The Hewlett-Packard and Compaq Merger:

A Case Study in Culture Change

Background of Study
This short case study is written as a part of MM6814 course requirement to study
culture change and its impacts in organizations. Geert Hofstede, a Dutch behavioral
scientist, defined culture “as the collective mental programming of a
people in an environment”. An organizational culture is, according
to Kotter and Heskett of the Harvard Business School, “an
interdependent set of values and ways of behaving that are
common to a community and tend to perpetuate themselves,
sometimes over a long period of time”. In short we can conclude
“organizational culture is the way we do things around here” (Burke and Litwin,
1995).

From those definitions we understand that how people inside the organization think
and act is influenced strongly by the culture exists that organization. Therefore, if we
can understand the culture, we can understand the organization more, deal with
people in the organization accordingly thus manage the organization better. Given the
solid existence of culture in the organization and its roles to shape the people’s beliefs
and behaviors, culture is important for successful integration between two
organizations. This case study focuses on the impacts of merger on the organizational

1
cultures in Hewlett-Packard and Compaq. The rationale of choosing to study the
culture change in both Compaq and HP companies because a merger of two
organizations means a merger of two different cultures to co-exist together. It will
allow us the opportunity to study how HP’s cultures differed from Compaq, the
previous and new cultures before and after the merger, what cultures that might clash
and analyze the happenings that gave impacts to their cultures. Our goal is to be able
to understand organizational culture and what impacts a merger can give to the
organizational culture of HP and Compaq.

“Any merger is doomed if there is no real effort beforehand to see whether the two
cultures have anything in common.” (Anne Fisher, Fortune, 24 January 1995)

History of Compaq
Compaq Computer Corporation was the world’s largest supplier of personal
computers and the second largest computer firm in the world founded in 1982 in
Houston, the United States by Rod Canion, Jim Harris and Bill Murto, three former
senior managers from Texas Instruments, each of whom invented $1,000 to establish
the company. It was when International Business Machines Corporation (IBM)
introduced its first personal computer (PC) in 1982 that Compaq, despite the
competition from other companies that created other look-like-IBM computers,
invented a portable IBM-compatible PC. This computer was portable and known as
‘luggable’. In its first year Compaq sold 53,000 luggables. By 1994, it overtook IBM
to become the biggest PC maker in the world. In 2002 Compaq’s sales was
$42,383,000,000.

As it was growing bigger in 1997 Compaq bought Tandem Computers known for
their NonStop server line and in January 1998 it acquired Digital Equipment
Corporation (DEC) for $9.6 billion in cash and stock. These two deals integrated
high-end servers, operation systems, chip technology and world-wide service
organizations into the Compaq’s product portfolio.

The next four to five year-period was, despite these two acquisitions and increase in
its PC manufacturing, a struggling time for Compaq as it faced its own internal issues
with its acquisition, cultures clash and external threats from major competitors such as
IBM and Dell Computer. In 2001 Compaq announced that it would eliminate 8,500
jobs in the United States and its companies worldwide, about 12 percent of its entire
workforce, and consecutively another 1,500 layoffs in order to save the company
$900 million a year.

The name Compaq is a short of Compatibility and Quality as it first produced some of
the first IBM PC compatible computers. Compaq manufactures workstations,
desktops, laptops and servers for business and consumers. It also offers hardware,
software, solutions and other services. Compaq markets its products in over 100
countries. It was one of the most reputable manufacturers for mid-range hardware. In
2002, it became a brand name of Hewlett-Packard as a result of merger.

History of HP
Stanford University classmates Bill Hewlett and Dave Packard founded Hewlett-
Packard Company or HP on 1 January 1939. The company's first product, built in a

2
garage in Palo Alto, California, was an audio oscillator—an electronic test instrument
used by sound engineers. One of HP's first customers was Walt Disney Studios,
which purchased eight oscillators to develop and test an innovative sound system for
the movie Fantasia. It introduced its first computer in 1966 and personal computer in
1980.

HP shipped its first LaserJet printer and its most successful product ever to the
markets in 1984. By September 2006, it sold its 100 millionth LaserJet printer. HP
divides its business into three groups: The Personal Systems Group handling business
and consumer PCs, mobile computing devices and workstations, the Imaging and
Printing Group handling inkjet, LaserJet and commercial printing, printing supplies,
digital photography and entertainment, and The Technology Solutions Group
handling business products including storage and servers, services and software.

