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 incom e 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 HPand 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 focussed 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 has 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 overla p. e.g: they are both are
involved in making data -storage equipment and both make hand held 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 com pete with two of
their biggest competitors, IBM and Dell.
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 anytime soon. It could take
several years to determine if the largest merger in I.T history will be a
success or a complete flop.
Presentation Outline
n PRE MERGE
n HP
n Compaq
n MERGE
n HP+COMPAQ
n POST MERGE
n NEW HP

•Branding competition : Compaq was a reference and standard leader.

•Market maintenance and development of new markets (2000: 58% revenues
outside U.S.
•Large Market Share.
•Product/service emphasis (strategic partnerships with Microsoft, Oracle…).
•Client base stable.
•Distributing dividends (1998).
•In 2000, emphasis on cost reduction and increase in gross margin.
•Competitor pressure
•Scope scale sales (ie, pocket computers)

Compaq: Products
n PC, (desktop and portable) – Manufacturing
and selling
n Servers – Manufacturing, selling plus
services
n Pocket Computer (handheld computer) -
Manufacturing and selling
n Storage – manufacturing, selling, services
and on-line storage

BCG matrix for Compaq

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Compaq: Competitors
n IBM
n Servers, PC’s, storage and IT services.
n Sun Microystems
n Servers
n Dell
n PC’s
n HP
n PC’s, IT services and pocket computers
n Palm
n Pocket computers

Pre Merge
Hewlett-Packard
Known as a box vendor, a one-stop shop
for business applications:
n Unix servers
n E-commerce application software
n Hosted services
n Network management
n Integration services
n PC’s, printers, ink cartridges

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Hewlett-Packard
Known as a box vendor, a one-stop shop
for business applications:
Unix servers
E-commerce application software
Hosted services
Network management
Integration services
PC’s, printers, ink cartridges

HP : Organization Life Cycle

Pre-merge
• HP known as a brand name for printers and ink
• Held number 1 position in a number of areas, i.e Storage Area Network (SAN),
RAID and disk storage systems
• Stable client base
• Competitor pressure

HP BCG matrix
STRATEGY
For decades, HP was a collection of independent businesses, each selling a
particular kind of product. Fiorina was hired to execute an "e-services"
strategy that would meld these pieces into one powerful, profitable whole. HP
could sell everything from handheld gizmos to back-office servers, with the
high- margin software and consulting to make it all work.
Grade: B
The "e-services" plan looks good on paper and may be the right long-term path
for the company. But so far, HP is as dependent as ever on its last remaining
gold mine: the $20 billion printing business, which has subsidized losses at the
rest of the $48 billion company for the past three quarters, say analysts.
EXECUTION
WhenFiorina arrived, HP was two companies: a world-class maker of printers
and imaging gear and a mediocre computer company. She set out to pump up
sales and profits in the ailing computer business by becoming stronger in
software, storage, and consulting.
Grade: C
HP is still the same two companies. While it remains the king of printers, the
economic downturn has hurt efforts to improve profits in the computer
business. It has gained market share in Unix servers, but there has been
negligible progress in storage and software. Also, consulting remains small
compared with rivals.

Fiorina)
Horizontal merge
Initiated Sept 2001,
Completed May 2002
8 month process
Biggest merger in IT history
25B$ all stock purchase
1 million working hours spent on merger
integration
HP and Compaq

HPQ : Pros and Cons

 The Positives:
COST SAVINGS
FINANCIAL BULK
CROSS-SELLING & TECHNOLOGY
BUYING POWER INCREASING

 The Negatives:
EXECUTION CHALLENGES
PCs BUSINESS OVERLAPING
COMPETITIVE POSITION
MORALE

HPQ is the new stock symbol for the new HP.

The merger alone will require 15,000 job cuts.
HPQ has to merge two struggling companies with divergent corporate cultures
and the CEO has a long way to go to win over the many employees who
opposed the deal.
The merger will double the size of HP's maintenance-and-support business.
But it does little to help HP in other service sectors, such as consulting and
outsourcing. These businesses would make up less than 20% of the company's
service revenue. Since they are key to landing big contracts with corporations
and governments, analysts say HP may still need to do an acquisition, which is
unlikely in the wake of the Compaq deal.
Armed with the market-share lead in PCs, back-office servers, and printers, the
new HP would have the sheer bulk and reach to turn these two troubled
companies into one far healthier one
This will enable HP to leverage Compaq's strong market share and brand
recognition in the commercial PC market.

HPQ : Objectives
Increase competition with major
competitors. i.e. IBM, Dell.
Cut costs by $3 billion annually by 2004
Increase earnings for shareholders
Face the challenge of a shrinking market

HP wants to emulate IBM's push into consulting and other services

The accelerated cost savings come from leveraging HP's new bulk to
renegotiate contracts for supplies such as memory chips and hard drives.
A big chunk of the savings--$1.5 billion annually--will come from trimming
the payroll.
And investors could benefit big time from huge cost savings. By eliminating
redundant administrative functions, HP cost savings would reach $3 billion a
year by 2004. The company would likely write off most of the more than $1
billion cost of the merger in 2002.
The new HP will exploit its market power for everything from better deals
with suppliers to pressuring software developers such as Oracle Corp.and SAP
to push HP gear. Then, over time, it will develop the consulting and software
smarts to help customers deliver whizzy new offerings.
The accelerated cost savings come from leveraging HP's new bulk to
renegotiate contracts for supplies such as memory chips and hard drives.
A big chunk of the savings--$1.5 billion annually--will come from trimming
the payroll

