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 i

S a l o m e Z h v a n i a

HP COMPAQ Merger

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TABLE OF CONTENTS Executive 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: .............................................................................. 7

POTENTIAL IMPACT OF MERGER:.......................................................................................... 8

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

Reasons for the Merger ................................................................................................................... 9

Reasons against Merger ................................................................................................................ 10

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

Negative Aspects ...................................................................................................................... 12

Summary of Benefits ................................................................................................................ 13

Market Benefits ..................................................................................................................... 13

Operational benefits of Merger ............................................................................................. 14

Financial Benefits ................................................................................................................. 14

SUMMARY OF THE DEAL ................................................................................................... 14

Five Forces .................................................................................................................................... 15

Threat of New Entrants (Barriers to Entry): (Moderate) .......................................................... 15

Bargaining Power of Buyers: (Low) ......................................................................................... 15

Bargaining Power of Suppliers: (High) .................................................................................... 15

Threat of Substitutes: (Moderate) ............................................................................................. 15

Rivalry: (High) .......................................................................................................................... 15

Implementation Strategy Highlight ............................................................................................... 16

Marketing .................................................................................................................................. 16

Operations ................................................................................................................................. 16

Technology ............................................................................................................................... 16

Buying ....................................................................................................................................... 17

Infrastructure ............................................................................................................................. 17

SWOT Analysis ............................................................................................................................ 18

Financial Highlights ...................................................................................................................... 19

Recommendations ......................................................................................................................... 22

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Executive Summary

The world’s largest corporate Information Technology merger began in September 2001

when 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 shareholder

and regulatory approval with the end result being one company. The new HP has annual

sales of approximately $90 billion which is comparable to IBM, and an operating income of

almost $4 billion. The merger was led by Carly Fiorina, the chairwoman and CEO of HP. The

president of the new HP was Michael Capellas who was the former chairman and CEO of

the 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 Compaq

and HP were struggling companies before the merger. The common question that has been

raised by analysts is: Do two struggling companies make a better merged company? Some

analysts have indicated that the merger is a gamble and that it is difficult to see any focused

logic behind the merge considering that most I.T acquisitions are not successful. Prior to

the 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 to

acquisitions they have made in the past and both were adjusting to new leadership (Fiorina

and Capellas). The merger deal also means that there are many overlaps in products,

technologies, distribution channels, services, facilities and jobs. Employee morale is a

threat to a successful merger as there have been numerous layoffs -15,000 employees. The

claimed annual cost savings of about $2.5 billion dollars by the year 2004 amounts to only

3 % of the combined costs of both companies. Gartner Group research has indicated that

the merged company has failed to do a good enough job of presenting the benefits of an

acquisition of this scale to justify the deal’s risk as it is generally known that technology

mergers rarely work. In addition, both companies in the past have struggled to resolve

conflicts 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 is

based on consensus; Compaq’s culture on the other hand is based on rapid decision

making.

From a positive perspective, most botched tech mergers involved companies that were

trying to buy their way into new businesses they knew little about, this is not the case with

the HP/Compaq merger. Apart from servers and PC’s, they have several areas where their

products overlap. e.g.: they are both are involved in making data -storage equipment and

both make handheld computing devices. In addition, both companies also bring different

strengths to the table. Compaq has done a better job in regard to engineering an entire line

and HP has been strong in consumer products. The justification provided by HP senior

management suggests that a merger will enable them to compete with two of their biggest

competitors, IBM and Dell.

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In conclusion, it is viewed by many analysts that there will be at least 2 more years of bitter

infighting which will cause the new HP to lose direction and good personnel. This is great

news for competitors such as IBM and Sun as both of them will be able to pick off the

market while the new HP is distracted by the merger. The new HP may be a threat to IBM

but not any time soon. It could take several years to determine if the largest merger in I.T

history will be a successor a complete flop.

Industry Highlight

Computer industry is one of the fastest-developing industries in the business history.

Competition has always been fierce and stays until now. Technological breakthroughs

make market dynamically changing thus each company has to be up to date in order to

handle the severe competition and stay successful.

COMPETITORS – IBM

IBM has a very strong R&D and marketing department, which aids the company to

popularize its brand and products. IBM is the company, which gave the rise to PC industry

by implementing Microsoft Windows Operational System (OS). IBM’s point of difference is

its strong customer assistance, which helps the company to gain customer loyalty.

