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Group Member: Himanshu Agarwal (v2074) Shirish goyal (2096) Shaheen shams (v2109) Mithlesh chauhan (v2111)
Why Merge?
y To compete with IBM and other companies y The combined services business will have 65,000 services
Compaq pre-merger
y Compaq Founded in 1982 y Primary strength - Innovation y Compaqs primary business divisions
y Access, commercial and consumer PCs y Enterprise computing: servers and storage products y Global services
y Market leader in PCs, with more international sales than US y Market leader in fault tolerant computing and industry standard
servers
Compaq pre-merger
y Compaq had successfully created a direct model in PCs y #2 in the PC business, stronger on the commercial side y Continuously weakening performance made Compaq
directors impatient y Dell became strong competitor through cost efficiency y Compaq missed the online bus and its made-to-order system through its retail outlets failed to take off due to bad inventory management
Compaq pre-merger
y To bring Compaq to the online market, Capellas (CEO) y y y y y
bought Digital Equipment (AltaVista) Acquisition was incohesive resulting in 15000 layoffs and loss in 1998 New management lacked the cutting edge to maintain stability Bad investments Got caught in a cycle of cost cutting and layoffs Firm was too small and poorly run to maintain its wide array of products and services
and David Packard. HP incorporated in 1947 y HP introduced its first PC in 1980 and the LaserJet (companys most successful product) in 1985 y In 2000, HP had 85,000 employees and revenues of $48.8 bn y Ranked 13th among Fortune 500
Growing problems at HP
y HP was not adapting to technological innovation fast enough y Margins were going down y IPG (HPs Imaging and Printing Group) was the leader in its
market segment but did not rank anywhere among top 3 in servers, storage or services y Printing line was facing competition from Lexmark and Epson which were selling lower-quality inexpensive printers y Needed to build strong complementary business lines
complacent HP y Cut salaries, laid off employees y Wanted to make high end computers HPs focus y According to her, home and business PCs, UNIX servers were the biggest areas of growth
Market share in mid-range Revenue UNIX servers 4% 30.3% Market share in laptops for quarter 2 (volume share) 12.1% 6.9% $488 mn $3,675 mn Market share in PCs for quarter 2 (volume share) 11.6% 4.5%
Compaq HP
growth targets became difficult for HP and it was forced to cut jobs and scrap plans y As a result HP stock price dropped drastically. y Turning the company around required more than just strategy from within
Back
Main Criteria
Financial Implications
Goal: Should HP and Compaq Merge?
Treeview
Ability to Improve Financial Conditions (L: .460 G: .460) Ability to Decrease Costs (L: .643 G: .296) Ability to Increase Sales (L: .357 G: .164) PC Technology (L: .422 G: .069) Server Technology (L: .228 G: .038) Service Technology (L: .210 G: .034) Printer Technology (L: .140 G: .023) Ability to Evolve Company (L: .358 G: .358) Increase Intellectual Property (L: .600 G: .215)
PC Technology (L: .422 G: .069) Server Technology (L: .228 G: .038) Service Technology (L: .210 G: Ability to Evolve Company .034) Printer Technology (L: .140 G: .023) Ability to Evolve Company (L: .358 G: .358) Increase Intellectual Property (L: .600 G: .215) Improving Brand Value (L: .400 G: .143) Image (L: .396 G: .057) Awareness (L: .366 G: .052) Loyalty (L: .238 G: .034) Ability to Integrate (L: .182 G: .182) Human Capital Management (L: .364 G: .066)
Increase Intellectual Property (L: .600 G: .215) Improving Brand Value (L: .400 G: .143) Image (L: .396 G: .057) Awareness (L: .366 G: .052) Ability to(L:Integrate Loyalty .238 G: .034) Ability to Integrate (L: .182 G: .182) Human Capital Management (L: .364 G: .066) Employees/Culture (L: .667 G: .044) Channel Partners (L: .333 G: .022) Company Organizational Structure (L: .251 G: .046) Resources (L: .222 G: .040) Technology (L: .337 G: .014) Marketing (Brand) (L: .268 G: .011) IT Infrastructure (L: .235 G: .009) Relationships with Customers & Suppliers (L: .161 G: .007) Future Planning (L: .163 G: .030) Strategy (L: .750 G: .022) Tactics (L: .250 G: .007)
capable of doing everything from selling PCs and printers to setting up complex networks y Merger would eliminate redundant product groups and costs in marketing, advertising, and shipping, while at the same time preserving much of the two companies revenues.
