Failure mergers

by Niyati Ojha on November 2, 2008 Its no secret that plenty of mergers dont work. Those who advocate mergers will argue that the merger will cut costs or boost revenues by more than enough to justify the price premium. It can sound so simple: just combine computer systems, merge a few departments, use sheer size to force down the price of supplies and the merged giant should be more profitable than its parts. In theory, 1+1 = 3 sounds great, but in practice, things can go awry. Historical trends show that roughly two thirds of big mergers will disappoint on their own terms, which means they will lose value on the stock market. The motivations that drive mergers can be flawed and efficiencies from economies of scale may prove elusive. In many cases, the problems associated with trying to make merged companies work are all too concrete. Coping with a merger can make top managers spread their time too thinly and neglect their core business, spelling doom. Too often, potential difficulties seem trivial to managers caught up in the thrill of the big deal. The chances for success are further hampered if the corporate cultures of the companies are very different. When a company is acquired, the decision is typically based on product or market synergies, but cultural differences are often ignored. Its a mistake to assume that personnel issues are easily overcome. For example, employees at a target company might be accustomed to easy access to top management, flexible work schedules or even a relaxed dress code. These aspects of a working environment may not seem significant, but if new management removes them, the result can be resentment and shrinking productivity. WHAT IS A FAILED MERGER? A failed merger can be understood in two ways: Qualitatively, whatever the companies had in mind that caused them to merge in the first place doesnt work out that way in the end. Quantitatively, shareholders suffer because operating results deteriorate instead of improve. Studies reveal that approximately 40% to 80% of mergers and acquisitions prove to be disappointing. The reason is that their value on the stock market deteriorates. The intentions and motivations for effecting mergers and acquisitions must be evaluated for the process to be a success. It is believed that when two companies merge the combined output will increase the productivity of the merged companies. This is referred to as economies of scale. However, this increase in productivity does not always materialize.

Heres a list of notorious failed mergers that evaluated in one way or another: AOL/Time Warner, HP/Compaq, Alcatel/Lucent, Daimler Benz/Chrysler, Excite/@Home, JDS Uniphase/SDL, Mattel/The Learning Company, Borland/Ashton Tate, Novell/WordPerfect, and National Semiconductor/Fairchild Semiconductor.

Some failed so spectacularly that the combined company went down the tubes, others resulted in the demise of the executive(s) that masterminded them, some later reversed themselves, and others were just plain dumb ideas that were doomed from the start. There are several reasons merger or an acquisition failure. Some of the prominent causes are summarized below:

If a merger or acquisition is planned depending on the (bullish) conditions prevailing in the stock market, it may be risky. There are times when a merger or an acquisition may be effected for the purpose of seeking glory, rather than viewing it as a corporate strategy to fulfill the needs of the company. Regardless of the organizational goal, these top level executives are more interested in satisfying their executive ego. In addition to the above, failure may also occur if a merger takes place as a defensive measure to neutralize the adverse effects of globalization and a dynamic corporate environment. Failures may result if the two unifying companies embrace different corporate cultures.

It is traditional to assume that acquisitions fail. In 1987, Harvard professor Michael Porter observed that between 50 and 60% of acquisitions were failures. There have been several other studies since then, and the results have continued to support his conclusions. In 1995, for example, Mercer Management Consulting noted that between 1984 and 1994, 60% of the firms in the Business Week 500 that had made a major acquisition were less profitable than their industry. In 2004, McKinsey calculated that only 23% of acquisitions have a positive return on investment. Academic research in strategy and business economics have taken these conclusions further, suggesting that acquisitions destroy value for the acquiring firms shareholders, although they create value for the shareholders of the target firm, something that was confirmed by a recent study carried out by the Boston Consulting Group (2007). Of course results vary depending on the type of acquisition, the similarity of the two protagonists industry, the international or domestic nature of the operation, etc., but the overall trend remains the same. It would not be correct to say that all mergers and acquisitions fail. There are many examples of mergers that have boosted the performance of a company and addressed the well-being of its shareholders. The primary issue to focus on is how realistic the goals of the prospective merger are.

Companies merge when, for one reason or another, their strategic plans indicate they should. That being the case, there must also be operating synergies between the two companies. In a nutshell, that means the whole will be financially healthier than the sum of the parts. Said differently, at some point after the merger is complete and the companies are integrated with redundant functions eliminated, shareholder value increased. Its that simple theoretically.

Apart from the above mentioned reasons, given below are some more reasons which result in failed mergers: 1. 2. 3. 4. 5. 6. 7. 8. Lack of Communication Lack of Direct Involvement by Human Resources Lack of Training Loss of Key People and Talented Employees Loss of Customers Corporate Cultural Clash Power Politics Inadequate Planning

While it is true that some of these failures can be largely attributed to financial and market factors, many studies are pointing to the neglect of human resources issues as the main reason for M&A failures. A 1997 PricewaterhouseCoopers global study concluded that lack of management and related organizational aspects contribute significantly to disappointing post-merger results. Provided that they have equal or less information than their management, shareholders of each firm accept the merger agreement. The merger goes then ahead and fails. This happens because the obtained synergy gains do not compensate the costs of merging. Accordingly, these mergers are unprofitable. Share prices, on the other hand, can rise at the moment of the merger announcement if markets do not have merging firms private information about the synergy gains.

