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Effect of M&A on Stakeholders
Case: The Merger of Hewlett‐Packard and Compaq(A) ‐ Strategy and
valuation
As a Shareholder in HP, Would you Vote your Shares in Favor of the Deal?
What is the Efficiency of HP Board?
Board failed to identify the strategic threats as they were emerging – Now reacting to competitors’ threat
Strategic dilemma: doing the deal and not doing the deal are risky alternatives – outcome of board’s delayed action
HP board had a chance to confront the strategic issues at the time it appointed Fiorina
Annual Pretax Cost Savings as a Result of Proposed Merger
Administrative/IT costs $625 million
Cost-of-goods-sold benefits $600 million Sales-management benefits $475 million Research-and-development efficiencies $425 million Indirect-purchase benefits $250 million Marketing efficiencies $125 million
Leaders in PCsIntel servers & storage
Fault‐tolerant computingHigh performance computing
Global reachEstablished direct‐sales
capability in response to Dell
Wants to be more like IBM but forced to compete with DellMajority of sales are not
direct and thus CPQ is unable to match Dell’s cost structure
in PCs
Continued cost cuttingDirect sales – moving in right
directionEnterprise consulting and
financial servicesWeak position in Unix market
Commoditization of core computing businesses
Competition and fragmentation of higher‐margin service business
Strengths Weaknesses
OpportunitiesThreats
Compaq
ImagingBrand and channel clout
owing to dominant imaging business
Cyclical proof imaging‐supplies businesses provide annuity‐like high‐margin
revenue streamsSecond only to Sun un UNIX
market share
PCs and Inter servers: trapped between Dell on the low end and IBM/Sun on the high end
High costs and low R&D productivity
No direct distributionLack of breadth and scale in
service
Direct distributionCost cutting and realignment
of R&DLess mature international
printer marketsCommercial printing system
Continued competition form low‐price/quality competitors
Maturation of corporate printing market
Uncertain growth prospects for Unix market on the heels of dot‐com bust and ongoing
telecom contraction
Strengths Weaknesses
OpportunitiesThreats
HP
Contest by Walter HewlettAgainst the Merger
Credibility of merger synergies
Strategic rationale for the deal
Impact of specific deal terms
Meaning of merger of equals
What are the Challenges in this Deal?
LayoffExpected integration across 160 countries involving
150,000 people
High end to now low end customers
Innovation to commodity type business Change in HP way Low margin, low job security
business
Compaq has struggled for years with layoffs and poor performance ‐‐‐ would send the mood of employees of both the companies further
south
Is it Really a Merger of Equals?
HP CompaqCEO = Fiorina COO = Capellas
14/20 senior executives 6/20 senior executivesBoard composition 6 = HP 5 = CPQ
Compensation unknown unknownShare of ownership 64% 36%
Layoffs shared sharedBrands HP brand retained Compaq brand retained
Form of transaction Tax-deferred, all stockCorporate name name = Hewlett-Packard
Headquarters location HQ = Palo Alto
Management/CEO
Social Terms and the Merger of Equals
Comparatively low acquisition premium should be viewed as part of the larger deal structure, billed as a “merger of equals”
Almost all will vote for the deal
Most likely it was to save face for the Compaq management team and to preserve for them a partial place at the table in managing the new firm
Challenges
Challenges of integrating global
operations
International nature of business
Execution of distribution
model
Development and transition of new Product Mix
Challenges
Exposure to increased competitive pressures
Weak economy may inhibit merger at critical stage
Current and future weakening of credit rating
Customer / Market Uncertainties
Regulatory approval / restrictions
Fixed Ratio of 0.635
Challenges
Competition ‐ As HP and Compaq smooth out their merger, the industry – and their competitors – move on to bigger and better things
Blending in ‐ The merged company needs to be a “hybrid enterprise”
Convincing customers ‐Customers want a clear
“migration path,” especial with regards to discontinued
offerings
Meshing cultures ‐ HP: “deliberative, thorough
decision‐making” Compaq: “fast decision‐making and marketing”Competition
What should be Communication Strategies of HP?
Demonstrate the Value of Acting
Now
Reduce the Cost of Action
Showcase the Risks of Waiting
Identification of key stakeholder
groups
Ensuring effective corporate
communications
Stakeholder Related Failure Factors in this Deal
Failure to secure the goodwill of a range of stakeholder groups common to both
companies. (shareholders vs. other stakeholders, e.g.
regulatory bodies)
To focus on the corporate objectives is difficult if people are worried about their own
position
Unavoidable because there is necessarily some uncertainty about the final shape of the
organization
Suggested Communication in a M&A Process
• Forms and channels available for communicating• Reactions need to be tracked throughout the merger process.