Market Benefits
y Merger will creates immediate end to end leadership y Compaq was a clear #2 in the PC business and stronger on the
commercial side than HP, but HP was stronger on the consumer side. Together they would be #1 in market share in 2001 y The merger would also greatly expand the numbers of the companys service professionals. As a result, HP would have the largest market share in all hardware market segments and become the number three in market share in services. y Improves access to the market with Compaqs direct capability and low cost structure y The much bigger company would have scale advantages: gaining bargaining power with suppliers; and scope advantage: gaining share of wallet in major accounts .
capabilities
y HP was strong in mid and high-end UNIX servers, a weakness
for Compaq; while Compaq was strong in low-end industry standard (Intel) servers, a weakness for HP
y Top management has experience with complex
organizational changes y Merger would result in work force reduction by around 15,000 employees saving around $1.5 billion per year
Financial Benefits
y Merger will result in substantial increase in profit
margin and liquidity y 2.5 billion is the estimated value of annual synergies y Provides the combined entity with better ability to reinvest
business, hence merging with Compaq is a strategic misfit. Larger PC position resulting from the merger is likely to increase risk and dilute shareholders interest in imaging and printing Lower growth prospects on invested capital Market position in key attractive segments remain same Services remain highly weighed to lower margin segment No precedent for success in big technology transactions Market reaction for the merger is negative Revenue risk might offset synergies HP and Compaq have different cultures Increased equity risk and hence cost of capital
Summary of Deal
Announcement Date Name of the merged entity Chairman and CEO President Ticker symbol change Form of payment Exchange Ratio Ownership in merged company Ownership of Hewlett and Packard Families Accounting Method Merger method September 4, 2001 Hewlett Packard Carly Fiorina Michael Capellas From HWP to HPQ Stock 0.6325 HPQ shares to each Compaq Shareholder 64% - former HWP shareholders 36% - former CPQ shareholders 18.6% before merger 8.4% after merger Purchase Reverse Triangular Merger
facilitate the merger y Result : A tax free reorganization in which HP would control all of Compaqs assets through a wholly owned subsidiary
Compaq
Hewlett Packard
Compaq Shareholders
-0.8%
-18.7% -3.5% -2.8% 2.1%
9/4/2001
9/5/2001 9/6/2001 9/7/2001
18.87
18.21 17.70 18.08
11.08
10.41 10.35 10.59
-10.3%
-6.0% -0.6% 2.3%
Deal Valuation
The final Exchange Ratio Exchange ratio implied by the market as on 31 Aug, 2001 0.6325 HPQ shares per Compaq share 0.5356 HPQ shares per Compaq share
Exchange ratio implied by the 12 0.596 HPQ shares per Compaq month market performance of HP share and Compaq stocks Compaqs Valuation by the market pre-merger announcement $20.995 billion
Aug 31, 2001 10 day average 30 day average 3 month average 6 month average 12 month average
overall and the tech sector in particular circa 2001 y Volatile trading activity : NASDAQ suffered a 30% drop in the 12 months preceding the merger announcement y Valuation multiples for comparable companies and recent comparable transactions were broadly distributed.
Valuation of Synergies
y $2.5 billion pre-tax cost savings in year 2004 y NPV of Cost savings estimated at $5 to $9/share of the combined
entity The result is based on the following estimations : y P/E multiples ranged from 15x to 25x y Weighted cost of equity of HP-Compaq 15% y Effective tax rate of the combined entity 26% y Pre-tax profit decline of close to $500 million in 2004 resulting from overall revenue loss of approximately $4.1 billion for the combined entity y Weighted average contribution margin of 12%
Value of Synergies > Price of Synergies HPs Valuation of a Compaq share at the time of deal announcement : $14.68 Compaqs share price at the time of announcement : $12.35 Price paid for Synergies as per market valuation : $ 2.33 Synergies valued at $5-$9 per share !!
