Beating Dell: Why Hewlett Packard Wanted to Acquire Compaq

- Compaq had agreed to be acquired by HP

- There was a significant product overlap between HP and Compaq

Fiorina “justifying the acquisition”

- number of benefits

1) cost savings.

- $2.5 billion a year would be taken out of annual expenses by eliminating redundant
administrative fnctions and cutting 15,000 employees.

- Expanded volume would enable HP to capture significant scale economies and thus
compete more efficiently with Dell.

- Computer server and storage businesses, (HP would take the number one spot_

2) Give a critical amss in the service area.

- being able to offer customers a total solution to their information technology needs, both
hardware and services,

VS 1) Critics

Dell’s competitive advantage is based on its direct selling model and the efficient management
of its supply chain, areas where both HP and Compaq lagged Dell.

Economies of scale are all very wel l, they argued, but unless the new HP could sell computers
and servers the way Dell does and manage its supply chain efficiently, the new HP might just
give Dell a bigger target to aim at.

VS 2) Critics

building a service business is not necessarily consistent with maximizing profitability.

#Merger and Acquisition (pg 473)

Finally, even when acquiring a company in a closely related industry, managers must realize that
each company has a unique culture, or way of doing things. Such idiosyncracies must be
understood in order to manage the merged company effectively. Indeed, such idiosyncracies are
likely to be especially important when companies from different countries merge. Over time, top
managers can change the culture and alter the internal workings of the company, but this is a
difficult implementation task. The differences between HP and Compaq are a case in point. HP
has a research-oriented culture and prizes its technology and the people who create it. Compaq
is a marketing-driven organization and prizes a hands-on, value-driven approach. In June 200,
many analysts were waiting to see how the culture of the combined company would shake out.
Would there be a departure of top Compaq managers given that HP is in control fof the new
company and its culture? Would it be possible to integrate their skills if they have such a
different orientation? Where would most of the layoffs that would occur for cost-savings
reason be coming from?

this is why the quality or capabilities of management is so important: Do Fiorina, and other
HP managers have the skills to integrate the two companies?

Internal new venturing is the safest path, and it is best to grow organically within.

internal new ventures are safe but, acquisition is fast,

#Drawbacks and Limits of Horizontal Integration

Although horizontal integration has clear benefits, there are also several drawbacks and limitations
associatied with the strategy. One problem concerns the numerous pitfalls associated with the
strategy. One problem concerns the numerous pitfalls associated with mergers and acquisitions,
which are the vehicles by which a horizontal integrations strategy is executed.

* The majority of mergers and acquisitions do not create value and many actually destroy value.

* M&A often fail to produce the anticipated gains for a number of reasons: problems associated
with merging very different company cultures, high management turnover in the acquired company
when the acquisition was a hostile one, a tendency on the part of managers to underestimate the
expenses associated with rationalizing operations to eliminate duplicate assets and realize scale
economies, and a tendency on the part of managers to overestimate the benefits to be had from a
merger or acquistion and for an acquiring company to overpay for the assets of the acquired
company. --> Much of the opposition to the merger between Hewlett Packard and Compaq
was based on the belief that Carly Fiorina was glossing over(숨기다) the difficulties and costs
associated with merging the operations of these two companies and eliminating duplicate
operations and products.

1) Horizontal integration: process of acquiring or merging with industry competitors in an effort to

achieve the competitive advantages that come with large scale and scope

2000s --> consolidated oligopolies have been replacing more fragmented industry structures.

i) reducing costs

- Horizontal integration is often seen as a way to capture the cost advantages associated
with economies of scale.

- can be important in industries with high fixed-cost structure

- cost savings may also be had by reducing duplication

part of the justification of acquiring rival computer maker Compaq, Hewlett

Packard claimed that the acquisition would save the combined company $2.5
billion in annual expenses by elimin ating redundant functions

ii) increasing the value of the company’s product offering through differentiation

- Product Bundling (source of differential advantage)

- cross selling

iii) managing rivlary within the industry to reduce the risk of price warfare

- acquiring or merging with a competitor may be required in order to eliminate excess

capacity in an industry. The need to use excess capacity often triggers price wars. By taking
excess capacity out of an industry, horizontal integration can create a more manageable
environment in which prices might stabilize or even increase

- make it easier to implement tacit price coordination between rivals (coordination without
communication, and explicit communication to fix prices being illegal)
 as, a general rule the larger the number of players in an industry, the more difficult it is to
establish pricing conventions, such as price leadership by a dominant firm

by creating an oligopoly, horizontal integration can make tacit coordination between rivals
easier to establish

Both of these motives seem to have behind the acquisition of Compaq by Hewlett
Packard in 2002. The personal computer industry was suffering from signifcant excess capacity
and a serious price war, triggered by Dell computer’s desire to gain market to share. By
acquiring Compaq, Hewlett Packard hoped to be able to remove excess capacitiy in the industry
and by reducing the number of large players, the company hoped to be able to impose some
pricing discipline in the industry.