Identification of key stakeholder
groups
• Through detailed analysis of the internal environments of both companies and a conscious decision to build on the strengths of each.
Developing a unified corporate
identity
• Monitoring the results• Identifying the emergence of potentially damaging issues • Monitoring perceptions pre‐, during, and post‐merger• Revealing conflicting messages emanating from the two companies• Evaluating the financial benefits and drawbacks of the merger
Ensuring effective corporate
communications
What are the Stakeholders ReactionsExpected in this Deal?
Customer dissatisfaction Employers attrition issuesImpact on the individual or group working in company
& on work culture
Differences in compensation packages
and designation
Ego clashes between the top management
Separation Anxiety Company wide rumorsEmployees loose faith in
their organization and tend to become demotivated
What are the Stakeholders ReactionsExpected in this Deal?
Stress level experienced by the CEOs often travels through the chain of command, affecting subordinates as well
Fear of transfer and retrenchment
Loss of position in the hierarchical level
Process of M&A has a great impact on the work culture during those deal process days as it disturbs whole
organization of the company
Step child treatment for target employees
Each company has its own set of values which may conflict
with those of acquired company
Loss of identity, Lack of information & anxiety, Talent is lost, Family repercussions
Managing Reactions!
Organization must effectively develop and implement
assistance program for displaced employees
Communication from the executive team with employees in the pre‐acquisition phase needs to be consistent so that anxiety levels among the personnel can
be kept at low level
Need for developing and executing effective employee communication, particularly conveying the employees that how the transaction will impact
organizational members
Communication between the members of transferor and
transferee Company should be open, honest and strategic
WALTER
AND
FAMILY
CARLY
AND
HP
Trading History of Compaq and HP Stock (in $) (surrounding Sept 4, 2001, Announcement Date)
DateHWP
Closing Price
HWP Percentage
Change
CPQ Closing
Price
CPQ Percentage
Change
Implied CPQ Price
Implied Premium for CPQ
8/27/2001 25.02 –0.4 13.27 –2.8 15.83 19.26%8/28/2001 24.61 –1.6 13.32 0.4 15.57 16.86%8/29/2001 23.95 –2.7 13.13 –1.4 15.15 15.37%8/30/2001 23.4 –2.3 12.69 –3.4 14.80 16.63%8/31/2001 23.21 –0.8 12.35 –2.7 14.68 18.87%9/4/2001 18.87 –18.7 11.08 –10.3 11.94 7.72%9/5/2001 18.21 –3.5 10.41 –6.0 11.52 10.64%9/6/2001 17.7 –2.8 10.35 –0.6 11.20 8.17%9/7/2001 18.08 2.1 10.59 2.3 11.44 7.98%9/10/2001 17.89 –1.1 10.35 –2.3 11.32 9.33%9/17/2001 16.02 –10.5 8.75 –15.5 10.13 15.80%
Financial Information on Peers (Data Presented at 2001 Year‐End)
Company Name SIC SalesSales 3-yr
CAGR
Gross Profit
Margin
EBIT Margin
Market Value
1-yr Total Return
Est. 2002 EPS