COMPETITORS – DELL

Dell’s competitive advantage is that it offers its customers direct business model, so

consumers can customize the product the way they want via Dell.com. This feature gives

Dell the ability to lower the inventory costs and make new technology introductions faster

than its competitors, so Dell suits quickly to rapid market changes. So Dell gained number

one 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 Packard’s Palo Alto home. One year

later, 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 years

later. Annual net revenue for the company grew from $5.5 million in 1951 to $3 billion in

1980. By 1997, annual net revenue exceeded $42 billion and HP had become the world’s

second largest computer supplier.

The company, which originally produced audio oscillators, introduced its first computer in

1966. In 1972, the company pioneered the era of personal computing by introducing the

first scientific, hand-held calculator. Hewlett-Packard introduced its first personal

computer in 1980. Five years later, HP introduced the LaserJet printer, which would

become the company’s most successful product ever.

THE COMPANY TIMELINE

1938: William Hewlett and David Packard, both graduates of the electrical engineering

program at Stanford University, start their own business in the garage behind Packard’s

rented 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 elected

president of the company. Revenue: $126 million. Employees: 7,092.

1966: HP forms Hewlett-Packard Laboratories, which becomes one of the world’s leading

electronics research centers.

1972: HP introduces the first scientific, hand-held calculator and also enters the business

computer market with its minicomputer. In 2000, Forbes ASAP will name the calculator

one 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 formed

in Houston, Texas. The company is started by three former Texas Instruments executives—

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Rod 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 company’s most

successful product ever.

Compaq is listed on the New York Stock Exchange.

1989: HP celebrates its 50th anniversary and is in the top 50 on Fortune 500 listing. HP

Revenue: $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 gives

insight into the business practices, culture and management style that helped make it a

success. 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 billion—at the time the

largest acquisition in computer industry history.

1999: HP's board of directors announces its decision to spin off a new company from the

existing HP organization. Agilent Technologies consists of HP's former measurement,

components, chemical analysis and medical businesses. HP retains its computing, printing

and imaging businesses. Agilent has its initial public offering of common stock on

November 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 and

television ads focus on the company's history of invention and innovation. The company

also 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 new

organization includes consulting, outsourcing, support, education and solutions

deployment.

On September 4, HP and Compaq announce a merger agreement to create an $87 billion

global technology leader. HP revenue: 45.2 billion. HP employees: 88,000.

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COMPAQ – THE COMPANY PRE-MERGER:

Compaq Computer Corporation is an American personal computer company founded in

1982. Once the largest supplier of personal computing systems in the world, it had the

charm of being called the largest manufacturers of personal computing devices worldwide.

The company was formed by Rod Canion, Jim Harris and Bill Murto — former Texas

Instruments senior managers. The name "COMPAQ" was derived from

"Compatibility and Quality", as at its formation Compaq produced some of the first IBM PC

compatible computers. The company introduced its first computer in the year 1983 after at

a price of 2995 dollars. In spite of being portable, the problem with the computer was that

it seemed to be a suitcase. Nevertheless, there were huge commercial benefits from the

computer as it sold more than 53,000 units in the first year with a revenue generation of

111 million dollars.

Compaq existed as an independent corporation until 2002, when it was acquired for $25

billion by Hewlett-Packard.

Prior to its takeover the company was headquartered in northwest unincorporated Harris

County, Texas, United States.

Important facts in Compaq history that led the company to merger decision:

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.

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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;

The merger would eliminate one player in an oversupplied PC marketplace;

It would also improve HP’s market share across the hardware line and double the

size of HP’s service unit—both essential steps in being able to compete with

industry-giant IBM;

Fiorina argued the merger would create a full-service technology firm capable of

doing everything from selling PCs and printers to setting up complex networks.

Life Cycle Pre-Merge of HP and COMPAQ

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Reasons for the Merger

A logical question that arises here is that, if HP was progressing at such a marvelous pace -

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 took place

in 2001. She was the first woman to have taken over as CEO of such a big company and 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 was very

extravagant in her approach as a CEO. In spite of the growth in the market value of HP's

share from 54.43 to 74.48 dollars, the company was still inefficient. This was because it

could not meet the targets due to a failure of both company and industry. HP was forced to

cut down on jobs and also be eluded from the privilege of having Price Water House

Cooper's to take care of its audit. So, even the job of Fiorina was under threat. This meant

that improvement in the internal strategies of the company was not going to be sufficient

for 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 stock

transaction 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 and

CEO of Compaq, Capellas. The idea behind the conversation was to discuss on a licensing

agreement but it continued as a discussion on competitive strategy and finally a merger. It

took two months for further studies and by September, 2001, the boards of the two

companies approved of the merger. In spite of the decision coming from the CEO of HP, the

merger was strongly opposed in the company. The two CEOs believed that the only way to

fight the growing competition in terms of prices was to have a merger. But the investors

and the other stakeholders thought that the company would never be able to have the

loyalty 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 each

other. This was because of the change in the organization culture as well. Even though

these 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 of

the company is bound to increase with the merger and also the working unit would double.