In 1990 the revenue was $13.2 billion and employees were 92,000. In July 2007, its
revenue totaled $100.5 billion and there were 156,000 people under its payroll. HP
was recognized to be the symbolic founder of Silicon Valley, the leading high-tech
hub in the southern part of San Francisco Bay Area, Northern California, the United
States.

The Merger
Both Compaq and HP are not new to acquisition activities, however judging from
their historical background merger was their first experience. Some of the companies
acquired by Compaq were Tandem Computers, founded in 1974, a manufacturer of
fault tolerant computer systems using Non-Stop architecture, Digital Equipment
Corporation, the leading company in the previous generation of computing during the
1970s and early 1980s and the #1 minicomputer maker in the 1980's.

As for HP, the first acquisition made was in 1958 when it acquired F.L. Mosele
Company of Pasadena, California, producer of high-quality graphic recorders. As the
years passed it purchased several companies including Sanborn Company, a
manufacturer of medical equipments, F&M Scientific Corporation, expert in chemical
analysis, and Mercury Interactive Corp., a leading IT management software and
services company.

On 5 September 2001, HP announced its agreement to buy Compaq in an all-stock

transaction valued at $25 billion, to form an entity that worth nearly $87 billion. It
was at that time the largest merger in history of technical sector. On May 3, 2002 HP
and Compaq officially merged, beginning operations as one unified company. A
consultant was hired to manage the integration and top management people from the
two companies were assigned new roles to work on the integration Webb McKinney,
president of HP's Business Customer Organization, Jeff Clarke, Compaq executive.
The new company, under HP name serves more than one billion customers across 162
countries. At the time the merger announced the work forces of HP was 88,500 and
Compaq was 70,100.

This merger would require a massive reorganization, integration and cultural change.
HP’s culture of engineering, consensus building, and entitlement was to be melted
with the hard-charging sales culture of Compaq.

3
4
Reasons for the Merger
In 1980s Compaq experienced growth for sales of its high quality and high cost
products. The computer markets was growing so fast that in 1990s, strong
competition from low-cost producers inevitably prevailed. Dell, Gateway, Micron
were offering high quality products at lower price. Other big corporations like IBM,
HP and DEC aimed at large computer market. These competitors slashed Compaq’s
market share. Even though Compaq finally acquired DEC, it did not help the
company to achieve a total recovery from loss of sales.

Although HP was still a model company for its outstanding performance,

management practice and employee relations, it success was still below the industry
growth and it competed heavily with IBM and Dell with their low-cost products. In
July 1999, Carleton S. (Carly) Fiorina, a 47-year-old MIT graduate, was hired to be
the chairman and CEO of HP. She was the first female leader ever to be in charge in
this 62-year-old company. Fiorina saw the need to boost the company’s growth
because she believed that it became slower and slower over the years. She traveled to
HP facilities worldwide to urge the employees to keep up a speedy work, integrating
operational activities and eliminating bureaucracy. Even though these helped the
company to improve its performance, Carly thought that HP needed to expand and
that was to acquire Compaq its rival in the PC business through merger.

This idea for merger came out of telephone conversation between Carly and the (at
that time) Compaq chairman and CEO Michael Capellas in late June
of 2001. In September both companies approved the merger. The
following is the merger transaction:

Structure: Stock-for-stock merger

0.6325 of an HP share per Compaq
Exchange Ratio:
share
Current Value: Approximately $25 billion
HP shareholders 64%; Compaq
Ownership:
shareholders 36%
Accounting: Purchase
Expected Closing: First half of 2002

Source: http://www.hp.com/hpinfo/newsroom/press/2001/index.html, Press Release

issued on September 3, 2001

After the Merger

Although this merger met heavy critics and oppositions from investors, HP’s
founders’ families in particular, and employees from both companies resulting in
falling stock prices of HP and Compaq, Carly defended the move was to strengthen
the market positioning of HP and that this merger was justified by the values of HP:
creativity, change and innovation. No matter how hard she argued, the board of
directors were all and up against her and her decision.