Growth*P/E Beta D/E ROA ROE ROI
(in $000) (% ) (% ) (% ) (in $000) (% ) (% ) (% ) (% ) (% )Apple Computer Inc 3571 5,363 −3.4 24.9 −6.2 5,441 −39.8 nm nm 1.31 0.08 −0.6 −0.9 −0.9
Cisco Systems Inc 3576 22,293 38.1 55 0.1 140,671 −70.6 −46.0 nm 1.82 0 −2.9 −3.7 −3.7Compaq Computer Corp 3571 33,554 2.5 25.3 1.4 16,592 −34.6 −94.0 nm 1.49 0.05 −2.4 −5.1 −4.8
Dell Inc 3571 31,168 19.5 18.4 7.3 71,666 5.2 −23.0 57.3 2.21 0.11 9.2 26.5 23.9Fujitsu Ltd (ADR) 7373 37,646 −4.6 34.2 −1.5 15,183 −42.2 nm nm 1.12 1.33 −8.3 −44.8 −17.4
Gateway Inc 3571 5,938 −7.4 21.1 −3.5 2,605 −55.3 nm nm 2.04 0 −33.9 −74.1 −57.5Hewlett-Packard Co 3570 45,226 −1.3 28.6 4.5 32,651 −63.3 4 52.6 1.48 0.27 1.9 4.5 3.5
Hitachi Ltd (ADR) 3570 60,104 −3.0 29.3 −1.5 24,550 −15.4 nm nm 1.15 0.78 −4.9 −21.0 −9.9IBM Corp 7371 85,866 1.7 41.9 10.8 208,371 43 −2.0 25.8 1.24 0.68 8.7 32.7 19.5
NEC Corp (ADR) 3571 38,354 −1.7 27.6 −1.3 13,830 −46.8 nm nm 1.69 2.83 −6.2 −54.8 −13.5Silicon Graphics Inc 3571 1,854 −15.7 41 −16.7 272 −62.9 nm nm 0.98 nm −38.5 nm −186.9
Sun Microsystems Inc 3571 18,250 23.1 51.9 10.1 51,197 −65.4 nm 52.4 1.82 0.14 5.4 9.3 8.1Unisys Corp 7373 6,018 −5.8 30 4.5 4,002 −14.3 −54.0 nm 1.2 0.35 −0.9 −2.4 −1.7
Averages 30,126 3.2 33 0.6 45,156 −35.6 −35.8 47 1.5 0.55 −5.6 −11.2 −18.6
Information on Recent Computer‐Related Transactions (Completed Transactions; Acquisition of 100% Interest)
Consideration
Offered1/26/1998 Digital Equipment Compaq Computer $9,124 $9,063 0.69 34.67 15.45 32.99 na na na None Cash, Stock
8/3/1998 Stratus Computer Ascend Comm. $970 $835 1.2 9.97 5.08 10.9 19.1 53.3 33.4 None Stock
11/11/1998 Sulcus Hospitality Eltrax Systems $71 $71 1.22 nm 26.16 nm 159.6 149.6 260.5 None Stock
5/11/1999 Meridian Data Quantum Corp $94 $93 5.08 nm nm nm 168.9 189.6 213.8 None Stock
5/24/1999 Texas Micro RadiSys Corp $120 $120 1.44 37.63 24.68 34.38 68.7 66.6 75.5 Lockup Stock
6/22/1999 Diamond Multimedia S3 Inc $183 $183 0.32 nm nm nm −13.9 21.6 4.5 None Stock
7/12/1999 Sequent Computer Sys. IBM Corp $809 $811 1.02 nm 166.5 nm 3.3 6.7 52.4 None Cash
7/27/1999 Mylex IBM Corp $261 $258 1.77 nm nm nm 20 17.8 108.7 None Cash
8/9/1999 Data General EMC Corp $1,410 $1,409 0.97 186.2 13.68 74.8 72.8 63.5 31.1 Lockup Stock
9/20/1999 Nichols Research Computer Sciences $401 $396 0.87 18.51 13.93 30.18 6.9 9 24.6 None Stock
7/26/2000 Telxon Corp Symbol Technologies $571 $571 1.57 nm nm 2.21 27.9 40 32.1 None Stock
2/21/2001 Blue Wave Systems Motorola Inc $120 $119 3.24 33.19 25.42 30.63 −2.2 −4.2 −12.4 Lockup Stock
4/2/2001 General Semiconductor Vishay Intertechnology $890 $660 1.37 8.74 6.21 20.25 43 40.6 40.9 None Stock
7/16/2001 SCI Systems Sanmina Corp $6,336 $4,812 0.55 20.88 11.18 48.17 19.6 27.8 44.5 None Stock, Liabs
9/4/2001 Compaq Computer Hewlett-Packard $25,263 $25,175 0.62 13.51 7.66 nm 18.9 10.2 −2.0 None Stock
12/7/2001 IKOS Systems Mentor Graphics $115 $116 1.91 nm nm nm 36.7 46.7 111.5 None Cash
Averages $2,921 $2,793 1.49 40.36 28.72 31.61 43.3 49.3 67.9
