Table of Contents

Executive Summary.2

Introduction..3

Background..4

Modeling Approach.8

Results12

Implementation..13

Conclusions....16

Appendix I..17

Appendix II.....18

Appendix III...19

THE HEWLETT-PACKARD/COMPAQ MERGER

FROM: TO: SUBJECT: DATE: Spring 2005 Business Decision Making Group Dr. Robert Nydick and Dr. Stephen Andriole, Professors, Villanova University EXECUTIVE SUMMARY May 9, 2005

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Organizational Structure: Coordinator Shannon Caputo Alternatives Steve Piskadlo Paul Ferraro Shawn Standen Criteria Phil LaSpisa Kathleen Cardelli Cassie Knox Chris Skorski Experts Evan Taylor (Presentation) Chris Skorski (Expert Choice) Writers Melissa Shah Jonathan Lai

Domain Experts Dr. Stephen Andriole Professor John Toppel Background: The Hewlett-Packard Company, predominantly recognized for its hardware offerings, namely desktop computers, servers, and printers, had made the pronouncement in September of 2001 that it would conduct a business merger with long-time competitor, the Compaq Computer Corporation. The merger, however, did not receive unanimous support from neither stakeholders at Hewlett-Packard nor parties affiliated with Compaq. The May 2002 fulfillment of the merger inevitably warranted much speculation as to the consequences and future environment of the merged companies, as well as several assumptions about the ultimate success or failure of the companies and the two associated CEOs, Ms. Carly Fiorina and Mr. Michael Capellas. Analytic Hierarchy Process: Based upon the review of Hewlett-Packard and Compaqs merger, the current financial and cultural environment, and the existing business progression and procedures, our group conducted an analytic hierarchical process in order to determine whether or not HP and Compaq ought to have completed the merger. Using criteria such as financial performance, the ability to evolve the merged companies, and the ability to integrate, our group was able to discover that though the merger was perceived as successful by both Fiorina and Capellas, the merger, based on the predetermined criteria, ought not to have occurred, for the long-term advantages did not outweigh the short-term downsides. Criteria:

The three primary criteria selected by our domain experts, Dr. Stephen Andriole and Professor John Toppel, were pensively determined in order to accurately assess whether or not the decision to merge was the correct resolution to HP and Compaqs aspirations.

Introduction Companies which choose the corporate combination of merging have several objectives and goals that warrant the decision to integrate both companies existing processes, procedures, personnel, and strategies. The combination of two separate entities and identities requires deliberate and detailed contemplation to ascertain if the merger will actually confer the advantages that upper management perceives it will. Merging is an option chosen by several companies for varied reasons, but primarily, mergers occur when two or more capable firms lack a necessary component for success in a particular corporate environment. By incorporating both identities and processes, a merger extends the supplier-consumer relationship and has strategic advantages for both associated parties. One partner can offer certain relationships and a particular share of the market, while the other partner could supply financial and human capital, or the status of market leader to leverage its partners product and service line. The aforementioned benefits and the actual financial ability to physically combine two entities influence many companies to merge.

As with any type of transaction, there are certain disadvantages associated with merging two companies. Though new opportunities are present with risks that can now be distributed over a greater range, merging often limits discretion, control, and profit potential of partners, as well as possibly demanding managerial attention and other resources that could be directed toward the firms mainstream activities. Other considerations are the need to downsize due to an excess of personnel and the difficult approach to determining which existing upper management employees will assume the limited executive positions available when the two companies combine.

In order to determine whether or not Hewlett-Packard and Compaq ought to have merged was analyzed and assessed through the use of the Analytic Hierarchy Process. The criteria and associated weights were determined by former Hewlett-Packard General Manager John Toppel, along with Dr. Stephen Andriole, professor at Villanova University. Through the Expert Choice program, we were able to determine, from a retrospective and internal perspective, that had the CEOs placed more emphasis on statistical and rank-related evidence, such as the data that AHP conveys, the outcome for Hewlett-Packard and Compaq may have been entirely different. Background The Hewlett-Packard Company The Hewlett-Packard Company has been a well-recognized name in regards to its hardware offerings, with predominant identification stemming from its printer business. Hewlett-Packard is a respected company within the personal computer industry, and prior to the merger, though smaller, was a viable competitor of IBM. HP is best known for its printers as the imaging and printing unit is the most profitable of HP's businesses, accounting for 35 percent of the company's total sales. The group's products include laser and inkjet printers, fax machines, personal copiers, all-in-one multifunction devices, scanners and digital photography products. With the March 2002 acquisition of Indigo, HP added high-end digital presses to their printing product line as well.1 Hewlett-Packard's systems group manufactures servers, storage components and networking software, with industry competitors including IBM, Dell and Sun Microsystems. Providing a full
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The Hewlett-Packard Company: A Merger of Gigantic Proportions. http://www.vault.com/companies/