In November 2002, six months after HP and Compaq joined forces,

the new HP’s President Michael Capellas left his position as
president to take charge of WorldCom. Nearly three years after the

5
merger Carly was forced to resign from her post just before the HP
board of directors could fire her in February 2005. During those three
years, thousands of former Compaq employees were laid off, its stock price generally
declined, profits stagnated, and it continued to lose market share to Dell. She was
then replaced by Mark V. Hurd, a former CEO of National Cash
Register (NCR), since March 2005 to date.

Stock Price Table

Date Details about Dates* Open Close

07/16/99 Day before Fiorina is hired $53.98 $54.43
07/19/99 Monday after Fiorina is hired 55.26 55.50
01/14/00 Six months after Fiorina is hired 54.87 53.71
04/07/00 High point 70.75 74.48
07/14/00 One year after Fiorina is hired 64.41 63.90
01/16/01 One and a half years after Fiorina is hired 29.25 29.13
07/16/01 Two years after Fiorina is hired 26.81 25.46
08/31/01 Before merger is announced 22.33 22.39
09/04/01 Day after merger is announced 20.40 18.33
09/20/01 Low point after merger is announced 14.44 14.05
10/03/01 One month after merger is announced 14.53 15.50
11/06/01 Hewlett announces his opposition 16.37 19.19
01/16/02 Two and a half years after Fiorina is hired 22.27 21.81
03/19/02 HP shareholders vote on merger 19.33 18.36
05/07/02 Combination day 18.41 17.98
09/03/02 One year after merger is announced 12.77 12.31
10/04/02 Low point 11.87 11.30
11/07/02 Six months after combination day 16.92 16.50
05/07/03 one year after combination day 17.01 17.15
07/01/03 four years after Fiorina is hired 21.30 21.18

Source: http://finance.yahoo.com

From the above figure, the prediction of those critics and analysts proved to be true
and this can be seen obviously from the stock price table within a year after the
merger. The stock price kept falling down. This was the result of customers’ shifting
to other brands and the speculations whether the new company would

After the merger most of Compaq products have been re-branded with the HP
nameplate, only some products retain Compaq brand such as Compaq Presario PCs.
Other products were re-branded HP Compaq, HP iPAQ etc.

The proposed merger called for a consolidation of HP’s and

Compaq’s product lines into four major operating groups: services,
imaging and printing, access devices, and information technology
infrastructure. This merger would create a full-service technology
firm with the ability to integrate hardware and software into
solutions while providing a wide range of services at the same time
and the new HP was reported to focus more on providing services.

6
The new company or the new HP laid off 15,000 employees and had
145,000 employees under its payroll. The merger of these two big
corporations seemed as a merger of bigger problems in the eyes of
critics and analysts and their opinion suffered the new HP’s image in
the eyes of its customers.

Cultures and Values of Compaq and HP

Before the Merger

Compaq HP Way
lower-paid computer-repair people Innovation
volume-oriented Creativity
adopt and go Change
risk taker fosters innovation by giving employees
speed autonomy and opportunities for
growth strategy professional/individual growth
soul-searching individual achievements recognition
focus centralized
can-do attitude privacy
constructive open conflict process-oriented
environmentally friendly respect and trust for individual
action-oriented compliance
business-driven slow decision-making
innovative and pioneering wealth-preservation oriented
quick decision-making low morale
direct and channel-friendly bottoms-up
wealth-creation oriented integrity and reliability

The above table shows both Compaq and HP ‘s core values and cultures before they
merged into one single company, HP. Compaq was then known as a leading PC brand
in the market. Compaq was known for its ‘adopt-and-go’ approach

Post-Merger
For the merger HP created a new strategy to integrate two companies into one by
incorporating its ‘people strategy’ because it believed that people was the most
important issue that must be tackled in every merger. Hugo Bagué who was HP’s
Vice President of Human Resources in Europe, the Middle East and Africa,
interpreted this ‘people strategy’ of the new HP in Chartered Institute of Personnel
and Development (CIPD) conference in Harrogate, UK. This ‘people strategy’ was
made up of three phases as follows:

Phase one: the new foundation

Phase two: a high performance culture
Phase three: the best place to work

The detail of these three phases of HP’s ‘people strategy’ is presented in the

7
Appendix A of this paper.

Under Chairman and Chief Executive, Mark Hurd’s leadership, HP’s business is
growing and H.P. will be the world’s largest technology company in 2007. In the
interview with New York Times published on 13 October 2007, Mark Hurd talked
about his leadership style and HP’s fundamental business. Under his three-year
management, HP made 21 acquisitions. HP focuses on allowing customers to easily
do business with the company and allows employees to execute and the business
emphasizes on software. Mark Hurd’s is known for his down-to-earth personality and
no-nonsense operation whiz.