Averages w/o DG/EMC $3,022 $2,886 1.52 22.14 30.23 26.21 41.2 48.2 70.6
Defensive Tactics
Deal Multiples Premium over Stock Price (%
Ann Date Target Name Acquirer NameTrans
Value ($ mil)
Equity Value* ($
mil)
Equity Value/ Net
Sales
Equity Value/ EBIT
Equity Value/ Target
Cash Flow
Equity Value/ Net
Inc
1 day prior
1 wk prior 4 wks prior
Information on Recent “Jumbo” Deals (Transaction Value > $25 Billion)
(%)Trans Value
Equity Value*
($mil) ($mil)
10/1/1997 MCI Communications WorldCom $41,907 $37,407 2.45 33.46 13.17 68.26 102.99 100.99 94.29 None Stock, Liabs
4/6/1998 Citicorp Travelers Group $72,558 $72,185 2.03 12.4 10.91 19.72 7.9 10.4 19 None Stock
4/13/1998 BankAmerica NationsBank $61,633 $61,415 2.54 11.38 9.8 18.81 0 –0.3 2.8 None Stock
4/13/1998 First Chicago NBD BANC ONE $29,616 $29,421 2.86 12.96 np 19.26 26.5 38 34.1 Lockup Stock
5/7/1998 Chrysler Daimler-Benz AG $40,466 $40,467 0.65 7.26 4.89 14.31 48.8 54.3 45.7 None Newly Issued Ord Sh
5/11/1998 Ameritech SBC Communications $62,593 $62,554 3.84 16.5 9.83 27.78 np np np None Stock
6/24/1998 Tele-Communications AT&T $53,592 $60,192 7.9 196.07 30.55 Nm np np np None Stock, Other
7/28/1998 GTE Bell Atlantic $53,415 $53,451 2.19 10.95 6.11 23.52 –2.7 –2.7 –4.9 Lockup Stock
8/11/1998 Amoco British Petroleum Co $48,174 $47,902 1.4 14.57 8.16 22.84 np np np Lockup Newly Issued Ord Sh
12/1/1998 Mobil Exxon Corp $78,946 $78,907 1.25 4.82 np 27.31 26.3 34.7 32.2 Lockup Stock
1/18/1999 AirTouch Communications Vodafone Group $60,287 $60,212 12.9 65.45 34.77 89.74 40.6 50.2 71.5 None Cash, Ord Sh
4/1/1999 ARCO BP Amoco $27,224 $27,224 2.52 nm 107.61 nm 27.2 29.9 54.4 None Newly Issued Ord Sh
4/22/1999 MediaOne Group AT&T Corp $49,279 $44,768 15.53 nm 47.48 31.31 12.1 13 22.8 None Cash, Stock, Liabs
6/14/1999 US WEST Qwest Commun Intl $56,307 $46,298 3.69 15.3 8.74 31.47 32.5 50.1 49.8 None Stock, Liabs
9/7/1999 CBS Viacom Inc $39,434 $39,434 5.78 62.5 31.88 579.92 –0.1 4 8.5 None Stock Type B
11/4/1999 Warner-Lambert Pfizer Inc $89,168 $99,710 7.71 38.61 33.86 57.53 25.3 29.7 40.8 None Stock
12/20/1999 Pharmacia & Upjohn Monsanto $26,486 $26,521 3.7 31.02 np 37.3 –1.1 –5.5 –13.5 Lockup Stock
1/10/2000 Time Warner America Online $164,746 $164,800 6.03 27.31 15.18 84.08 70.9 55.8 70.2 None Stock
5/2/2000 Bestfoods Unilever PLC $25,065 $20,895 2.41 15.44 12.95 28.51 42.3 35.7 53.3 None Cash
7/10/2000 SDL Inc JDS Uniphase $41,144 $35,172 188.09 1056.21 781.6 1395.71 77.2 68.6 106.3 None Stock
7/24/2000 VoiceStream Wireless Deutsche Telekom AG $29,404 $29,104 12.14 nm nm nm –25.4 –20.3 –20.2 None Cash, Ord Sh, Liabs
9/6/2000 Associates First Capital Citigroup $30,957 $30,938 2.36 4.85 4.78 20.57 50.8 52.8 45.6 None Stock
9/13/2000 JP Morgan & Co Chase Manhattan $33,555 $33,716 1.72 10.48 7.45 15.9 14.7 21.5 32.4 Lockup Stock
10/16/2000 Texaco Chevron $42,872 $35,993 0.78 10.25 6.92 15.55 17.7 22.6 17.5 None Stock
9/4/2001 Compaq Computer Hewlett-Packard $25,263 $25,175 0.62 13.51 7.66 nm 18.9 10.2 –2.0 None Stock