range of servers, HP produces both entry-level models for small businesses and high-end mission critical machines utilized by major corporations. Machines sold by HP implement Windows, Linux and various varieties of UNIX. Included in Hewlett-Packards service department is the providing of customer service and product support as well as consulting, integration, and managed network services to corporate clients. Finally, the financial services group, created in August of 2002, offers leasing, loan financing and asset management services.2 The Compaq Computer Corporation The Compaq Computer Corporation was the worlds third-largest computer company prior to its acquisition by Hewlett-Packard. The Houston-based company was recognized for designing, developing, manufacturing and marketing hardware, software, solutions and services in more than 200 countries. Founded in 1982 by Texas Instruments executives, Compaq Computer boasted $111 million in sales in its second year in business. The companys success could simply be attributed to the fact that it provided computers more powerful than IBM's for comparable prices. Compaq maintained minimal overhead costs and improved sales by granting exclusive dealership rights to stores across the nation. In early 1988, sales had increased to $1.2 billion, setting a record for reaching that level faster than any other company. By 1995, Compaq had attained the position as the market leader in the worldwide personal computer industry. In 1998, Compaq faced hardship when inventory began to grow and Dell Computer was gaining market share with its built-to-order program. Compaq sales reached a plateau and the company
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The Hewlett-Packard Company: A Merger of Gigantic Proportions. http://www.vault.com/companies/

strained to reengineer its manufacturing and distribution process. In June of 1998, Compaq acquired Digital Equipment for $8.7 billion, creating the second-largest computer company in the world. After paying $5.4 billion to finance the merger, Compaq announced it would eliminate overlap by gradually cutting thousands of jobs worldwide - mostly from Digital's end through plant closings and consolidations,3 resulting in the elimination of 17,000 employees. During the 1999 fiscal year, Compaqs stock had declined and profits were minimal. Hewlett-Packard and Compaq In September of 2001, Hewlett-Packard announced plans to buy Compaq. The deal eventually closed in May of 2002, after gaining approval from the Federal Trade Commission. Revenue from the combined company was close to that of IBM's, while the deal boosted HP's services business and gave it more than 80 percent of the U.S. retail personal computer market. Throughout discussion of the merger, shareholders never fully agreed on the prospect of combining the two companies the concept of a joint identity, joint processes, and joint employees discouraged most shareholders from moving forward with the corporate combination. Regardless, both CEOs Fiorina and Capellas fully promoted the merger with continuous press conferences, comprehensive literature, and briefings with Wall Street analysts and investors. The European Unions approval of the merge, however, surged the idea further in the minds of the CEOs, and Compaq executives reiterated the positive growth that would be conferred with the achievement of a merger, as well as how certain strategies would be accelerated and particular objectives would be facilitated. Potential goals that would be accomplished through the merger included cost savings of $2.5 billion annually, adding $5 to $9 to present HP share
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The Compaq Computer Corporation http://www.vault.com/companies

value, the ability to lead the market in servers, storage, and management software, and a doubled sales force that could reach 160 countries.4 Other key benefits of the merger would be that HP and Compaq could combine and streamline their workforces to avoid slipping further down in the current economic slump. Particular reports, including research from IDC, have analyzed the HP/Compaq merger and drew the conclusion that the two companies would be better off together than apart. However, IDC also deduced that both HP and Compaq face multiple challenges, including how to best combine their organizations, their sales teams, and their corporate cultures. Furthermore, another challenge includes downsizing, thereby eliminating 15,000 employees and disruption to existing customers and channel partners. Additionally, a merger may denote the termination of product lines in which buyers have a heavy investment. Users also have contemplated how the merged company would support the variety of software owners might possess.5 Despite negative publicity and incomplete support of the merger from all shareholders, the merger was completed in May of 2002. Following the merger, Fiorina administered an entire restructuring of HP's organization. Redundant business units were eliminated and the workforce cut by a total of 10 percent. In the end, 80 formerly separate units were combined and reorganized into five new business groups.6 Fiorina's reorganization plan divided HP into five distinct business groups: personal systems, imaging and printing, enterprise systems, services and financial services. Personal systems would be the largest of the five units, responsible for the manufacturing and marketing of HP-and Compaq-branded computer products.