A majority of corporate mergers fail. Failure occurs, on average, in every sense: acquiring firm stock prices tend to slightly fall when mergers are announced; many acquired companies are later sold off; and profitability of the acquired firm is lower after the merger (relative to comparable non merged firms). One of the main difficulties in measuring acquisition performance lies in the assessment methods used. These methods include measuring the stock market reaction, valuing the whole entity after acquisition, abnormal returns, synergies and economies of scale, to name just the most common. However, they all lack the capacity to isolate the sole impact of the acquisition on the firms value from the plethora of events that occur in these circumstances. When one assess the stock

market reactions to an acquisition over a 180-day window, a number of other events have impacted on the share value during this period. At best these methods allow us to measure the financial markets short-term reaction. Many business commentators are now acknowledging that failure does not have its roots simply in financial, monetary and legal issues but in lack of intercultural synergy. Research suggests that up to 65% of failed mergers and acquisitions are due to people issues, i.e. intercultural differences causing communication breakdowns that result in poor productivity. DAIMLERCHRYSLER MERGER, A CULTURAL MISMATCH? A recent example of such intercultural failure has been that of DaimlerChrysler. Both sides in the partnership set out to show that intercultural hurdles would and could be overcome in their global merger. Recent articles in the Wall Street Journal and Business Week suggest however that DaimlerChrysler underestimated the influence of culture, and due to culture clash, almost two years later is still struggling to become a unified global organization. In the period leading up to the Daimler-Chrysler merger, both firms were performing quite well (Chrysler was the most profitable American automaker), and there was widespread expectation that the merger would be successful (Cook 1998). People in both organizations expected that their merger of equals would allow each unit to benefit from the others strengths and capabilities. Stockholders in both companies overwhelmingly approved the merger and the stock prices and analyst predictions reflected this optimism. Performance after the merger, however, was entirely different, particularly at the Chrysler division. In the months it was found that the high rate of turnover among management at acquired firms was not related to poor prior performance, indicating that the turnover was not due to the pruning of underperforming management at the acquired firm. Following the merger, the stock price fell by roughly one half since the immediate post merger high. The Chrysler division, which had been profitable prior to the merger, began losing money shortly afterwards and was expected to continue to do so for several years. In addition, there were significant layoffs at Chrysler following the merger (that had not been anticipated prior to the merger. Differences in culture between the two organizations were largely responsible for this failure.

Operations and management were not successfully integrated as equals because of the entirely different ways in which the Germans and Americans operated: while Daimler-Benzs culture stressed a more formal and structured management style, Chrysler favored a more relaxed, freewheeling style (to which it owed a large part of its pre merger financial success). In addition, the two units traditionally held entirely different views on important things like pay scales and travel expenses. As a result of these differences and the German units increasing dominance, performance and employee satisfaction at Chrysler took a steep downturn. There were large

numbers of departures among key Chrysler executives and engineers, while the German unit became increasingly dissatisfied with the performance of the Chrysler division. Chrysler employees, meanwhile, became extremely dissatisfied with what they perceived as the source of their divisions problems: Daimlers attempts to take over the entire organization and impose their culture on the whole firm failed.

While cultural conflict often plays a large role in producing merger failure, it is often neglected when the benefits of a potential merger are examined. For instance, following the announcement of the AOL Time Warner deal, a front-page Wall Street Journal article (Murray et al. 2000) discussed possible determinants of success or failure for the merger (such as synergies, costs, competitor reaction, and so forth). The only clear discussion of possible cultural conflict is a single paragraph (out of a 60-column-inch article) revealing how the different personalities of AOLs Steve Case and Time Warners Gerald Levin reflect cultural differences between the two firms. A similar article included a single paragraph entitled What could go wrong with the synergy strategy. Moreover, in these sorts of short, cursory, obligatory discussions of possible cultural conflict, there is rarely discussion of what steps might be taken if there is dramatic conflict. While culture may seem like a small thing when evaluating mergers, compared to product-market and resource synergies, we think the opposite is true because culture is pervasive. It affects how the everyday business of the firm gets donewhether there is shared understanding during meetings and in promotion policy, how priorities are set and whether they are uniformly recognized, whether promises that get made are carried out, whether the merger partners agree on how time should be spent, and so forth.

The guiding hypothesis is that an important component of failure is conflict between the merging firms cultural conventions for taking action, and an underestimation by merger partners of how severe, important, and persistent conflicts are. Cultural conventions emerge to make individual firms more efficient by creating a shared understanding that aids communication and action. However, when two joined firms differ in their conventions, this can create a source of conflict and misunderstanding that prevents the merged firm from realizing economic efficiency Such discourse is highlighting the need for more intercultural training both within the framework of mergers and acquisitions and for key personnel such as managers and HR departments. In both instances culture is being ignored rather than being embraced and used positively. Piero Morosini emphasizes that, misunderstood national cultural differences have been cited as the most important factors behind the high failure rate of global JVs [joint ventures] and alliances.