Averages – Total Sample $51,364 $50,555 11.72 75.97 56.87 125.21 27.88 29.71 34.57
Averages – without JDS/SDL $51,790 $51,195 4.38 25.63 17.19 51.4 22.34 24.37 27.26
1 wk prior 4 wks prior
Defensive Tactics
ConsiderationO ffered
Deal Multiples Premium over Stock Price
Equity Value / Target Cash Flow
Equity Value / Net Inc 1 day priorAnn Date Target
Name Acquirer Name Equity Value / Net Sales Equity Value / EBIT
Compaq Triangulation Diagram
Net Sales Mult
DCF
Implied Equity Value at 2/4/02
Valuation Method High Low DifferenceNet Sales Multiple (0.5× to 1.5×) $50.30 $16.80 $33.50DCF (Stand-alone) $20.80 $15.90 $4.90Cash Flow Multiple (6× to 26×) $31.80 $7.30 $24.50Latest Mkt. Price ($12.00 to $12.40/share) $21.10 $20.40 $0.70LTM Mkt. Price ($12 to $20/share) $34.10 $20.40 $13.60
Hewlett‐Packard Triangulation DiagramNet Sales Mult
DCF
EBIT Mult
Valuation Method High Low DifferenceNet Sales Multiple (0.5× to 1.5×) $67.50 $22.50 $45.00DCF (Stand‐alone) $42.50 $34.10 $8.40EBIT Multiple (9x to 40x) $46.70 $10.50 $36.20Cash Flow Multiple (6× to 26×) $46.20 $10.70 $35.50Latest Mkt. Price ($22.00 to $23/share) $44.60 $42.70 $1.90LTM Mkt. Price ($22 to $31/share) $60.20 $42.70 $17.50
Monthly Stock PricesRatio of CPQ to HWP
Ratio of CPQ to HWP
Price Beta Price Beta Price Price Beta Price Beta PriceSep-98 31.63 na 26.47 na 1.19 Sep-00 27.58 1.04 48.50 1.21 0.57Oct-98 31.63 na 30.13 na 1.05 Oct-00 30.41 1.05 46.50 1.24 0.65Nov-98 32.50 1.07 31.28 1.34 1.04 Nov-00 21.50 1.25 31.63 1.44 0.68Dec-98 42.00 1.15 34.16 1.35 1.23 Dec-00 15.05 1.28 31.56 1.44 0.48Jan-99 47.63 1.15 39.19 1.36 1.22 1-Jan 23.71 1.37 36.85 1.46 0.64Feb-99 35.38 1.36 33.22 1.47 1.06 1-Feb 20.20 1.40 28.85 1.53 0.70Mar-99 31.69 1.35 33.91 1.45 0.93 1-Mar 18.20 1.40 31.27 1.43 0.58Apr-99 22.31 1.29 39.44 1.47 0.57 1-Apr 17.50 1.33 28.43 1.34 0.62May-99 23.69 1.25 47.16 1.35 0.50 1-May 15.99 1.33 29.32 1.34 0.55Jun-99 23.69 1.15 50.25 1.34 0.47 1-Jun 15.32 1.34 28.60 1.33 0.54Jul-99 24.06 1.13 52.34 1.30 0.46 1-Jul 14.94 1.40 24.66 1.33 0.61
Aug-99 23.16 1.12 52.69 1.28 0.44 1-Aug 12.35 1.45 23.21 1.32 0.53Sep-99 22.88 1.06 45.38 1.33 0.50 1-Sep 8.31 1.55 16.05 1.41 0.52Oct-99 19.13 0.95 37.09 1.21 0.52 1-Oct 8.75 1.54 16.83 1.43 0.52Nov-99 24.44 0.95 47.44 1.23 0.52 1-Nov 10.15 1.55 21.99 1.47 0.46Dec-99 27.06 0.97 56.88 1.28 0.48 1-Dec 9.76 1.55 20.54 1.46 0.48Jan-00 27.25 0.94 54.13 1.28 0.50 2-Jan 12.35 1.48 22.11 1.46 0.56Feb-00 25.13 0.98 67.25 1.16 0.37 High 47.63 1.55 67.50 1.53 1.23Mar-00 27.00 0.96 66.44 1.06 0.41 Average 23.60 1.20 39.92 1.32 0.62Apr-00 29.19 0.91 67.50 1.04 0.43 Low 8.31 0.90 16.05 1.04 0.37May-00 26.25 0.95 60.09 1.08 0.44 Volatility 18.30% 15.40%Jun-00 25.56 0.94 62.44 1.08 0.41 0.6325Jul-00 28.06 0.90 54.59 1.11 0.51
Aug-00 34.06 0.94 60.38 1.13 0.56
Proposed Exchange Ratio
CPQ HWPCPQ HWP
DCF Valuation of Merger SynergiesThis image cannot currently be displayed.
Application of Leadership to the M&A Process