4 5

Jacobs, April. HP and Compaq Press on With Merger, but Road is Bumpy. Network World Fusion. Jan 2002. Jacobs, April. HP/Compaq Deal All but Final. Network World Fusion. Mar 2002. 6 The Hewlett-Packard Company: A Merger of Gigantic Proportions. http://www.vault.com/companies/

For a short time following the merger, HP reigned as the No.-1 PC maker in the world, but the top spot was later regained by Dell. According to a February 2005 article in the Chicago Tribune, Dell ended 2004 with 17.9 percent of the global PC market, while HP was in second with 15.8 percent.7 Modeling Approach The most imperative aspect of the modeling process was not the alternatives themselves, but the criteria selected that determined which alternative was ultimately given more significance, and thus the preferred alternative. The criteria were given certain weights, determined by Domain Experts Professor Toppel and Dr. Andriole, and placed in a hierarchy. Each of the two alternatives was then influenced by these weights. The Analytic Hierarchy Process The Analytic Hierarchy Process, a substitute method to the maximization of expected utility, is a decision-making approach for prioritizing alternatives when multicriteria must be considered. It is an approach for structuring a problem as a hierarchy or set of integrated levels.8 The basis for comparison using AHP is relative, and never requires an absolute judgment or assessment. These relative evaluations are known as pairwise comparisons. It is imperative to note that while AHP can assist in the decision-making process, it is not a conclusive or ultimate decision maker. The weights of each criterion were subjective, and the estimation of weights was the responsibility of the Domain Experts the experts throughout the process.

7 8

The Hewlett-Packard Company: A Merger of Gigantic Proportions. http://www.vault.com/companies/ Liberatore, Matthew and Robert Nydick. Decision Technology: Modeling, Software, and Applications. Hoboken: Wiley, 2003.

The alternatives were yes and no. The alternative yes would denote if Hewlett Packard and Compaq ought to have merged and no would imply that the companies ought to have avoided merging. See Appendix I for the final hierarchy. Criteria There were three criteria that were used during the Analytic Hierarchy Process. These criteria were contemplated by the group, and finalized by the Domain Experts. Each criterion was selected based on research and knowledge of the merger and the identified motivating factors influencing Hewlett-Packard and Compaq to consider a corporate combination. See Appendix II, which graphically depicts the main criteria weightings. The criteria included financial performance, ability to evolve the merged companies, and the ability to integrate. The criterion of financial implications was given the greatest weight, with a local weight of .460, for financial performance was the primary incentive for the two companies to consider a merger. Financial performance included stock price, cost streamlining, and minimized employee costs. Shared property, plant, and equipment were also associated costs that would be reduced. Finally, an increase in sales was considered a significant factor that influenced the two companies to merge. Increase in sales in terms of personal computers, servers, service, and printers were the four aspects that conferred the greatest potential for sales increases. Financial implications also included the increased costs associated with physically merging two companies, retraining costs, and acquiring new product lines and processes. Financial performance posed as a significant criterion, and to a letter to shareholders, Hewlett-Packard claimed that the merger would confer certain financial benefits.

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Included was HP achieving annual cost savings through synergies of $2.5 billion, adding $5 to $9 in present value to each HP share. Furthermore, HP speculated increasing earnings per share by 13% during the first year following the merger. Consequently, by improving profitability in enterprise computing systems, in PCs and access devices, and in IT services, HP would have the financial strength to extend their successful imaging and printing franchise into new multi-billion dollar categories like digital imaging and digital publishing. Conversely, there were financial implications as well. There was a certain amount of skepticism because Compaq may have had several previous concerns from past acquisitions that had yet to be resolved,9 said Doug Cavit, CIO at McAfee.com. Compaq continued to suffer financially from paying $9.6 billion for Digital Equipment in 1998. In regards to HP, it tried to purchase service firm PricewaterhouseCoopers last year but failed. These two cases reflect both companies prior misfortunes in terms of corporate combinations. The ability to evolve the merged companies served as the second criterion, with a local weight of .358. Increasing intellectual property (L: .600) by means of sharing certain patents, licensing, and technologies served as an important criterion, being that property sharing could potentially result in increased efficiency and higher profits. The ability to build brand awareness (L: .400) additionally served under the criterion of evolving the company. This sub-criterion was an important aspect of merging because each of the companies had a particular market that it currently served; therefore,
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Jacobs, April. HP/Compaq Deal All but Final. Network World Fusion. Mar 2002.

