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THE HP-COMPAQ MERGER STORY Presented By :- Ankit Gupta Ankita Mandhata Kapil Rustagi

HP - Compaq

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Page 1: HP - Compaq

THE HP-COMPAQ MERGER STORY

Presented By :- Ankit Gupta

Ankita Mandhata

Kapil Rustagi

Kriti Nigam

Robin Asati

Page 2: HP - Compaq

HEWLETT-PACKARD (HP) - PRE MERGER

Stanford engineers Bill Hewlett and David Packard started HP in California in 1938 as an electronic instruments company.

In 1963, HP entered into a joint venture agreement with Yokogawa Electric Works of Japan to form Yokogawa-Hewlett-Packard.

In 1966, the company established HP Laboratories, to conduct research activities relating to new technologies and products. During the same year, HP designed its first computer for controlling some of its test-and-measurement instruments.

In 1974, HP launched its first minicomputer. During the 1980s, HP emerged as a major player in the computer

industry, offering a full range of computers from desktop machines to powerful minicomputers. 

After the spun off of its test-and- measurement equipment division and the cut-throat competition in the computer industry, HP felt the need for new leadership to cope with the rapidly evolving industry trends.

By 2001, with net revenues of $48.78, HP was ranked 19th in global Fortune 500 list.

Besides computer related products and services the company also made electronic products and systems for measuring computing and communication.

Page 3: HP - Compaq

COMPAQ – PRE MERGER

Compaq was founded by Joseph R. Canion along with some Texas

Instruments colleagues in Feb. 1982with a capital of $1.5 million.

Initially it manufactured and sold IBM compatible computers but, soon

came to be seen as a major alternative to IBM for supply of computers.

It offered three broad category of products:

a) The enterprise Computing Group

b) The Commercial PC Group

c) The Consumer PC Group

In 1988, Compaq acquired Digital Equipment Corp. for $9.1 billion to

become ‘full services’ computer company.

In 2001 with revenues of $42.38 billion, it secured 27th rank in Global

Fortune 500 list.

Page 4: HP - Compaq

FACTS AND FIGURES

Founded: 1938

Employees: 86,200

2001 Revenues: $45.2bn

2001 profits: $408m

CEO: Carly Fiorina

Founded: 1983

Employees: 63,700

2001 Revenues: $33.5bn

2001 loss: $785m

CEO: Michael Capellas

HP Compaq

Page 5: HP - Compaq

PRE MERGER STATS FOR HP & COMPAQ

Company Market share in high end servers

Revenue

Compaq 3% $134 mn

HP 11.4% $512mn

Company Market share in mid-range UNIX servers

Revenue

Compaq 4% $488 mn

HP 30.3% $3,675 mn

Company Market share in laptops for quarter 2 (volume share)

Market share in PCs for quarter 2 (volume share)

Compaq 12.1% 11.6%

HP 6.9% 4.5%

Page 6: HP - Compaq

GROWING PROBLEMS AT HP

HP was unable to adapt to technological innovation fast.

Margins lowered day by day.

Printing line was facing strong competition from Lexmark

and Epson who were providing low quality inexpensive

printers.

Need of a strong complementary business line.

Recession, pay cuts and lay offs.

Page 7: HP - Compaq

SOLUTION - “ MERGER “

Page 8: HP - Compaq

SUMMARY 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 Compaq Shareholder

Ownership in merged company

64% - former HWP shareholders36% - former CPQ shareholders

Ownership of Hewlett and Packard Families

18.6% before merger8.4% after merger

Accounting Method Purchase

Merger method Reverse Triangular Merger

Page 9: HP - Compaq

QUESTION 1) THE HP-COMPAQ MERGER HAD MET WITH OPPOSITION FROM VARIOUS PARTIES. ANALYZE THE REASONS FOR THIS OPPOSITION AND CRITICALLY COMMENT ON THE PROS AND CONS OF THE MERGER

Page 10: HP - Compaq

PACKARD’S RATIONALE FOR HIS OPPOSITION

Packard, the oldest son of the other late co-founder David

Packerd, claimed that

Fiorina’s high-handed management and her efforts to

reinvent the company ran counter to the company’s core

values as established by the founders.

Citing massive layoffs as an example of this departure from

HP’s core values,

Packard argued that although the founders never

guaranteed job security, “Bill and Dave never developed a

premeditated business strategy that treated HP employees

as expendable

Page 11: HP - Compaq

HEWLETT’S RATIONALE FOR HIS OPPOSITION

According to Walter Hewlett, the eldest son of Hewlett-

Packard co - founder William R Hewlett.

Fiorina had exaggerated the importance of scale in the

computer business.

In addition, he believed that rather than makeing the

company more competitive, the merger would expose HP to

the brutal, low-profit PC business.

Hewlett believed that the merger would significantly dilute

the value of the company’s lucrative printing business.

Page 12: HP - Compaq

EMPLOYEES RESENTMENT

Steps taken for controlling cost.

Forced 5 day vacation for workers in Dec 2000.

The postponement of wages hikes for 3 months.

Layoff of 1700 employees in Jan 2001.

Management sent memos saying that layoffs would continue and that volunteering for pay-cuts would not guarantee continued employment.

Mergers would result to layoff of 15000 to 30000 employees.

Page 13: HP - Compaq

PROS HP would become the undisputed worldwide leader in revenues for

server, access devices(PCs) and imaging and printing.

Cross selling and technology.