HpQ swot analysis

SWOT stands for Strengths, Weaknesses, Opportunities and Threats. It's a

four-part approach to analyzing a company's overall strategy or the strategy of
its business units. All four aspects must be considered to implement a longrange
plan of action. In order to “swat” the competition you need to
understand SWOT. SWOT stands for Strengths, Weaknesses, Opportunities
and Threats. It's a way to analyze a company's or a department's position in the
market in relation to its competitors. The goal is to identify all the major
factors affecting competitiveness before crafting a business strategy

IBM
STORAGE (+) LEAD EMC, SONY
LOW LEVEL SERVICES 62% IBM (HIGH LEVEL)
HIGH-END SERVERS (-) LAG IBM (+), SUN
LOW-END SERVERS 37% IBM (+)
PRINTERS (+) 15% CANON, LEXMARK
PCs (-) 19% DELL ( + )
MAIN
COMPETITORS
MARKET
SHARE (%)
The new HP will feature Compaq's corporate PCs, low-end servers, and its
iPAQ handhelds, along with HP printers and UNIX servers. Consumer PCs
from both sides will also remain, though HP's business PCs and Jornada
handhelds will not.
Fiorina: We'll continue to organically grow, particularly the outsourcing and
consulting ends of the business. We'll be looking for strategic opportunities for
acquisition.
Capellas: We believe we can be brutally competitive in the individual product
segments. But we can also integrate hardware and software into solutions.
The company must cut costs to the bone to beat Dell in PCs while pouring
money into research and development and consulting to take on IBM and
others on the high end
Although HP enjoys the biggest share of the PC market now, the combined
company's share is expected to remain flat, while Dell grows 30% a year.
Sensing a possible vulnerability as HP merges with Compaq, Dell recently
reached an agreement with Lexmark International to have printers and ink
cartridges manufactured under the Dell name.
FOR PC’s:
HP needs flawless execution and cost-cutting--especially with more-focused
rivals such as Dell and Sun fighting for every deal in this down economy –
cost leadership
Capellas: First and foremost you've got services growth, the fastest-growing
segment of the whole IT market. Managed services and outsourcing is growing
fastest. The customer service side is growing slower but is very profitable.
A more focused HP might also make more of its franchise printer operation.
HP has built a thriving business in photo printers and all- in-one printer-copierfax
gizmos. These categories brought in 32% of HP's $5 billion in printer sales
in its most recent quarter. Since photos require more ink than plain documents,
the photo printers drive sales of highly profitable ink cartridges.
And while PC sales help the top line, profits from the printer-supplies unit
held up the bottom line.
HP develops and markets products in a broad range of printing and imaging
categories. We lead the market in inkjet printers, all- in-one devices, laser
printers, wide- format plotters, scanners, print servers and ink.
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HPQ : BCG Matrix

Relative market share ( Cash generation )
High
Low
Industry growth rate
High
Low
Image
printer
Software
PCs
Servers
Service
Storage
Notebook
Post-merger
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HP: CHALLENGES
 CHOOSING PRODUCTS
Fix the PC business
Optimize the server business
Enhance the service & consulting

CUT COSTS WHILE MONITORING


REVENUES
Cut $3b

Keep revenues from shrinking more than

5%
INCREASE MORALE & AVOIDING

CULTURE CLASHES

Workers from HP and Compaq have spent more than 1 million hours planning
their merger. Here's how they're doing.
Their merger faces huge challenges. One top problem may be morale.
The new HP will feature Compaq's corporate PCs, low-end servers, and its
iPAQ handhelds, along with HP printers and UNIX servers. Consumer PCs
from both sides will also remain, though HP's business PCs and Jornada
handhelds will not.
Most of the $2.5 billion in reduced costs will come from eliminating
overlapping corporate functions, from legal and marketing to human resources
and sales management.
The team's biggest task: finding financial synergies. It has been dispatched to
hit two targets: $2.5 billion in cost savings by 2004 and keeping revenues from
shrinking more than 5%, as rivals swoop in to grab customers.

Conclusion - HP Strategy
Balance between the innovation/being first
to the market and pure, raw, low cost.
Maintaining both company brands and
strength.
Adjust and optimize product line.
Enhance high-end Service.

Capellas: “There is very clearly a balance between innovation and being first
to market on one hand, and pure, raw, low cost on the other hand. If you don't
spend any money in R&D you will by definition have a couple of points on the
bottom line, but you'll also never lead in any new product categories, so you
won't get the margins there.”--
Fiorina: “People are declaring the PC business dead because it has had a
couple of rough quarters. That's incredibly shortsighted. It's clear that this is a
critical part of the ability for consumers to do interesting things in their homes.
But the reason for buying isn't going to be to get the hottest box at the lowest
price. You've got things like digital imaging, digital music. It's something that
does something for a consumer. This is what the industry is missing. It's
innovation. That's what Dell can't do.”
Compaq has compelling offerings for home/wireless networking and HP has
strength in digital imaging solutions. Maintaining both brands will enable HP
to leverage existing brand awareness and preferences and give customers the
opportunity to continue to buy the brand and products that best meet their
needs.