Morosini argues that when intercultural differences are ignored during the evaluation and negotiation stages of a merger, integration inevitably fails. He adds that the manner in which an organization handles intercultural challenges is directly correlated with the performance of the merger in the post-integration stage and can mean the difference between long-term success or failure. If intercultural understanding is to be recognized within the systems of processes of mergers and acquisitions, staff training is critical. It is the leaders, managers and HR personnel of companies that must have intercultural competency. However, it appears that companies are not investing enough in intercultural, or for that matter any, training. In the Business Energy Survey, where 1,500 managers were surveyed, only a third had received training in the last 12 months. If management is receiving such low levels of support one can assume that other functions are receiving as much or even less. STEPS TO AVOID FAILURE MERGERS: Despite months of work, millions of dollars in fees, and a firm conviction that the transaction makes all the sense in the world, your merger is going down in flames. The two cultures are not meshing. Key talent is heading for the door. And everyone knows it. One of the solutions put forward by researchers is to study acquisition survival. An acquisition is regarded as successful if, over a certain period of time (generally several years), it has remained in the hands of the acquiring firm. Studies on survival confirm the previously obtained results, in other words a failure rate of between 50 and 75%. Divestment as a success criterion poses a major problem, however: if an acquisition is sold off at the end of 4 years with a large profit, can we really consider it as a failure? Obviously not. There are some transactions, such as the marriage of HP and Compaq, which are troubled from the start. Theres little anyone can do. Fortunately, this is far from the norm. More than twothirds of transactions that fail do so at the execution stage. DaimlerChrysler, for example, neglected early on to establish a proper set of guiding principles based on the mergers strategic intent, and then continued to misfire by failing to align leadership and integrate the cultures of the two organizations. Bringing disparate groups of people together as one company takes real work and represents an effort that is often largely overlooked. Culture change management is not indulgent; it is a critical aspect of any transaction. However, simply acknowledging the issue or handing it off to specialists is not enough. Management must set a vision, align leadership around it, and hold substantive events to give employees a chance to participate. Detailed actions and well articulated expectations of behavior connect the culture plan to the business goals. Companies must start to become more aware of these deficiencies and their possible future impacts. If the mergers and acquisitions of the future are to prove fruitful, companies must design and implement comprehensive intercultural training programs for staff; assess and tackle possible areas of intercultural difficulties prior to, during and after mergers and put into place

mutually agreeable intercultural frameworks of understanding to act as guidelines for postmerger synergy. These tasks should not be seen as reactive, damage limitation exercises but as a positive, proactive means of creating cohesion, maximizing efficiency and building a competitive advantage.

Biggest Merger and Acquisition Disasters

Marv Dumon
Contact | Author Bio

The benefits of mergers and acquisitions (M&A) include, among others:

a diversification of product and service offerings an increase in plant capacity larger market share utilization of operational expertise and research and development (R&D) reduction of financial risk

If a merger goes well, the new company should appreciate in value as investors anticipate synergies to be actualized, creating cost savings and/or increased revenue for the new entity. However, time and again, executives face major stumbling blocks after the deal is consummated. Cultural clashes and turf wars can prevent post-integration plans from being properly executed. Different systems

and processes, dilution of a company's brand, overestimation of synergies and lack of understanding of the target firm's business can all occur, destroying shareholder value and decreasing the company's stock price after the transaction. This article presents a few examples of busted deals in recent history. (Learn what corporate restructuring is, why companies do it and why it sometimes doesn't work in The Basics Of Mergers And Acquisitions.) New York Central and Pennsylvania Railroad In 1968, the New York Central and Pennsylvania railroads merged to form Penn Central, which became the sixth largest corporation in America. But just two years later, the company shocked Wall Street by filing for bankruptcy protection, making it the largest corporate bankruptcy in American history at the time. (For related reading, see Taking Advantage Of Corporate Decline and An Overview Of Corporate Bankruptcy.) The railroads, which were bitter industry rivals, both traced their roots back to the early- to mid-nineteenth century. Management pushed for a merger in a somewhat desperate attempt to adjust to disadvantageous trends in the industry. Railroads operating outside of the northeastern U.S. generally enjoyed stable business from long-distance shipments of commodities, but the densely-populated Northeast, with its concentration of heavy industries and various waterway shipping points, created a more diverse and dynamic revenue stream. Local railroads catered to daily commuters, longer-distance passengers, express freight service and bulk freight service. These offerings provided transportation at shorter distances and resulted in less predictable, higher-risk cash

