The HP-Compaq Compaq Merger Deal Terms Summary:

Announcement Date Name of the merged entity Chairman and CEO President Ticker symbol change Form of payment Exchange Ratio Ownership in merged company Ownership of Hewlett Packard Families Accounting Method Merger method 4-Sep-01 Hewlett Packard Carly Fiorina Michael Capellas From HWP to HPQ Stock 0.6325 HPQ shares to each Compaq Shareholder 64% - former HWP shareholders 36% - former CPQ shareholders and 18.6% before merger 8.4% after merger Purchase Reverse Triangular Merger

The HP and Compaq Merger Deal Design:

The main part of the deal was its merger method i.e., Reverse-Triangular Reverse Triangular Merger. A subsidiary, Heloise Merger Corporation, created solely for merging with Compaq. This resulted in taxtax free reorganization in which HP would control all of Compaqs assets through through a wholly owned subsidiary, thereby limiting HPs exposure to Compaqs liabilities.

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Evaluation of Exchange Ratio and Accretion/dilution impact

The final Exchange Ratio Exchange ratio implied by the market as on 31 Aug, 2001 0.6325 HPQ shares per Compaq share 0.5356 HPQ shares per Compaq share

Exchange ratio implied by the 12 month market performance of 0.598 HPQ shares per Compaq share HP and Compaq stocks

Period ending Aug 31 2001 31-Aug-01 3 month average 6 month average 12 month average

Market Price for Compaq shares 12.35 14.20 15.72 19.40

Market Price of Compaq shares 23.21 25.49 27.58 32.45

Average Exchange ratio 0.532 0.557 0.570 0.598

Implied Acquisition Premium paid by HP (in %) 18.9 13.7 8.2 6.1

The exchange ratio decided for the deal is 0.6325, which is decided based on 40 months average (Exhibit-10). However, if we observe from the above table, the exchange ratio is changing depending on the time horizon taken. Since, the exchange ratio is fixed at 0.6325; the premium paid will also differ on the basis of time horizon taken into consideration for calculating the same.

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Is this deal A Merger of Equals?

As per theory Merger of equals combines two firms that have equal power. The board of directors and senior management of the old companies get absorbed and hold positions in the new company. Also the shareholders of the old companies share the prospective synergies equally. Considering the above theoretical criterias and using the figures from the table above (Pessimistic Scenario, 50 % Synergy division) the share price which HP should offered to Compaq is $ 15.82 , very close to the existing deal value of $ 14.68. Also the total deal value as per this scenario turns out to be $ 26.72 billion (close to the current deal value of $ 25 billion). So based on these criterias and figures calculated it can be inferred to be a Merger of Equals. Now considering the flip side of the coin i.e. considering an Optimistic Scenario, 50% Synergy value sharing we get a share price of $20.26 and a deal value of 34.23 Billion, which is significantly different and high compared to the current deal value. So based on these it appears not be a Merger of Equals deal. Also if we take the quick and dirty calculation method into consideration there also a significant premium has been paid to Compaq which negates the very criteria of equal premium sharing in Merger of Equals.

Evaluation of Integration Plan

HP has realized the difficulties and complexity of integrating the enterprises as the two companies differ in their culture and competencies in areas of operation. Thus, they have established an integration office to go through the whole process. The proposed integration plan called for a consolidation of HPs and Compaqs product lines into four major operating groups namely, services, imaging and printing, access devices, and information technology infrastructure. This implies that redundant and overlapping product groups would be eliminated and would result in cost savings.

According to the projected plan, the new company would remain competitive in individual product segments and the merger would results in a full-service technology firm capable of integrating hardware and software into solutions while providing services at the same time. Also, the management of both companies believe that since HP and Compaq are at 8th and 9th
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positions respectively, in the IT service market share, the combined firms rank would jumped to 3rd.

However, the above projections reflect the optimistic perspective of the management of both the companies. The synergies to achieve in individual segments as projected (Exhibit 5) are difficult to achieve as the synergy risk is very high. The assumption that combined entity would reach to 3rd rank in IT services is just an over optimism on the part of management as they are ignoring the fact that other competitors, such as Dell and IBM are very strong in market and they will also react to the merger and try to reduce their costs and improve their operations. Also, considering the fact that in 2002- 2004 there has been revenue loss due to the merger of personal computer business and enterprise business. In addition the markets have reacted negatively to the deal.

Vote or Not to Vote

The share price of HP dropped in the wake of the announcement of the deal, but considering the synergy values the deal is expected to generate in the range of $ 11.72 billion $ 26.74 billion, the shareholders stand to benefit if the deal goes through in the long run. Thus as a shareholder of the company it should vote for the deal. Though one of the board of Directors of the company Mr. Walter Hewett and the Packard foundation (both jointly holding 18.6 % shares of the company) are opposing the deal but it cannot be ascertained with certainty their assumptions and also their motives of opposing the deal since they stand to loose in terms of equity dilution (their holding reduces to 8.4%) post the deal.

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