Reorganization: Changes in the new HP after the merger

There were changes resulted from the merger and some of the changes are:

1. Culture
The new HP way is established by retaining some of the HP old way such as
innovation, change and creativity, and adopting some constructive cultures
that belonged to Compaq.

New HP’s culture

• Innovation
• Creativity
• Change
• Constructive open conflict
• Privacy that values customer and employee personal data
• Respect and trust for individual that values time to talk to employees
• Commitment for research that values innovation focused on the
combination of technology, local needs and sustainable economic models.
• Integrity and reliability that values customers’ satisfaction and secure
employment for employees
• Friendly and personal
• Customer-centric
• People-priority that values employee development and swift behavioral
change through reward system as a motivator, training programs for
managers, e-learning modules and online tutorials, and people’s
development through effective coaching, performance feedback and
developmental planning.

2. Workforce
At the time the merger announced, there were 88,500 employees working for
HP and 70,100 employees working Compaq. Later on the workforce was
slashed down and as many as 15,000 employees, eliminated 6400 jobs.
Though HP had tried its best not to lay off its workforce for nearly 60 years,
until 2002, as many as 45,000 or 30% of the new HP’s employees were laid
off. However, it continues hiring people while slashing down its employees
worldwide in response to its churn strategy to survive the onslaught from
technological innovation and global competition. According to several HP

8
 executive in Europe, the global layoffs helps the new HP to trim expensive
workforce in the United States and Western Europe and to make way to
channel work to lower paid employees in Asia, Eastern Europe and Latin
America. Mark Hurd added that the layoff of jobs is a means to eliminate HP’s
competitive disadvantage of having too many workers in information
technology, human resources and finance positions – and not enough in
revenue-generating jobs, such as sales.

3. Company structure
The merger combined the annual revenue of both companies totaled $87
billion. The company is being restructured around 6 global data-centres,
encompassing 87 regional centres in 29 countries, and a single enterprise data-
warehouse in California. As its two CEOs departed the management structure
was reorganized. New CEO, Mark Hurd was appointed and over the past five
years HP has successfully transformed itself into a company capable of
delivering both volume products and value products.

4. Leadership
Under Carly Fiorina, leadership was seen as a superstar status, centralized and
rigid opposite to the old HP way that regarded highly on decentralized and
people-oriented style. When Mark Hurd was appointed as the new CEO to
replace Fiorina, the previous image of a leader created by Fiorina was
changed. Mark Hurd brought back the HP’s old culture by his down-to-earth
warm personality. He is known to the workers as someone who will stop by
and chat with employees over a cup of coffee. He enjoys walking to look
around the office and talking to all levels of employees. It is obvious that
Mark Hurd recognizes the importance of uplifting culture above numbers as
starters. The ‘Bill and Dave’ (founders of HP) legacy of leadership is finally
brought back to this new HP.

5. Product lines
The merger of Compaq’s volume orientation and HP’s quality consolidated
both Compaq and HP’s product lines into 4 major operating groups and they
are: services, imaging and printing, access devices, and information
technology infrastructure. Redundant product groups and costs associated with
the manufacturing of these products were eliminated as the result of this
product consolidation; therefore, it gave the new company a room to focus
more on services, a greater focus to build what the customers really want.

Recommendations
The following are several recommendations suggested to keep the new HP fares with
the competition in the IT industry:

1. Continue to leverage products and services to compete with IBM in the IT

industry
In order to be the market leader in the server market and IT service, HP must
always cast its eyes on IBM because IBM is HP’s closest competitor in server
market and IT service. In China’s business computer market IBM holds the
largest share. In 2006 IBM accounted for a massive 42.3 per cent of the blade

9
 market, according to research group IDC, and HP came second with 35 per
cent. In the third quarter of 2007, IDC reported that HP led with 44.1 share
outnumbered IBM and Dell.