Key points that encourages the merger decision:

HP’s Failure to meet target (in spite of increased share value)

Merger as the way to fight the growing competition in terms of prices

Merger as the solution to remove one serious competitor in the over-supplied

market

Increased market share for HP and doubled working unit.

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Reasons against Merger

The last remaining board member from the founding families, Walter B. Hewlett went

public with his opposition to the Compaq deal. He mentioned several key reasons for this

decision, a few of which are summarized below:

It would increase HP's exposure to the PC market, which he felt was neither growing nor

profitable;

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 due

to uncertainty;

There could be considerable disruption among employees during integration which

could lead to loss of talent and market share;

Possible benefits to HP since the announcement have declined due to negative outlooks

for Compaq;

In addition to these points, Mr. Hewlett specifically pointed out the fact that he does not

believe that this merger will aid HP in creating shareholder value nor does he felt this was

worth the risk.

Also the son of HP co-founder Dave Packard said he would vote the 1.3% stake he

controlled against the Compaq deal the day after childhood friend Walter Hewlett

announced his opposition. His big problem with the deal: It would require 15,000 layoffs.

Strategic Analysis of the Case

POSITIVE ASPECTS

A CEO will always consider such a merger to be an occasion to take a competitive

advantage 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 merger

between HP and Compaq:

Having an eye over shareholders' value: If one sees this merger from the eyes of Fiorina, it

would be certain that the shareholders have a lot to gain from it. The reason for the same is

the increment in the control of the market. So, even of the conditions were not suitable

from the financial perspective, this truth would certainly make a lot of profits for the

company in the future.

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Development of Markets: Two organizations get involved in mergers as they want to expand

their 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 this

case, a challenging task is on head. A thorough situation scanning is significant before

putting your feet in International arena. Here, the competitor for HP was Compaq to a large

degree, so this merger certainly required a lot of thinking. Organizations merge with the

international companies in order to set up their brands first and let people know about

what they are capable of and also what they eye in the future. This is the reason that after

this merger the products of Compaq would also have the logo of HP. Once the market is

well-known, then HP would not have to suffer the branding created by Compaq. They

would 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 over

it to the maximum extent. We can see that HP would now have an increased set of

employees. The only factor is that they would have to be controlled properly as they are of

different 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 a

common mission to excel with financial profits to the company. Here, one can't deny the

fact that even the top brains of Compaq would be taking part in forming the strategies of

the company in the future.

Management of risks: If we particularly take an example of this case, HP and Compaq

entering into this merger can decrease the risk level they would have diversified business

opportunities. The options for making choice of the supply chain also increase. Now even

though HP is a pioneer in inkjet orienting, it would not have to use the Product based

Facility layout which is more expensive. It can manage the risk of taking process based

facility layout and make things cheaper. Manufacturing and Processing can now be done in

various nations according to the cost viability as the major issue.

Listing potential: Even though Wall Street and all the investors of the company are against

the merger, when IPOs are offered, a development will definitely be there because of the

flourishing earnings and turnover value which HP would be making with this merger.

Necessary political regulations: When organizations take a leap into other nations, they

need to consider the different regulations in that country which administer the policies of

the 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 only

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need to make certain minor regulations with the political parties of some countries where

Compaq was flourishing more than HP.

Better Opportunities: When companies merge with another company, later they can put up

for sale as per as the needs of the company. This could also be done partially. If HP feels

that it would not need much of warehouse space it can sell the same at increased profits. It

depends on whether the company would now be regarded a s a make to stock or a make to

order company.

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

trade. Additional Warehouse services and distribution channels offer business values. Here

HP 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 to

function. In the critical phase of implementation itself, the companies come to know that it

would 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 to

be extremely likely. So, motivation amongst the employees is an extremely important

consideration in this case. This requires an extra effort by the CEO, Fiorina. This could also

help her maintain her position in the company.

Legal Contemplations: Anti-competitive deals are often limited by the rules presiding over

the competition rules in a country. This leads to out of order functioning of one company

and 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 in

publicizing the venture would go to be a waste. Moreover, even more would be required to

re-promote as a single entity. Even the packaging where the entire inventory from Compaq

had 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 companies

such as HP and Compaq, many problems can take place because both the companies have

worked on different strategies in the past. Now, it might not seem necessary for the HP

management to make changes as per as those from Compaq. Thus such problems have

become of greatest concern these days.

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Fiscal catastrophes: Both the companies after signing an agreement hope to have some

return on the money they have put in to make this merger happen and also desire

profitability 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 each

other for the failure.

