HP-Compaq MergerBy:Piyush Dwivedi-12EX-033Santosh Kumar Singh- 12EX-042Vivek Kumar-12EX-056

HP- BackgroundHP was founded in 1939 by two Stanford engineers, William R. Hewlett and David Packard.HP had above-average growth of over 20% per year up to mid 1990. By the late 1990s, revenue growth declined . HPs computer business faced stiff competition from Dell, Compaq, IBM and Sun Microsystems, Inc.Since the mid-1990s, demand for printers soared as home PCs became more popular. As a result, HP dominated the Inkjet and Laser jet segments, as well as in the printer supply business.The companys net earnings declined 89% on an 8% decline in revenue in 2001.

Contd.6. In 1996, Dells direct distribution model took the computer industry by storm and disrupted the traditional route through which products were sold.7.As a result, the company only had about 13 days of inventory, versus 75 to 100 days in an ordinary indirect model. With its low-cost direct distribution strategy, Dell drove down computer prices, which resulted in reduced operating margins throughout the industry.Between 1994 and 1998, Dells profits increased from US$149 million to US$1.5 billion. During the same period, it grew twice as fast as its major rivals in the computer market and tripled its market share.

CompaqFounded in 1982, Compaq surpassed IBM in 1994 to become the worlds largest manufacturer of PCs.Compaq acquired Tandem Computers in 1997for US $3 Billion & doubled its sales force & support team.Compaq acquired Digital equipment corp in 1998 for US$9.6 billion which gave competent service & consulting staff of 22000 people.Compaq was the third largest computer company, behind IBM and HP, with revenue of US$42 billion.The company had 66,000 employees in over 200 countries.Compaqs integration with Tandem and DEC had also proved difficult, and this had translated into increasing explicit and hidden costs.

Why the Merger took placeHP hired McKinsey & Company in May 2001 to advise on the strategic direction HP ought to take. They suggested for a deal with Compaq.

In 2001, HP was the second largest computer company (behind IBM), and its pre-merger revenue was US$45 billion

4.HPs management pointed to a weakened macro-economic environment and competitive price pressures in personal computers (PCs) and printers to help explain its disappointing margins

Pros of the mergerAdvantage of HP & Compaq merger according to HP Management:-

Before the merger, IBM was a leader in the computing service market, & Dell excelled at direct-sales distribution.2. The merger could help to achieve economies of scale and generate cost savings.3. HP could also leverage Compaqs progress in developing direct sales capabilities to compete effectively with Dell.4.Compaq dominated the overall storage market. Adding HPs capabilities in high-end storage, the consolidated company could become the market leader in both the enterprise storage segment and the storage area network segment.It would have 65,000 IT staff operating in 160 countries.The merger was expected to generate cost synergies of about US$2 billion in 2003 & US$2.5 billion by mid-2004.

Cons of the MergerAccording to Hewlett:-The PC market was expected to grow at less than half the rate of the imaging and printing market in the next several years. This meant that the merger could dilute HPs shareholders interest in the profitable imaging and printing business and increase their exposure to an unprofitable PC business.Resulting in lower credit rating, greater equity risk and a higher cost of capital.The proposed merger would not substantially improve HPs market position in mid-range and high-end servers or in high-end services.Compaqs market share in servers was primarily in the low end of the market, where margins were low. In the mid-range and high-end server markets, the consolidated companys market share could not match that of IBM.

Merger

On May 3rd 2002, HP and Compaq officially merged . The new HP served more than one billion customers across 162 countries and had about 142,000 employees.

HP issued 1.1 billion shares to Compaqs shareholders for the merger, which accounted for about 37% of the total shares of the company. Deal had resulted in a bargain sale of 37% of the profitable printing business.

After the merger, the new HP was the second largest global technology provider, behind IBM, with about US$87 billion in revenues. The merger had expanded HPs revenue from US$45 billion to nearly US$80 billion in 2004.

ContdThrough consolidation of purchases and price masking, HP had successfully reduced direct materials cost by about US$1.2 billion from 2001 to 2003.In services, HP and Compaqs resource mix looked very similar as they both relied on lower-margin customer services, with relatively small exposure to outsourcing and consulting

As of early 2005, Dell was still the leading player in direct sales, followed by the new HP and then IBM.

New HP PerformanceThe company competed in nearly all major IT product market, with operations organised into seven business segments:The Imaging and Printing Group (IPG)The Personal Systems Group (PSG)Enterprise Storage and Servers (ESS) HP Services (HPS) HP Financial Services (HPFS) Software Corporate Investments.

In the corporate computer market, HP was squeezed between Dell at the low end of the market and IBM at the high end.

In 2002, HP committed to corporate operating profit margins of 8% to 10%, and margins of 3% in its PSG division.In the fiscal year ending October 31st 2004, the company posted operating profit margins of only 6.3% and the PSG division reported margins of only 1.2%. The companys US inkjet printer market share fell to 48% at the end of 2004 from 57.4% in the preceding year, and its US laser printer market share declined to 38% from 45.7% in the same period.

In technology consulting and services, HP lagged behind IBM, Accenture Ltd. and Electronic Data Systems Corporation (EDS). In consumer electronics, HP encountered strong competitors including Sony and Kodak.

Contd..In 2005 Revenues from the PSG division were up by 11% from the previous year, which slightly outpaced industry growth of 11%.

Solid cost control, price protection from key component vendors and a less aggressive pricing strategy all contributed to the rise in operating margins.

HPs notebook revenue increased by 9% from the previous year (versus Dells 17%) and desktop revenue rose by 8% (versus Dells 10%).

IBM had disposed of its PC division to Lenovo Group Limited, the largest PC maker in China, in a deal that was valued at approximately US$1.75 billion. The deal was completed in May 2005.

Future Strategy HP had already taken more than US$3 billion in costs out of its infrastructure since 2001, cost reduction strategy alone might not bring significant benefits to the company in the future.In June 2005, Mark Hurd reversed Fiorinas decision and announced plans to split the combined IPSG operations and manage them as separate, highly focused organizations.To improve costs, HP planned to reduce its workforce over the next six quarters by 14,500 employees, or about 10% of its regular full- time staff.Beginning in fiscal 2007, HP expected approximate ongoing annual savings of US$1.9 billion, composed of US$1.6 billion in labor costs and US$300 million in benefits savings.

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