2. Communication and dialogue

Communication and dialogues must be encouraged and challenged not only
from top down but also bottom up. Top management officers should listen to
what its subordinates have to say because one-side opinion can never be free
of misjudgment and bias. True to HP’s culture of respect and trust for
individual. A close interaction among the Board of Directors and stakeholders
must be maintained.

3. Adopt and go
In order to cope with the ever-growing competition and demand in the market,
a speedy move is important. Due to the merger, many customers left the
company and it took the company many years to reorganize its management
and recreate its culture, during that inactive time the competitors took the
opportunity to attack the market and take the market share. Now that HP has
stabilized its operations, it should make use of its’ adopt and go’ strategy.

4. Upholds old and constructive culture

HP and Compaq’s old cultures that are adopted into the new culture must be
embraced and maintained by all people in the company, not only the low level
employees but also the top-level officers. There should not be another time
repeating the previous CEO’s behavior that disrespect

5. Ethics based training

6. Strengthen service sector
7. Separate CEO and Chairman position

10
 Appendix A

HP’s new people strategy was made up of three phases:

Phase one – the new foundation

The best place to start is the beginning! HP’s first phase was all about the basics and
concentrated on clear communication of business objectives and cultural aspects of
the new organization. Bagué revealed that a lot of Compaq employees were initially
outspoken in their opposition to HP’s acquisition. It was therefore very clear from the
start that it would be crucial to “win over” these disillusioned workers with the
minimum of delay.
Speed became a recurring theme in Bagué’s talk. He revealed that within two weeks
of the merger announcement 250 account managers had been named. Also, functional
overlap between the two organizations was eliminated within 12 months in all
countries – an impressive achievement. Bagué is also a firm believer in the fact that
badly managed change will freeze an organization in its tracks, probably bringing
with it catastrophic consequences. In this kind of situation urgent stabilization is
needed so that an organization in transition can focus on the aspects that matter most.
According to Bagué, this first phase was pivotal in ensuring that external
communication such as press reports, hearsay and rumors, did not outweigh the
organization’s own internal communication.
It is perhaps becoming something of a cliché in business today, but Bagué
nevertheless reinforced the vital role communication played in this first phase of the
people strategy. He articulated that employees simply cannot focus on their jobs until
they receive reassurance that the organizational foundations have been established
and that they “have visibility to when these changes will occur”. Clear, regular and
transparent communication to help build trust and tackle uncertainty was nothing
short of critical. To make this a reality, a new “communication cornerstone” was
established. Called “@hp”, this employee portal was in operation from day one,
proving HP’s commitment to open communication.
Phase one was also concerned with organizational design. Combining two companies
in the same locality throws up enough challenges of its own, but amplifying this onto
a global level leads to a myriad of far-flung difficulties which could easily crush any
ambitions before they have even left the ground. Therefore Bagué stressed the
importance of acting early and very quickly ensuring that the new HR strategy was
linked to the overall business strategy.
But herein lies a paradox. Whilst recognizing the need to move quickly, how could
HP also ensure that management did not appear to be rushing through these elements
too quickly? The answer was “fast start” – a program of new team discussion
meetings for every employee. This initiative helped HP and Compaq employees come
together and begin the process of culture building. According to Bagué, the fast start
sessions were “a vital communication vehicle for transmitting, interpreting and
incorporating information about the new HP strategy, organization model, brand,
culture and transition plan to employees”.

11
Phase two – a high performance culture

Having worked hard in an effort to win over the worried Compaq employees and also
maintain the motivation of its own workforce, it was important for the new HP to
maintain its people focus. Therefore phase two of the people strategy involved the HR
function partnering with the business to develop a high performance workplace.
In essence, the next stage was all about moving from education to action – or
“mobilization” as Bagué explained. From two quite different cultures and reward
systems emerged a single, unified one in which worker performance and personal
objectives were directly tied in to the overall business strategy. Employee
development and swift behavioral change was encouraged through using reward as a
motivator and providing manager training programs, e-learning modules and online
tutorials. In addition, developing people through effective coaching, performance
feedback and developmental planning was initiated.
A crucial element introduced at this stage was feedback. Another example of HP’s
ambition to nurture the highest possible employee satisfaction, the “voice of the
workforce” survey was designed to evaluate how far the organization had come on
this aspect and also identify areas for improvement. Rather than merely sitting on the
results, management action plans were devised to directly tackle the problem areas
thrown up in the survey.