flow for the Northeast-based railroads. (Learn about the importance of commodities in the modern market in Commodities That Move The Markets.) Short-distance transportation also involved more personnel hours (thus incurring higher labor costs), and strict government regulation restricted railroad companies' ability to adjust rates charged to shippers and passengers, making cost-cutting seemingly the only way to positively impact the bottom line. Furthermore, an increasing number of consumers and businesses began to favor newly constructed wide-lane highways. The Penn Central case presents a classic case of post-merger cost-cutting as "the only way out" in a constrained industry, but this was not the only factor contributing to Penn Central's demise. Other problems included poor foresight and long-term planning on behalf of both companies' management and boards, overly optimistic expectations for positive changes after the combination, culture clash, territorialism and poor execution of plans to integrate the companies' differing processes and systems. (Learn why a merger and acquisition advisor is often the best choice when selling companies in Owners Can Be Deal Killers In M&A.) Quaker Oats Company and Snapple Beverage Company Quaker Oats successfully managed the widely popular Gatorade drink and thought it could do the same with Snapple. In 1994, despite warnings from Wall Street that the company was paying $1 billion too much, the company acquired Snapple for a purchase price of $1.7 billion. In addition to overpaying, management broke a fundamental law in

mergers and acquisitions: make sure you know how to run the company and bring specific value-added skills sets and expertise to the operation. In just 27 months, Quaker Oats sold Snapple to a holding company for a mere $300 million, or a loss of $1.6 million for each day that the company owned Snapple. By the time the divestiture took place, Snapple had revenues of approximately $500 million, down from $700 million at the time that the acquisition took place. (Read Mergers And Acquisitions: Break Ups to learn how splitting up a company can benefit investors.) Quaker Oats' management thought it could leverage its relationships with supermarkets and large retailers; however, about half of Snapple's sales came from smaller channels, such as convenience stores, gas stations and related independent distributors. The acquiring management also fumbled on Snapple's advertising campaign, and the differing cultures translated into a disastrous marketing campaign for Snapple that was championed by managers not attuned to its branding sensitivities. Snapple's previously popular advertisements became diluted with inappropriate marketing signals to customers. While these challenges befuddled Quaker Oats, gargantuan rivals Coca-Cola (NYSE:KO) and PepsiCo (NYSE:PEP) launched a barrage of competing new products that ate away at Snapple's positioning in the beverage market. (Read about the importance of memorable advertising in Advertising, Crocodiles And Moats.) Oddly, there is a positive aspect to this flopped deal (as in most flopped deals): the acquirer was able to offset its capital gains elsewhere with losses generated from the bad transaction. In this case, Quaker Oats was

able to recoup $250 million in capital gains taxes it paid on prior deals thanks to losses from the Snapple deal. This still left a huge chunk of destroyed equity value, however. (To learn how to offset capital gains at the individual level, read Seek Out Past Losses To Uncover Future Gains.) America Online and Time Warner The consolidation of AOL Time Warner is perhaps the most prominent merger failure ever. Time Warner is the world's largest media and entertainment corporation, with 2007 revenues exceeding $46 billion. The present company is a combination of three major business units:

Warner Communications merged with Time, Inc. in 1990. In 2001, America Online acquired Time Warner in a megamerger for $165 billion - the largest business combination up until that time.

Respected executives at both companies sought to capitalize on the convergence of mass media and the Internet. (Read about how the Internet has changed the face of investing in The History Of Information Machines.) Shortly after the megamerger, however, the dot-com bubble burst, which caused a significant reduction in the value of the company's AOL division. In 2002, the company reported an astonishing loss of $99 billion, the largest annual net loss ever reported by a company, attributable to the goodwill write-off of AOL. (Read more in Impairment

Charges: The Good, The Bad And The Ugly and Can You Count On Goodwill?) Around this time, the race to capture revenue from Internet searchbased advertising was heating up. AOL missed out on these and other opportunities, such as the emergence of higher-bandwidth connections due to financial constraints within the company. At the time, AOL was the leader in dial-up Internet access; thus, the company pursued Time Warner for its cable division as high-speed broadband connection became the wave of the future. However, as its dial-up subscribers dwindled, Time Warner stuck to its Road Runner Internet service provider rather than market AOL. With their consolidated channels and business units, the combined company also did not execute on converged content of mass media and the Internet. Additionally, AOL executives realized that their know-how in the Internet sector did not translate to capabilities in running a media conglomerate with 90,000 employees. And finally, the politicized and turf-protecting culture of Time Warner made realizing anticipated synergies that much more difficult. In 2003, amidst internal animosity and external embarrassment, the company dropped "AOL" from its name and simply became known as Time Warner. (To read more about this M&A failure, see Use Breakup Value To Find Undervalued Companies.) Sprint and Nextel Communications In August 2005, Sprint acquired a majority stake in Nextel Communications in a $35 billion stock purchase. The two combined to

become the third largest telecommunications provider, behind AT&T (NYSE:T) and Verizon (NYSE:VZ). Prior to the merger, Sprint catered to the traditional consumer market, providing long-distance and local phone connections and wireless offerings. Nextel had a strong following from businesses, infrastructure employees and the transportation and logistics markets, primarily due to the press-and-talk features of its phones. By gaining access to each other's customer bases, both companies hoped to grow by cross-selling their product and service offerings. (Read about the ideal outcome of a M&A deal in What Makes An M&A Deal Work?) Soon after the merger, multitudes of Nextel executives and mid-level managers left the company, citing cultural differences and incompatibility. Sprint was bureaucratic; Nextel was more entrepreneurial. Nextel was attuned to customer concerns; Sprint had a horrendous reputation in customer service, experiencing the highest churn rate in the industry. In such a commoditized business, the company did not deliver on this critical success factor and lost market share. Further, a macroeconomic downturn led customers to expect more from their dollars. Cultural concerns exacerbated integration problems between the various business functions. Nextel employees often had to seek approval from Sprint's higher-ups in implementing corrective actions, and the lack of trust and rapport meant many such measures were not approved or executed properly. Early in the merger, the two companies maintained separate headquarters, making coordination more difficult between executives at both camps.

