
April 10, 2023 The HP-Compaq Merger: Case Analysis
Role of HR in HP – Compaq merger
• Adopt & go methodology no dual systems, processes or policies swift decisions regarding HR practices
• Creating a global job structure common system of job codes, titles & functions
• Creating a global grade structure common pay ranges across all countries
• New reward system introduced that acted as a motivator
• “Voice of the workforce” survey evaluates level of employee engagement
April 10, 2023 The HP-Compaq Merger: Case Analysis
Recap of what happened in the background
page 30April 10, 2023 The HP-Compaq Merger: Case Analysis April 10, 2023 The HP-Compaq Merger: Case Analysis
What happened after 2005
page 32April 10, 2023 The HP-Compaq Merger: Case Analysis
HP Timeline (2005 – 2006)
2005• Acquired Snapfish, online photo service company• Acquired Scitex Vision, industrial wide-format digital printing
2006• Acquired VoodooPC, high-end gaming PC provider• Acquired Mercury Interaction, IT management software and services
company• Legal investigations –board members leaked confidential information
to media• Formal inquiry from Securities and Exchange Commission• Shareholder lawsuits
April 10, 2023 The HP-Compaq Merger: Case Analysis
HP TimeLine (2007)
2007• HP & Wataniya Telecom Algeria – advanced billing solution to support
new mobile services
• Established research lab in St. Petersburg, Russia (growing economy)
• Expansion of printing, PC & software businesses
• Removed itself from NASDAQ listing to reduce the cost of fees and admin duties
• Filed patent infringement lawsuits against Acer
• Filed Print cartridge and ink formulation patent infringement case against Pelikan Hardcopy
• Awarded 7-year contract for technology services with NASA worth $5.6 billion
• Entered into agreements with 30 content providers for their media libraries (4,000 movies, TV, films, etc) for production & distribution through HP Video Merchant Services
April 10, 2023 The HP-Compaq Merger: Case Analysis
HP TIMELINE (2008)
2008• HP & Unilever signed a 7-year outsourcing contract for the
management of Unilever’s technology infrastructure• Sara Lee renewed its infrastructure outsourcing services contract for
7-years and from 10 countries to 35• HP & Foxconn started constructing a manufacturing facility in Russia
for the production of HP PCs with an investment of $50 million• Created HP & Novell alliance for identity and security management
solutions – HP sells Novell products, Novell manages technology• HP & Acer resolved all claims between them• New radio frequency identification (RFID) technology to secure and
improve audit controls in the data center• US Air Force contract for desktop, laptop, and services• Joined with Intel & Yahoo, created a cloud computing research and
education data center• Acquired Electronic Data Systems Corp (EDS), global technology
services, for $13.9 billionApril 10, 2023 The HP-Compaq Merger: Case Analysis
HP Timeline (2009 – Present)
2009• HP & Sun Microsystems agreement – HP to distribute and provide
software support for Sun’s OS on HP’s server• 10-year contract with Avivia (insurance) to manage 2 data centers for
$1 billion• 12-year contract with British Columbia Ministry of Labour and Citizens’
Services for hosting and data center services for $586 million• 11/11 – Acquires 3COM, global enterprise networking solution, for $2.7
billion
April 10, 2023 The HP-Compaq Merger: Case Analysis
HP Today
• Total Revenue: $118,364 million (2008)– 13.5% growth over prior year
• Net Income: $8,329 million (2008)– 14.7% growth over prior year
• CEO: Mark Hurd– Started on April 1, 2005
April 10, 2023 The HP-Compaq Merger: Case Analysis
HP Market Share
• Leading global PC market for shipments– 2006 – Took market
leadership from Dell– 18% HP, 14% Dell, 11%
Acer, 7% Lenovo (2008)
• Leading global server market– 30% market share in 2008
• Leading blade servers segment– 47% HP, 26% IBM (2008)
• Leading global printers market– 40% market share in 2008– Competitors: Xerox, Canon
• Storage market– EMC, HP (2008)
• IT services– 2nd largest player (EDS
acquisition in 2008)– Competitors: Accenture, IBM
• Branding– #12 in Top 100 Best Global
Brands (Interbrand, 2008)– #1 in US, #10 in world for
Environment, Social Impact Ratings (The Economist, 2008)
April 10, 2023 The HP-Compaq Merger: Case Analysis
PC Shipments for 3Q09 (US & INT’L)
Source: IDC Worldwide, Quarterly PC Tracker 10/09
April 10, 2023 The HP-Compaq Merger: Case Analysis
HP Structure Now
7 business segments Technology Solutions Group• Enterprise Storage and Servers (ESS)• HP Services (HPS)• HP Software
Personal Systems Group (PSG)
Imaging and Printing Group (IPG)
HP Financial Services (HPFS)
Corporate Investments
April 10, 2023 The HP-Compaq Merger: Case Analysis
So what’s the Verdict?
• They did manage to save $3 billion with the merger, successfully accomplishing their main goal of reducing costs of $2.1 billion
• However, that came at the price of firing 44,000 employees over the last 3 years– Original estimate: 15,000-17,000
• Success/ Failure? Let time decide…
April 10, 2023 The HP-Compaq Merger: Case Analysis
page 42
Thank You
April 10, 2023 The HP-Compaq Merger: Case Analysis