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combining companies could increase market share. Conversely, two brands might have had entirely separate identities and images, and the combination of these two brands might alter consumer perception of this new shared brand. If the two brands were perceived as completely different from one another, and formerly targeted certain niches that might not desire to transfer their loyalty to a new shared brand, the merger could be adversely affected. The final criterion, locally weighted at .182, was the ability to integrate. While this criterion was the lowest-ranked with respect to the goal, and was not the principal goal of the merger, the ability to integrate had significant future implications for the long-term success of the merger. Most importantly was the focus integration placed on the ability to manage both parties human capital the stakeholders who would be greatly influenced by the outcome of a merger. The subcriterion of Human Capital Management, with a local weight of .364 in respect to the criterion, concentrated on the necessity of people in any aspect of business and their importance for the success of a merger. The sub-criterion of organizational structure, with a local weight of .251, influenced the outcome by concentrating on the ability to combine pre-existing organizational configurations, integrate pre-trained and acclimated employees with new and unfamiliar employees in order to comprise one wholly functional team, as well as incorporate separate processes and procedures. The ability to integrate channel partners, such as maintaining certain loyalties with particular buyers and suppliers, was an additional factor that required research. Additionally, a factor in terms of organizational structure was the achievement of communication synergies through aligning structures.

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Furthermore, the ability to integrate existing technologies and resources served as a major issue upon which to focus when assessing the alternatives. Resources was locally weighted at .222 and involved achieving economies of scale and consistency through differing technologies, as well as maintaining a brand name and image, with similar cognitive perceptions of the brands, and brand loyalty development. Information technology infrastructure concentrated on integrating differing technological information for more efficient and improved communication abilities and ease of use. The relationship with customers and suppliers was another issue that emphasized strong management and maintenance of relationships with current suppliers and buyers, and between suppliers and buyers. Future Planning was the final sub-criterion, and while weighted the least (L: .163), it continued to have several long-term implications for Hewlett-Packard and Compaq. Future planning included strategy, and how the two companies would manage differing long-term visions, and diverse definitions of success. As well, future planning focused upon business tactics, and how the two companies potentially had varying methods in regards to approaching daily business decisions and situations. Results The Analytic Hierarchy Process, through Expert Choice, had determined that the financial performance criterion, the most heavily-weighted criterion (L: .460), was inclined toward the yes alternative that HP and Compaq ought to have merged from a retrospective outlook. The other two criteria the ability to evolve the company and the ability to integrate while individually weighing less than the financial performance criterion, combined had a local weight

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of .540; both of these criteria were disposed toward the no alternative that HP and Compaq ought not have merged. Therefore, because the last two criteria, which signaled against the merger, had a greater combined weight, the final process has resulted in the no alternative being the preferred alternative. Though the financial performance criterion was the primary motive for the merger because it would confer the benefit of cost reduction, it did not hold a sufficient amount of weight to overpower the weights of the other two criteria. The no alternative was supported 53.4% while the yes alternative was supported 46.6%. Retrospectively, Hewlett-Packard and Compaq ought not to have moved forward with their corporate combination strategy, and considered alternative approaches to attaining the advantages and benefits the two companies were both hoping to achieve through the merger. See Appendix III for a graphical representation of the final results. The final results were relatively close and as a result, dynamic sensitivity analysis was performed. The ability to improve financial performance criterion would require an increase from 46.6 to 55.7, or experience a 19.5% change, in order to change the final decision. The ability to evolve the company criterion would require a decrease from 35.8 to 27.8, or experience a -22.3% change, in order to affect the final decision. The ability to integrate criterion does not significantly affect the final decision and can be completely changed in weight and not yet change the recommendation to a yes. This suggests that our final recommendation is not exceedingly sensitive to the criteria used in this project. Implementation Since there did not exist a direct alternative to implement, our primary recommendation was only that HP and Compaq ought not to have merged. Through AHP, we have decided that the strength