Sprint Nextel's (NYSE:S) managers and employees diverted attention and resources toward attempts at making the combination work at a time of operational and competitive challenges. Technological dynamics of the wireless and Internet connections required smooth integration between the two businesses and excellent execution amid fast change. Nextel was simply too big and too different for a successful combination with Sprint. Sprint saw stiff competitive pressures from AT&T (which acquired Cingular), Verizon and Apple's (Nasdaq:AAPL) wildly popular iPhone. With the decline of cash from operations and with high capitalexpenditure requirements, the company undertook cost-cutting measures and laid off employees. In 2008, the company wrote off an astonishing $30 billion in one-time charges due to impairment to goodwill, and its stock was given a junk status rating. With a $35 billion price tag, the merger clearly did not pay off. (Read about the implications of this label in What Is A Corporate Credit Rating?) Conclusion When contemplating a deal, managers at both companies should list all the barriers to realizing enhanced shareholder value after the transaction is completed.

Cultural clashes between the two entities often mean that employees do not execute post-integration plans.

As redundant functions often result in layoffs, scared employees will act to protect their own jobs, as opposed to helping their employers "realize synergies".

Additionally, differences in systems and processes can make the business combination difficult and often painful right after the merger.

Managers at both entities need to communicate properly and champion the post-integration milestones step by step. They also need to be attuned to the target company's branding and customer base. The new company risks losing its customers if management is perceived as aloof and impervious to customer needs. (Read about the importance of branding to retaining market share in Competitive Advantage Counts.) Finally, executives of the acquiring company should avoid paying too much for the target company. Investment bankers (who work on commission) and internal deal champions, both having worked on a contemplated transaction for months, will often push for a deal "just to get things done." While their efforts should be recognized, it does not do justice to the acquiring group's investors if the deal ultimately does not make sense and/or management pays an excessive acquisition price beyond the expected benefits of the transaction.

Mergers and Acquisition - A Case Study and Analysis of HP-Compaq Merger

Brief Description

The following is a brief description of the two companies: HP It all began in the year 1938 when two electrical engineering graduates from Stanford University called William Hewlett and David Packard started their business in a garage in Palo Alto. In a year's time, the partnership called Hewlett-Packard was made and by the year 1947, HP was incorporated. The company has been prospering ever since as its profits grew from five and half million dollars in 1951 to about 3 billion dollars in 1981. The pace of growth knew no bounds as HP's net revenue went up to 42 billion dollars in 1997. Starting with manufacturing audio oscillators, the company made its first computer in the year 1966 and it was by 1972 that it introduced the concept of personal computing by a calculator first which was further advanced into a personal computer in the year 1980. The company is also known for the laser-printer which it introduced in the year 1985. Compaq The company is better known as Compaq Computer Corporation. This was company that started itself as a personal computer company in the year 1982. It had the charm of being called the largest manufacturers of personal computing devices worldwide. The company was formed by two senior managers at Texas Instruments. The name of the company had come from"Compatibility and Quality". The company introduced its first computer in the year 1983 after at a price of 2995 dollars. In spite of being portable, the problem with the computer was that it seemed to be a suitcase. Nevertheless, there were huge commercial benefits from the computer as it sold more than 53,000 units in the first year with a revenue generation of 111 million dollars. Reasons for the Merger A very simple question that arises here is that, if HP was progressing at such a tremendous pace, what was the reason that the company had to merge with Compaq? Carly Fiorina, who became the CEO of HP in the year 1999, had a key role to play in the merger that took place in 2001. She was the first woman to have taken over as CEO of such a big company and the first outsider too. She worked very efficiently as she travelled more than 250,000 miles in the first year as a CEO. Her basic aim was to modernize the culture of operation of HP. She laid great emphasis on the profitable sides of the business. This shows that she was very extravagant in her approach as a CEO. In spite of the growth in the market value of HP's share from 54.43 to 74.48 dollars, the company was still inefficient. This was because it could not meet the targets due to a failure of both company and industry. HP was forced to cut down on jobs and also be eluded from the privilege of having Price Water House Cooper's to take care of its audit. So, even the job of Fiorina was under threat. This meant that improvement in the internal strategies of the company was not going to be sufficient for the company's success. Ultimately, the company had to certainly plan out something different. So, it was decided that the company would be acquiring Compaq in a stock transaction whose net worth was 25 billion dollars. Initially, this merger was not planned. It started with a telephonic conversation between CEO HP, Fiorina and Chairman and CEO Compaq, Capellas. The idea behind the conversation was to discuss on a licensing

