THE HEWLETT-PACKARD AND COMPAQ MERGER:

A Case Study in M&A

Group: Kumar Raunak Nikhil Garg Ashish Agarwal Sanil Goel Kartikeya Sharma

DEFINITIONS
A merger is a combination of two or more corporations in which only one corporation survives and the merged corporations go out of business. Statutory merger is a merger where the acquiring company assumes the assets and the liabilities of the merged companies.

A subsidiary merger is a merger of two companies where the target company becomes a subsidiary or part of a subsidiary of the parent company

TYPES OF MERGERS


Horizontal Mergers

- between competing companies Vertical Mergers - Between buyer-seller relation-ship companies Conglomerate Mergers - Neither competitors nor buyer-seller relationship

MOTIVES AND DETERMINANTS OF MERGERS

Synergy Effect
NAV= Vab (Va+Vb) P E Where Vab = combined value of the 2 firms

Vb = market value of the shares of firm B. Va = As measure of its own value P

-

= premium paid for B = expenses of the operation

Operating Synergy Financial Synergy

Diversification Economic Motives

Horizontal Integration Vertical Integration Tax Motives

HP PRE- MERGER
Established in 1936 by 2 Stanford engineers. In 1990s HP had an enviable growth rate of 20%. HP was considered as an one-stop shop for business applications:

Hosted services

E-commerce application software

Unix servers

Network management

Integration services

PCs, printers, ink cartridges

HP : COMPETITORS IBM Servers, PCs, storage and IT services Dell PCs Canon Printers, fax, copiers, optical equipment Compaq Pcs, Servers, Pocket computers

COMPAQ - PRODUCTS
PC, (desktop and portable) Manufacturing and selling Servers Manufacturing, selling plus services

Pocket Computer (handheld computer) -Manufacturing and selling

Storage manufacturing, selling, services and on-line storage

COMPAQ- PRE MERGER

Branding competition : Compaq was a reference and standard leader. Founded in 1982. Acquired Tandem Computers in 1997 which lead to doubling of sales.

Client base stable.

Product/service emphasis (strategic partnerships with Microsoft, Oracle).

Acquired DEC at the cost of $9.6 billion which lead to its access to 22,000 people in consulting and services domain.

In 2000, emphasis on cost reduction and increase in gross margin.

Competitor pressure

COMPAQ: COMPETITORS
IBM Servers, PCs, storage and IT services. Sun Microsystems Servers Dell PCs HP PCs, IT services and pocket computers Palm Pocket computers

PROBLEMS
Pressurized and loosing market share since 1998. Integration with Tandem and DEC did not take place as smoothly as thought.

Increasingly loosing market share to DELL.

Carly Fiorina: C.E.O. of Hewlett-Packard

Mike Capellas: C.E.O. of Compaq

THE MERGER: DEAL STRUCTURE

Structure: Stock-for-stock merger Exchange Ratio: 0.6325 of an HP share per Compaq share Value: Approximately $25 billion Ownership: HP shareholders 64%; Compaq shareholders 36%.

The HP/Compaq merger. By The Numbers: HIGH-END

High-end Unix Servers: Worldwide (2000) Factory Revenues ($m) Hewlett-Packard Compaq 512 134 Market Share 11.4% 3.0% Hewlett-Packard Compaq High-end Unix servers: US (2000) Factory Revenues ($m) 124 66 Market Share 6.1% 3.3%

Closest Rival: Sun Microsystems with factory revenues of $2.1 billion and a 47.1% market share

Closest Rival: Sun Microsystems with factory revenues of $1.2 billion and a 60.1% market share

MID-RANGE
Mid-range Unix servers: Worldwide (2000) Factory Revenues ($m) Market Share Hewlett-Packard Compaq 3,673 488 30.3% 4.0% Mid-range Unix servers: US (2000) Factory Revenues ($m) Hewlett-Packard Compaq 1552 296

Market Share 28.2% 5.4%

Closest Rival: Sun Microsystems with $2.8 billion in factory revenue and a 23.5% market share

Market Leader: Sun Microsystems with revenues of $1.7 billion and a 30.5% market share)

PERSONAL COMPUTERS
PC Shipments: Worldwide (in thousands of units) HewlettPackard Compaq Units (q2/01) Share (q2/01) Units (q2/00) Share(q2/00) Growth 2,065 6.9% 2,260 7.4% -8.6% 3,590 12.1% 4.011 13.2% -10.5% PC Shipments: US(in thousands of units) HewlettPackard Compaq Units (q2/01) Share (q2/01) Units (q2/00) Share(q2/00) Growth 991 9.4% 1,221 10.7% -18.8% 1,332 12.7% 2,293 20.1% --21.3%