Human Resource Differences: Problems as a result of cultural dissimilarities, hospitality and

hostility issues, and also other behavior related issues can take apart the origin of the

merger.

Lack of Determination: When organizations involve, they have plans in their minds, they

have a vision set; but because of a variety of problems as mentioned above, development of

the combined company to accomplish its mission is delayed. Merged companies set the goal

and 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 of

bias reactions.

Risk management failure: Companies that are involved in mergers and acquisitions, become

over confident that they are going to make a profit out of this decision. This can be seen as

with Fiorina. In fact she can fight the whole world for that. When their self-confidence turns

out into over-confidence then they fail. Adequate risk management methods should be

adopted which would take care of the effects if the decision takes a downturn. These risk

policies should rule fiscal, productions, marketing, manufacturing, and inventory and HR

risks 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 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.

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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 Compaq

Shareholder

Ownership in merged company 64% - former HWP shareholders

36% - former CPQ shareholders

Ownership of Hewlett and Packard

Families

18.6% before merger

8.4% after merger

Accounting Method Purchase

Merger method Reverse Triangular Merger

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Porter’s Five Forces

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

PC market – developing computing equipment

o Economies of scale;

o Low capital requirements;

Product differentiation

o Rapid moving industry;

o Technology constantly improving;

Moderate customer switching costs

o Transferring files;

o Standardization of most computer components;

Access to distribution channels

o 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;

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Two big players hold the top two market share spots in the computer hardware

industry;

IBM;

Dell.

Implementation Strategy Highlight

MARKETING

Hp and Compaq would now have common channels after their merging. So, the benefits in

this concern is that even those materials which were initially of high cost for HP would now

be available at a cheaper price. The end users are also likely to increase. Now, the company

can reframe its competitive strategy where the greatest concern can be given to all time

rivals IBM. The advantages of this merger in the field of marketing can be seen in the case

of shared branding, sales and service. Even the distribution procedure is likely to be

enhanced with Compaq playing its part. Now, the company can look forward to cross

selling, subsidization and also a reduced cost.

OPERATIONS

The foremost advantage in this area is that in the location of raw material. Even the

processing style would be same making the products and services synchronized with the

ideas and also in making a decent operational strategy. As the philosophical and

mechanical control would also be in common, the operational strategy would now be to

become 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 now

be 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 a

disadvantage from the perspective of the differentiation that HP had in the field of inkjet

printers but the advantages are also plentiful. With a common product and process

technology, the technological strategy of the merged company would promote highly

economical functioning. This can be done through a common research and development

and designing team.

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BUYING

The buying strategy of the company would also follow a common mechanism. Here, the

raw materials, machinery, and power would be common hence decreasing the cost once

again. This can be done through a centralized mechanism with a lead purchaser keeping

common policies in mind. Now Hp would have to think with a similar attitude for both

inkjet printers as well as personal computers. This is because the parameters for

manufacturing would also run on equal grounds.

INFRASTRUCTURE

This is the most important part of the strategies that would be made after the merger. The

companies would have common shareholders for providing the requisite infrastructure.

The capital source, management style, and legislation would also be in common. So, the

infrastructure strategies would have to take these things into account. This can be done by

having a common accounting system. HP does have an option to have a separate accounting

system for the products that it manufactures but that would only arouse an internal

competition. So, the infrastructural benefits can be made through a common accounting,

legal and human resource system. This would ensure that the investment relations of the

company would improve. None of the Compaq investors would hesitate in making an

investment if HP follows a common strategy.

HP would now have to ensure another fact that with this merger they would be able to

prove competitors to the present target and those of competitors like IBM as well. Even the

operations and the output market needs to be above what exists at present. The company

needs to ensure that the corporate strategy that it uses is efficient enough to help such a

future. The degree of diversification needs to be managed thoroughly as well. This is

because; the products from the two companies have performed exceptionally well in the

past. So, the most optimum degree of diversification is required under the context so that

the company is able to meet the demands of the customers. This has been challenged by the

owners of HP but needs to be carried by the CEO Fiorina.

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SWOT Analysis

Strengths:

• Compaq-Server category and overall

storage;

• HP-High-end storage;

• Strong brand recognition.

Weaknesses:

• Consulting and outsourcing (low

market share);

• Overlapping management

• Overlapping product lines

Opportunities:

• Merger could improve economics and

innovation -

• Economies of scale;

• Strengthen leadership in storage;

• Market growth in IT services.

Threats:

• Dell increases pressure in the low-end

server market;

• IBM, Dell and new entrants erode more

market share.