agreement but it continued as a discussion on competitive strategy and finally a merger. It took two months for further studies and by September, 2001, the boards of the two companies approved of the merger. In spite of the decision coming from the CEO of HP, the merger was strongly opposed in the company. The two CEOs believed that the only way to fight the growing competition in terms of prices was to have a merger. But the investors and the other stakeholders thought that the company would never be able to have the loyalty of the Compaq customers, if products are sold with an HP logo on it. Other than this, there were questions on the synchronization of the organization's members with each other. This was because of the change in the organization culture as well. Even though these were supposed to serious problems with respect to the merger, the CEO of HP, Fiorina justified the same with the fact that the merger would remove one serious competitor in the over-supplied PC market of those days. She said that the market share of the company is bound to increase with the merger and also the working unit would double. (Hoopes, 2001) Advantages of the Merger Even though it seemed to be advantageous to very few people in the beginning, it was the strong determination of Fiorina that she was able to stand by her decision. Wall Street and all her investors had gone against the company lampooning her ideas with the saying that she has made 1+1=1.5 by her extravagant ways of expansion. Fiorina had put it this way that after the company's merger, not only would it have a larger share in the market but also the units of production would double. This would mean that the company would grow tremendously in volume. Her dream of competing with the giants in the field, IBM would also come true. She was of the view that much of the redundancy in the two companies would decrease as the internal costs on promotion, marketing and shipping would come down with the merger. This would produce the slightest harm to the collection of revenue. She used the ideas of competitive positioning to justify her plans of the merger. She said that the merger is based on the ideologies of consolidation and not on diversification. She could also defend allegations against the change in the HP was. She was of the view that the HP has always encouraged changes as it is about innovating and taking bold steps. She said that the company requires being consistent with creativity, improvement and modification. This merger had the capability of providing exactly the same. (Mergers and Acquisitions, 2010) Advantages to the Shareholders The following are the ways in which the company can be advantageous to its shareholders: Unique Opportunity: The position of the enterprise is bound to better with the merger. The reason for the same was that now the value creation would be fresh, leadership qualities would improve, capabilities would improve and so would the sales and also the company's strategic differentiation would be better than the existing competitors. Other than this, one can also access the capabilities of Compaq directly hence reducing the cost structure in becoming the largest in the industry. Finally, one could also see an opportunity in reinvesting. Stronger Company: The profitability is bound to increase in the enterprise, access and services sectors in high degrees. The company can also see a better opportunity in its research and

development. The financial conditions of the company with respect to its EBIT and net cash are also on the incremental side. Compelling Economics: The expected accumulation in IIP gains would be 13% in the first financial year. The company could also conduct a better segmentation of the market to forecast its revenues generation. This would go to as much as 2 and a half billion dollars of annual synergy. Ability to Execute: As there would be integration in the planning procedures of the company, the chances of value creation would also be huge. Along with that the experience of leading a diversified employee structure would also be there. (HP to buy Compaq, 2001) Opposition to the Merger In fact, it was only CEO Fiorina who was in favor of going with the merger. This is a practical application of Agency problem that arises because of change in financial strategies of the company owners and the management. Fiorina was certain to lose her job if the merger didn't take effect. The reason was that HP was not able to meet the demand targets under her leadership. But the owners were against the merger due to the following beliefs of the owners: The new portfolio would be less preferable: The position of the company as a larger supplier of PCs would certainly increase the amount of risk and involve a lot of investment as well. Another important reason in this context is that HP's prime interest in Imaging and Printing would not exist anymore as a result diluting the interest of the stockholders. In fact the company owners also feel that there would be a lower margin and ROI (return on investment). Strategic Problems would remain Unsolved: The market position in high-end servers and services would still remain in spite of the merger. The price of the PCS would not come down to be affordable by all. The requisite change in material for imaging and printing also would not exist. This merger would have no effect on the low end servers as Dell would be there in the lead and high-end servers either where IBM and Sun would have the lead. The company would also be eluded from the advantages of outsourcing because of the surplus labor it would have. So, the quality is not guaranteed to improve. Finally, the merger would not equal IBM under any condition as thought by Fiorina. Huge Integrated Risks: There have been no examples of success with such huge mergers. Generally when the market doesn't support such mergers, don't do well as is the case here. When HP could not manage its organization properly, integration would only add on to the difficulties. It would be even more difficult under the conditions because of the existing competitions between HP and Compaq. Being prone to such risky conditions, the company would also have to vary its costs causing greater trouble for the owner. The biggest factor of all is that to integrate the culture existing in the two companies would be a very difficult job. Financial Impact: This is mostly because the market reactions are negative. On the other hand, the position of Compaq was totally different from HP. As the company would have a greater contribution to the revenue and HP being diluted at the same time, the problems are bound to