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of the improved financial performance criterion was not sufficient to move forward with the corporate combination. Our suggestion proved fairly accurate with the actual events occurring after the merger. While Carly Fiorinas goal of reducing costs was accomplished a reduction of 3 billion dollars it was associated with a greater expense to the company. Although it was originally estimated that between 15,000 and 17,000 employees would be dismissed due to the merger, nearly three times that amount, or 44,00010, have been discharged over the past three years as a direct result of the pitfalls of the merger. What Happened? Carly Fiorina took over as CEO of Hewlett-Packard in 1999. Brought in from Lucent Technologies to revive the troubled Hewlett-Packard, Fiorina was the first outsider to control the company. She has become one of the worlds most famous and charismatic CEOs of the 21 st Century. Never holding a CEO position before, Fiorina was a sales and marketing specialist without experience in the computer or printer business. She brought with her a necessary sense of urgency to the company and centralized its sprawling operations. In 2001 came the $19 billion merger with Compaq Computer Corporation. Hewlett-Packard shareholders and stakeholders, however, feared that the deal would dilute HPs lucrative printing and imaging business and an influx of hard-charging Compaq execs would turn HPs hallowed culture upside down.11

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Hewlett Packard Annual 10-K 2001. Pgs. 29-31. Business Week February 21, 2005. Can anyone save HO? By Ben Elgin Page 28.

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Nevertheless, in 2002, with the purchase of Compaq, Fiorina created a computer giant with tremendous scale. Fiorina did not, however, fundamentally change HPs ability to defend itself against Dell Incorporated in the basic computing sector or match IBM in its ability to create particular computer sophistication. Therefore, the merger of HP and Compaq had backfired and continues to fail against both IBM and Dell. Further making the merger an unfortunate venture is the fact that the corporate combination divided the company into separate groups one group having been opposed to the merger and another group having been in favor of the merger. It was wholly assumed that Compaq CEO Michael Capellas would remain at the company to handle daily duties and responsibilities. This expectation was unlikely after discovering that Capellas possessed a contract that granted him $14.4 million if he resigned within one year of the mergers closing. After briefly serving as Fiorinas number 2, Capellas resigned to control MCI Incorporated. Before the merger, Compaq was making significant improvements following Dells efficient model of direct sales to customers. Yet when the companies merged, this initiative never garnered total support. As a result, HP continued with the former industry model as it battled super-efficient Dell. It was announced at the end of January 2004 that Carly was dismissed with a $21 million severance package. News of her departure resulted in different responses. While some employees felt sorrow, others experienced shock, then a party. Fiorina was a decisive leader and a gifted communicator. She exhibited weakness, however, throughout her tenure. Initially, Fiorina dismissed numerous executives. Furthermore, she

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resisted change, and aside of its stellar printing business, Fiorina left behind an $80 billion company struggling in everything from PCs to software. HP was simply trying to achieve too much. The computer giant lacked both the resources and management skills to compete with the best in nearly every industry in technology. Conclusion Through background research and the Analytic Hierarchy Process, we are certain that the merger was forcefully facilitated by the two CEOs involved and not enough due diligence was performed in order to thoroughly examine what would result after the companies merged. We believe the CEOs moved forward with the corporate combination to reduce costs, salvage Compaq, and attempt to turn HP into a powerhouse similar to IBM. Both companies, unfortunately, did not have the necessary resources to accomplish most of those goals, resulting in one CEO fired and thousands of people without a job. We are certain that our AHP allowed us to accurately value what was important to both of the companies and if they had the abilities to make those important activities and events transpire. Although reducing costs was accomplished and was of primary importance to those involved in the merger, the abilities for the two companies to integrate themselves and evolve into a greater company was non-existent. Therefore, it can be assumed that even if the merger was more properly executed, the merger would not have been able to survive based on its pre-merger circumstances.

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APPENDIX I Final Hierarchy

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APPENDIX II Main Criteria Weightings

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APPENDIX III Results NO YES 53.4% 46.6%

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