• Economic downturn

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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, growth of the industry, need of product and service diversification – these are only few of reasons why mergers and acquisitions have become indivisible part of last decade’s business environment. Analyzing most hotly discussed mergers of 2000-2010 if becomes obvious that there has been no straight forward opinion about merger success. Despite ambiguous research results companies still continue to engage in M&A procedures as they find hard to go against motivations forces behind M&A. In order to analyze financial outcomes of HP-Compaq merger we have to take a look to profitability 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 company formed as a result of the merger itself, one can come up to obvious finding: market where companies operate is competitive enough to keep direct costs at very competitive level. It is clear that even after such powerful merger as HP-COMPAQ companies were not able to get synergy effect at their direct production materials (bargaining power over suppliers) and direct labor (bargaining power over professional labor force market) level. On the other had companies were able to achieve economies of scale in operating expenses. After initial deterioration of Operating Profit margin (-1% in 2002) (which can be considered as normal at the beginning of post-merger period, company started to recover its profitability starting from 2003 and achieved 5% operating margin in 2004. Positive outcomes of the given merger can be accessed based on the Profit Margin time

series analyses. Starting from 2001 (COMPAQ Profit Margin 2000 was equal to 1.3%) through 2004 company managed to increase its profitability from zero to 4%. Considering the difficulties caused by the merging of two companies’ cultures and financial 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 Profit Margin 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 not always equivalent to taking away market share from competitors, creating economic profits, and providing returns to shareholders HP and COMPAQ still decided to unite their Assets and to strive for leading place on the market. By affectively using united fixed assets companies managed to maintain and increase turnover of production plant and equipment (in year 2000 10.9 and 11.8 fixed asset turnover was reported by HP and COMPAQ).

Efficient usage of total assets preserving fixed cost stability is evident from company’s Return on Assets employed. After the merger HP achieved increased profits bymaintaining stable financial leverage (stable fixed costs). Return On Equity (ROE) has always been the best measure of Merger success. Chart presented below compares ROEs of HP and COMPAQ before merger and continues with Post-Merger company ROE performance. We see that after 2002 negative performance company overwhelmed pre-merger profitability and started to generate two times more value 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_COMPAQ merger 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 expected synergy is wishful thinking, management and strategy not being applied consistently from the start, 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 and service overlap.

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

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

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

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

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

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

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, now succeed through a transparent discovery of business solutions and partners across the globe. Connecting with suppliers, partners, and customers naturally will sweep them through HP-Compaq solutions.

In the middle phase of the merger, the combined entity must be able to hold its own against market leaders in all competing sectors. A key challenge to address will be not losing 18 months of "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 be competing 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 contiguous corporate entity. Servers are key hardware strengths for HP-Compaq, as is their business software. Storage needs will continue to grow exponentially, as will data management and network services.

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

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* The first approach is to ensure integration opportunities for server-software solutions by including features, which quickly extend the reach of HP-Compaq's customers to their suppliers, partners, and customers. As B2Bi creates immediate value for businesses with easily extensible business architectures, new solutions will require extensive analysis of business problems 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-Compaq data centers. Distributed and extensible business solutions can be architected and evolved by HP-Compaq engineers in controlled environments, and seamlessly deployed to customers after thorough testing.

Key points in Strategy Managed for HP-Compaq:

* Fortune 500 / Global 2000 - This is the target market for HP- Compaq going head-to-head with IBM. Strategy managed will have to include combining direct sales force of HP with Compaq 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-Business integration over the Internet. This represents untapped value for servers, software, and services, where it is almost a free-for-all in today's untamed world of Web services. Quick positioning here allows HP-Compaq to create offerings connecting the 100,000 SME firms that are one step removed from the Fortune 500.

* Consumer markets - This is where HP-Compaq has both opportunity and challenge. Together they are the best-known nationwide brand in both retail and discount venues. However, Dell's direct sales now command the lead in total market size, with IBM also faring quite well. The overlap 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 approach rivaling Dell and IBM, while continuing to command a combined 50% market share in the consumer 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 that optimizes the internal development of the combined entity in the rapidly evolving global ecosystem of networked business solutions.

Strategy Deployed

Redundant or non-competitive product and service offerings must be identified quickly and eliminated, or refocused into core value competency activities. Integrated solutions across hardware, software, and enterprises are where HP-Compaq has the greatest potential to excel. Both firms possess technical strength, product maturity, and customer knowledge required for building 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. Garnering market share here is the key for the combined HP-Compaq entity.

* Services - This is the Holy Grail in enterprise IT markets going forwards, as it drives discovery of 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 data management. This is a replenishment and dynamic transaction in the value framework, and also drives 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.