Economies of scale- volume advantage : Savings of $2.5bn

Cost saving of 3% or 4% on materials.

Direct selling using Compaq sales force.

Have operations in more than 160 countries with over 145,000 employees.

The merger deal also means that there are many overlaps in products, technologies, distribution channels, services, facilities and jobs

Will provide complete set of products and services.

Page 14: HP - Compaq

CONS Synergies/integration can not be materialize easily.

Companies were potentially vulnerable to insider information being misused.

PC marker was shrinking in US.

Top management who are against the deal might leave.

Employee faith can get harmed, due to layoffs.

Merger failure will set back the company opting out of the deal by $675 mn in form of a breakup free.

Credibility in stock market will decrease.

Compaq shareholders will get 0.6325 share of the new company for each share of Compaq.

Page 15: HP - Compaq

QUESTION 2) ASSUMING THE MERGER IS COMPLETED, DO YOU THINK THE NEW HP WOULD BE ABLE TO COUNTER THE COMPETITION FROM COMPANIES LIKE DELL AND IBM ? GIVE REASONS FOR YOUR ANSWER

Page 16: HP - Compaq

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 Hewlett Packard

Heliose Merger Corp

Compaq Shareholder

s

Compaq

Stock (Cash for fractional shares)

Stock

Page 17: HP - Compaq

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, and shipping, while at the

same time preserving much of the two companies’ revenues.

Page 18: HP - Compaq

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, but HP was stronger on the consumer side.

Together they would be #1 in market share in 2001

The merger would also greatly expand the numbers of the company’s

service professionals. 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.

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 accounts .

Page 19: HP - Compaq

OPERATIONAL BENEFITS OF MERGER

HP and Compaq have highly complimentary 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

Page 20: HP - Compaq

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

Page 21: HP - Compaq

OPERATIONAL EFFICIENCIES• Achieved merger-related cost savings of more than $1.3B 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

Page 22: HP - Compaq

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

- Direct sales model benefited from Compaq direct sales model

Out-compete IBM

- Manage the high level relationships with global enterprise

customers

- With help of Compaq consultants managed 40 big deals in

competition with IBM

Page 23: HP - Compaq

SHAREHOLDER VALUE

Myth:

A strategically poor integration will be reflected by the stock

market’s pushing the combined company's stock price down ,

an illustration of how mergers can destroy value

Fact :

In mid-July 2007, five years after the merger announcement,

HP's total shareholder returns were up 46 percent. Over the

same period, the Standard & Poor's IT index had sunk 9

percent, rival IBM was down 23 percent, and even Dell was up

only 2 percent.

Page 24: HP - Compaq

PC BUSINESS Myth:

HP, even after combining with Compaq, 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 15.2 % from 18.2 %

last year, a particularly sharp decline given that the overall

market grew 10.9 percent

Hewlett-Packard holds 19.1 percent of the world PC market

Even in the US, HP and Dell have 24.2 and 26.8 % of the PC

market in 2007

Page 25: HP - Compaq

PRINTER BUSINESS

Myth:

HP is pursuing only market share in printers instead of ROI

Fact :

In HP’s printer business, “good” share consists of devices

that deliver color, photos, lots of output, and perform multiple

functions. Those characteristics lead to more pages printed,

and more profitability. HP has extended that business, leaving

low-end, single-function printers to competitors.

The company also refused to respond to Dell price-cutting

intended to weaken HP's market share in printers

Page 26: HP - Compaq

SERVER BUSINESS

Myth:

Pursuing more market share in PCs will divert resources and

distract attention from its strengths in printers and servers

Fact :

Vendor 2007 Revenue (Mn US $)

2007 Share(%)

2006Revenue(Mn US $)

2006Share(%)

Growth (%)

IBM 4069 31 3824 30.9 6.4

HP 3707 28.2 3424 26.0 22.2

Sun 1711 13 1620 13.1 5.6

Dell 1526 11.6 1270 10.3 20.2

Fujitsu/Siemens

542 4.1 554 4.5 -2.3

Page 27: HP - Compaq

The merger wasn't the problem; it was the Management. All that

HP needed was a strong management in order to realize the latent

potential of the merged company.

HP, hired Mark Hurd to replace Fiorina. Only then did the company

acquire the management skills needed to take the raw material

that was there and transform it into a world leader in technology.

In the three years since Hurd became CEO, the results have been

truly remarkable. He took the pieces assembled by Fiorina, applied

his management skills to them, and created a growing, profitable

and increasingly valuable company.

CONCLUSION

Page 28: HP - Compaq

HP VS. IBM : LAST 5 YEARS

Page 29: HP - Compaq

HP VS. DELL : LAST 5 YEARS

Page 30: HP - Compaq

HP VS. SUN : LAST 5 YEARS

Page 31: HP - Compaq

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.

Page 32: HP - Compaq

ACHIEVED BENEFITS FOR CUSTOMERS

Ease of doing business

The supply chain strategy allows a single point of collaboration

with HP, simplifying suppliers’ interaction with HP, increasing

business collaboration, and lowering costs for both parties.

Enhanced supply and demand visibility

This visibility improves participants’ ability to predict demand.

It also enables suppliers to build purchasing, manufacturing,

and logistical efficiencies into their own supply chains. Further,

it enables suppliers to pass associated discounts onto

customers such as HP

Elimination of non-value-added steps, such as administration, and

costs

Page 33: HP - Compaq

THANK YOU