develop. This would mean that drawing money from the equity market would also be difficult for HP. In fact this might not seem to be a very profitable merger for Compaq as well in the future. The basic problem that the owners of the company had with this merger was that it would hamper the core values of HP. They felt that it is better to preserve wealth rather than to risk it with extravagant risk taking. This high risk profile of Fiorina was a little unacceptable for the owners of the company in light of its prospects. So, as far as this merger between HP and Compaq is concerned, on side there was this strong determination of the CEO, Fiorina and on the other side was the strong opposition from the company owners. This opposition continued from the market including all the investors of the company. So, this practical Agency problem was very famous considering the fact that it contained two of the most powerful hardware companies in the world. There were a number of options like Change Management, Economic wise Management, and Organizational Management which could be considered to analyze the issue. But this case study can be solved best by a strategy wise analysis. (HP-Compaq merger faces stiff opposition from shareholders stock prices fall again, 2001) Strategic Analysis of the Case Positive Aspects A CEO will always consider such a merger to be an occasion to take a competitive advantage over its rivals like IBM as in this case and also be of some interest to the shareholders as well. The following are the strategies that are related to this merger between HP and Compaq: * Having an eye over shareholders' value: If one sees this merger from the eyes of Fiorina, it would be certain that the shareholders have a lot to gain from it. The reason for the same is the increment in the control of the market. So, even of the conditions were not suitable from the financial perspective, this truth would certainly make a lot of profits for the company in the future. * Development of Markets: Two organizations get involved in mergers as they want to expand their market both on the domestic and the international level. Integration with a domestic company doesn't need much effort but when a company merges internationally as in this case, a challenging task is on head. A thorough situation scanning is significant before putting your feet in International arena. Here, the competitor for HP was Compaq to a large degree, so this merger certainly required a lot of thinking. Organizations merge with the international companies in order to set up their brands first and let people know about what they are capable of and also what they eye in the future. This is the reason that after this merger the products of Compaq would also have the logo of HP. Once the market is well-known, then HP would not have to suffer the branding created by Compaq. They would be able to draw all the customers of Compaq as well. * Propagated Efficiencies: Any company by acquiring another or by merging makes an attempt to add to its efficiencies by increasing the operations and also having control over it to the

maximum extent. We can see that HP would now have an increased set of employees. The only factor is that they would have to be controlled properly as they are of different organizational cultures. (Benefits of Mergers:, 2010) * Allowances to use more resources: An improvised organization of monetary resources, intellectual capital and raw materials offers a competitive advantage to the companies. When such companies merge, many of the intellects come together and work towards a common mission to excel with financial profits to the company. Here, one can't deny the fact that even the top brains of Compaq would be taking part in forming the strategies of the company in the future. * Management of risks: If we particularly take an example of this case, HP and Compaq entering into this merger can decrease the risk level they would have diversified business opportunities. The options for making choice of the supply chain also increase. Now even though HP is a pioneer in inkjet orienting, it would not have to use the Product based Facility layout which is more expensive. It can manage the risk of taking process based facility layout and make things cheaper. Manufacturing and Processing can now be done in various nations according to the cost viability as the major issue. * Listing potential: Even though Wall Street and all the investors of the company are against the merger, when IPOs are offered, a development will definitely be there because of the flourishing earnings and turnover value which HP would be making with this merger. * Necessary political regulations: When organizations take a leap into other nations, they need to consider the different regulations in that country which administer the policies of the place. As HP is already a pioneer in all the countries that Compaq used to do its business, this would not be of much difficulty for the company. The company would only need to make certain minor regulations with the political parties of some countries where Compaq was flourishing more than HP. * Better Opportunities: When companies merge with another company, later they can put up for sale as per as the needs of the company. This could also be done partially. If HP feels that it would not need much of warehouse space it can sell the same at increased profits. It depends on whether the company would now be regarded a s a make to stock or a make to order company. * Extra products, services, and facilities: Services get copyrights which enhances the level of trade. Additional Warehouse services and distribution channels offer business values. Here HP can use all such values integrated with Compaq so as to increase its prospects. (Berry, 2010) Negative Aspects There are a number of mergers and acquisitions that fail before they actually start to function. In the critical phase of implementation itself, the companies come to know that it would not be beneficial if they continue as a merger. This can occur in this merger between HP and Compaq due to the following reasons.