Market leader: Dell Computer Corp. with a 24% market share and a 9.8% growth in the same period. LAPTOPS/NOTEBOOKS Worldwide shipments of portable computers (thousands of units) HewlettPackard Compaq Units(q4/00) Share(q4/00) Units(q4/99) 318 4.5% 139 817 11.6% 739 Market Leader: Palm with a 52.9% market share and 3.53 million units. SMART HANDHELDS Shipments (in 000s) Hewlett-Packard Compaq 254 129 Share 2000 3.8% 1.9%

Rank 4 9

TIMELINE OF THE HP AND COMPAQ MERGER

2001/06/22

Carly Fiorina visits Michael Capellas for licensing HP software issue, but wound up a merger talking. 2001/09/03 Hewlett-Packard announces it will buy Compaq Computer in a deal worth $25 billion. 2001/11/07 The Compaq Board of Directors meets and reaffirms its strong support for the proposed merger. 2002/01/17 Compaq shareowners vote on the merger proposal. 2002/03/05 The proposed merger gets a positive recommendation from Institutional Shareholder Services report. 2002/03/19 HP shareholders vote on the merger; HP declares victory in Compaq merger base on preliminary vote. 2002/03/28 Walter Hewlett files a lawsuit asking the Delaware Chancery Court to overturn the vote by HP shareholders to approve the deal. 2002/04/30 Walter Hewlett abandons his opposition after a Delaware judge rules that Hewlett-Packard's shareholder vote was legal 2002/05/01 HP announces final results of vote count; 838,401,376 HP shares were voted in favor of the deal, compared with 793,094,105 shares voted against the proposal. 2002/05/03 HP completed merger by acquiring Compaq Computer, valued at an estimated $19 billion.

QUESTIONS
Objective of the merger Risks involved in the merger Fiorina Vs Mark Hurd If you were Hurd what decisions would you have taken

OBJECTIVES OF MERGER
Achieve Economies of Scale and generate cost savings. Have a greater say with the suppliers. HPQ would become the biggest in servers category.

2nd largest in the PC market behind Dell.

HPQ combined expertise in the high end storage would become biggest in the world. Cost cutting in terms of labor costs by removing redundant profiles.

Merger would create huge customer base which in turn would create a stable stream of cash flow.

THREATS
Neither of company had a strong low end PC business. Neither had as strong a direct selling network like Dell.

Had potential risk in terms of directing resources from profitable business(imaging) to weak business(PCs).

Historical precedents of integration problems and failure of technology related M&A.

CHALLENGES: POST MERGER

Choosing Products
Fix the PC business Optimize the server business Enhance the service & consulting

CUT COSTS WHILE MONITORING REVENUES

Cut costs by $3b Keep revenues from shrinking more than 5 % INCREASE MORALE & AVOIDING CULTURE CLASHES

TRACKING THE STOCK PRICES

HPQ FROM 2002-2004

Despite refining the value chain HPQ failed to leverage the resources at its disposal. The companys US inkjet printer market share fell to 48% the end of 2004 from 57.4% in the preceding year, and its US laser printer market share declined to 38% from 45.7% in the same period. In the fiscal year ending October 31st 2004 the company posted operating profit margins of only 6.3% and the PSG division reported margins of only 1.2%.

FIORINA HURD
In terms of strategy Fiorina had some good plans with integrating different businesses of HP into one. Execution of the strategies were weak and couldnt yield the desired synergy and results. Deal that was struck was expensive for HP in terms of the results expected. Fiorina missed the opportunity of inculcating a new culture in the new organization.

VS
In terms of strategy Hurd was more into damage control and tried focusing on HPQs strength. Execution of these strategies were strong as bifurcated the imaging and the PC business. Hurd focused on consolidating the deal made and worked on achieving maximum synergy.

IF YOU WERE HURD WHAT YOU WOULD HAVE DONE

HPQ currently is pursuing both direct selling as well as the indirect selling channel. As Hurd I would choose the direct selling model and save costs. HPQ still has a small presence in the lucrative Consulting business as Hurd I would focus more on the consulting business. Divert resources from less profitable business to more profitable business like Printing & Imaging

Move out of the PC business and focus more on the mobile notebook business.