Phase three – the best place to work

Phase three of the strategy advertised HP’s ambition to be the best place to work in
the world. Bagué described it as the aspirational view of the company HP wants to be
– the goal for everyone to work towards. As the new HP is barely 18 months old,
Bagué revealed that a lot of the work in this phase is in the early stages of
development. Eventually it will include diversity policies and work-life programs as
well as reiterate HP’s ambition to be the world’s most satisfying and rewarding
working environment.
Bagué paid tribute to HP’s employees in working towards this exciting and
challenging work environment. He said it was down to their dedication and hard work
that HP was able to take full advantage of the opportunities that presented themselves
during the merger.

12
References

http://www.signonsandiego.com/uniontrib/20061226/news_1b26hp.html

The issues surrounding the merger: HP prepares for merger with Compaq
http://www.sfgate.com/cgibin/article.cgi?
file=/chronicle/archive/2001/12/05/BU179964.DTL&type=business

Making HP "Old Reliable" Again, BusinessWeek (22 Feb 2005)

http://www.businessweek.com/technology/content/feb2005/tc20050222_9097_tc120.
htm

http://www.businessweek.com/innovate/content/nov2007/id20071114_289027_page_
2.htm

People at priority at HP: Managing the aftermath of a mega merger

http://www.emeraldinsight.com/Insight/ViewContentServlet?
Filename=Published/EmeraldFullTextArticle/Articles/0810180206.html

http://www.gartner.com/1_researchanalysis/focus/hp_sl.html

http://www.hp.com/hpinfo/abouthp/histnfacts/

Next HP-Compaq merger battle: Cultures

http://sanfrancisco.bizjournals.com/sanfrancisco/stories/2002/01/21/daily8.html

http://www.fundinguniverse.com/company-histories/Compaq-Computer-Corporation-
Company-History.html

http://www.businesspme.com/uk/articles/technologies/44/History-of-Compaq-.html

http://news.zdnet.co.uk/itmanagement/0,1000000308,2094632,00.htm

Merger caps short, turbulent Compaq history

Tags: HP, Financial, Compaq, Microsoft John G. Spooner ZDNet US
Published: 05 Sep 2001 12:55 BST

http://www.news.com/Compaq-Sales-down%2C-more-layoffs-in-store/2100-1001_3-
269738.html?tag=st.rn

http://en.wikipedia.org/wiki/Compaq

http://en.wikipedia.org/wiki/Hewlett-Packard

http://www.news.com/HP-outlines-long-term-strategy---page-2/2100-1014_3-
6029519-2.html?tag=st.num

HP's New Low-Profile Boss, Business Week (29 March 2005)

http://www.businessweek.com/technology/content/mar2005/tc20050329_0279_tc024.
htm?campaign_id=nws_techn_apr1&link_position=link4

13
http://www.sfgate.com/cgi-bin/article.cgi?
file=/chronicle/archive/2001/12/05/BU179964.DTL&type=business

http://www.sfgate.com/cgi-bin/article.cgi?
file=/chronicle/archive/2002/03/18/BU55548.DTL&type=business

http://www.microsoft.com/presspass/press/1998/sept98/mscompaqpr.mspx

The Hewlett-Packard and Compaq Merger: A Case Study in Business

Communication, Kristen Bell DeTienne and Charlotte L. Hoopes, Education
Review of Business Communication 1(1): 27-46. © 2004,
Senate Hall Academic Publishing

Hewlett-Packard The New Way? Nick Forster, The Management Case Study Journal
Vol. 6 Issue 1 July 2006 pp 14-29 © University of South Australia ISSN: 1445-033X

http://www.businesspme.com/uk/articles/technologies/44/History-of-Compaq-.html

Emerald FullText Article: People at Priority at HP, Managing the Aftermath of a

mega-merger, Development and Learning in Organizations, Volume 18 Number 2
2004 pp. 19-21, Alistair Craven, UK.

http://www.washingtontechnology.com/print/16_13/17177-1.html?topic=business

http://www.pcpro.co.uk/news/98594/ibm-leads-hp-for-server-market-share.html

14