Conversations are not implemented: Because of unlike cultures, ambitions and risk profiles; many of the deals are cancelled. As per as the reactions of the owners of HP, this seems to be extremely likely. So, motivation amongst the employees is an extremely important consideration in this case. This requires an extra effort by the CEO, Fiorina. This could also help her maintain her position in the company. Legal Contemplations: Anti-competitive deals are often limited by the rules presiding over the competition rules in a country. This leads to out of order functioning of one company and they try to separate from each other. A lot of unnecessary marketing failures get attached to these conditions. If this happens in this case, then all that money which went in publicizing the venture would go to be a waste. Moreover, even more would be required to re-promote as a single entity. Even the packaging where the entire inventory from Compaq had the logo of HP would have to be re-done, thus hampering the finance even further. (Broc Romanek, 2002) Compatibility problems: Every company runs on different platforms and ideas. Compatibility problems often occur because of synchronization issues. In IT companies such as HP and Compaq, many problems can take place because both the companies have worked on different strategies in the past. Now, it might not seem necessary for the HP management to make changes as per as those from Compaq. Thus such problems have become of greatest concern these days. Fiscal catastrophes: Both the companies after signing an agreement hope to have some return on the money they have put in to make this merger happen and also desire profitability and turnovers. If due to any reason, they are not able to attain that position, then they develop a abhorrence sense towards each other and also start charging each other for the failure. Human Resource Differences: Problems as a result of cultural dissimilarities, hospitality and hostility issues, and also other behavior related issues can take apart the origin of the merger. Lack of Determination: When organizations involve, they have plans in their minds, they have a vision set; but because of a variety of problems as mentioned above, development of the combined company to accomplish its mission is delayed. Merged companies set the goal and when the goal is not accomplished due to some faults of any of the two; then both of them develop a certain degree of hatred for each other. Also clashes can occur because of bias reactions. (William, 2008) Risk management failure: Companies that are involved in mergers and acquisitions, become over confident that they are going to make a profit out of this decision. This can be seen as with Fiorina. In fact she can fight the whole world for that. When their self-confidence turns out into over-confidence then they fail. Adequate risk management methods should be adopted which would take care of the effects if the decision takes a downturn. These risk policies should rule fiscal, productions, marketing, manufacturing, and inventory and HR risks associated with the merger. Strategic Sharing Marketing

Hp and Compaq would now have common channels as far as their buying is concerned. So, the benefits in this concern is that even for those materials which were initially of high cost for HP would now be available at a cheaper price. The end users are also likely to increase. Now, the company can re frame its competitive strategy where the greatest concern can be given to all time rivals IBM. The advantages of this merger in the field of marketing can be seen in the case of shared branding, sales and service. Even the distribution procedure is likely to be enhanced with Compaq playing its part. Now, the company can look forward to cross selling, subsidization and also a reduced cost. Operations The foremost advantage in this area is that in the location of raw material. Even the processing style would be same making the products and services synchronized with the ideas and also in making a decent operational strategy. As the philosophical and mechanical control would also be in common, the operational strategy would now be to become the top most in the market. In this respect, the two companies would now have co-production, design and also location of staff. So, the operational strategy of HP would now be to use the process based facility layout and function with the mentioned shared values. Technology The technical strategy of the company can also be designed in common now. There is a disadvantage from the perspective of the differentiation that HP had in the field of inkjet printers but the advantages are also plentiful. With a common product and process technology, the technological strategy of the merged company would promote highly economical functioning. This can be done through a common research and development and designing team. Buying The buying strategy of the company would also follow a common mechanism. Here, the raw materials, machinery, and power would be common hence decreasing the cost once again. This can be done through a centralized mechanism with a lead purchaser keeping common policies in mind. Now Hp would have to think with a similar attitude for both inkjet printers as well as personal computers. This is because the parameters for manufacturing would also run on equal grounds. Infrastructure This is the most important part of the strategies that would be made after the merger. The companies would have common shareholders for providing the requisite infrastructure. The capital source, management style, and legislation would also be in common. So, the infrastructure strategies would have to take these things into account. This can be done by having a common accounting system. HP does have an option to have a separate accounting system for the products that it manufactures but that would only arouse an internal competition. So, the infrastructural benefits can be made through a common accounting, legal and human resource system. This would ensure that the investment relations of the company would improve. None of the Compaq investors would hesitate in making an investment if HP follows a common strategy. HP would now have to ensure another fact that with this merger they would be able to prove competitors to the present target and those of competitors like IBM as well. Even the operations

and the output market needs to be above what exists at present. The company needs to ensure that the corporate strategy that it uses is efficient enough to help such a future. The degree of diversification needs to be managed thoroughly as well. This is because; the products from the two companies have performed exceptionally well in the past. So, the most optimum degree of diversification is required under the context so that the company is able to meet the demands of the customers. This has been challenged by the owners of HP but needs to be carried by the CEO Fiorina. (Bhattacharya, 2010) I am a pre final year student at the Indian Institute of Information Technology and Management, Gwalior, India pursuing a five year integrated course (dual degree) leading to the award of B.Tech (Information Technology) and MBA. I am currently in the 9th Semester. ABV-IIITM Gwalior, a Deemed University, is an apex Institute, established by the ministry of HRD (Human Resource Development), Government of India. The competitive environment at my Institute coupled with my inherent trait of trying to learn something new from each experience has made me come a long way in these four years. I have not only learnt to work under pressure and intense competition with some of the brightest students in the country but have also worked with an esteemed KPO called CBI Solutions in the meanwhile. This has given me the experience to get exposed to some of the most challenging marketing traits in the business. Moreover, I have been awarded first rank for IT and Entrepreneurship at the end of my 7th Semester. I have been privileged to work at Polaris Retail Infotech Limited, Gurgaon from May to July'08. This taught me the practical application of relationship marketing as I saw the preparation of customer interfaces through their software Smart Store. This is visible at billing counters at retail stores of the fame of Shopper's Stop. Also, I've been in the editorial board of my college magazine, La Vista for the past 3 years and eventually I hold the responsibility of the Chief Editor.