customers Both companies are in similar businesses: Combine Product road maps
months They don't need two Unix or NT development teams 15,000 Jobs Eliminated HP:6000 Compaq: 8500 Problems with sackings: Even talent packs their bags Achieving the integration will be tied to peoples compensation packages
Operational Efficiencies
Achieved merger-related cost savings of more than $1.3B annually Restructured direct material procurement to save $450M annually Redesigned products & re-qualifying components to save $300M Consolidated multiple mfg sites achieving $120M in annualized savings Achieved manufacturing savings of $200M annually Reduced supply chain headcount by 2,700 Realized logistics savings of $100M+ annually Indirect Procurement negotiated annual savings of $220M
Strategic Integration
y Out-compete Dell: The new HP needed a highly competitive direct
sales model - 50% of retail shelf space was occupied by HP & Compaq - Direct sales model benefited from Compaq direct sales model y Out-compete IBM - Manage the high level relationships with global enterprise customers -With help of Compaq consultants managed 40 big deals in competition with IBM
Shareholder value
y Myth: y A strategically poor integration will be reflected by the stock markets pushing the combined company's stock price down , an illustration of how mergers can destroy value y Fact : y In mid-July 2007, five years after the merger announcement, HP's total shareholder returns were up 46 percent. Over the same period, the Standard & Poor's IT index had sunk 9 percent, rival IBM was down 23 percent, and even Dell was up only 2 percent.
Link
PC business
y Myth: y HP, even after combining with Compaq, cannot fight Dells directsales model with their retail (indirect) plus direct model y Fact : y HPs PC business has steadily improved and is bringing competition to Dell that Dell has not seen for the past 5 or 10 years y Dell's PC shipments worldwide share fell to 15.2 % from 18.2 % last year, a particularly sharp decline given that the overall market grew 10.9 percent y Hewlett-Packard holds 19.1 percent of the world PC market y Even in the US, HP and Dell have 24.2 and 26.8 % of the PC market in 2007
Printer business
y Myth: y HP is pursuing only market share in printers instead of ROI y Fact : y In HPs printer business, good share consists of devices that deliver color, photos, lots of output, and perform multiple functions. Those characteristics lead to more pages printed, and more profitability. HP has extended that business, leaving lowend, single-function printers to competitors. y The company also refused to respond to Dell price-cutting intended to weaken HP's market share in printers
Server business
y Myth: y Pursuing more market share in PCs will divert resources and distract attention from its strengths in printers and servers y Fact :
Vendor 2007 Revenue (Mn US $) 4069 3707 1711 1526 2007 Share (%) 31 28.2 13 11.6 4.1 2007 Revenue (Mn US $) 3824 3424 1620 1270 554 2007 Share (%) 30.9 27.8 13.1 10.3 4.5 Growth (%) 6.4 8.0 5.6 20.2 -2.3
Fujitsu/Siemens 542
corporate customers
y The company has the ability to procure everything from PDAs
manufacturing innovation
y It can build and deliver precisely the product that customers
with HP, simplifying suppliers interaction with HP, increasing business collaboration, and lowering costs for both parties.
y Enhanced supply and demand visibility
y This visibility improves participants ability to predict demand.
It also enables suppliers to build purchasing, manufacturing, and logistical efficiencies into their own supply chains. Further, it enables suppliers to pass associated discounts onto customers such as HP
y Elimination of non-value-added steps, such as administration,
and costs
References
y Buchanan, Anna D., The Merger of HP and Compaq, Case (A) and (B), y
y y y y y
Darden Business Publishing, 2004 Hoopes, Charlotte L., The Hewlett-Packard and Compaq Merger: A Case Study in Business Communication, Marriott School of Management Supply Chain Management for the adaptive enterprise, HPs Internal Document www.nasdaq.com Strategic Analysis: The Integration of Hewlett-Packard and Compaq, Tiffany Adams and Renee Poutous Compaq and Hewlett-Packard, Mergent Online, www.mergent.com Burgelman, Robert A. and Webb McKinney, Managing the Strategic Dynamics of Acquisition Integration: Lessons from HP and Compaq, Aug 2005
Thank You