hpq - hp and compaq merger

8/8/2019 HPQ - HP and Compaq merger

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HP+COMPAQIn search of scope and scale


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P RESENTED BY

Sumit kanade 09-731 Advait Malvankar 09-739 Aditya Khandale 09-730

Swapneel Khavare 09-732

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H I STOR IC EVENT

A merger as big and bold as H ewlett-Packards $25 billion acquisition of C ompaq C omputer in2002 had never taken place before in TechnologyIndustry.

C arly Fiorina , H Ps C EO, believed it was theright move for H P

The leading technology company in the world

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H P

William (Bill) H ewlett and David (Dave) Packardoriginated a company in a garage in nearby Palo

Alto,california

1939, Packard and H ewlett established H ewlett-Packard ( H P) in Packard's garage with an initialcapital investment of US$538.Kickstarted the silicon valleys progress

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P REMERGER POS I T I ON OF H P-2000

Ranked 13 th in fortune 500Turnover US $48.8 bn85500 employeesC arly fiorina: C hairman (September 22)2nd largest computer manufacturerleader in Desktop computers, Servers, Peripherals &services.I nternet infrastructure,high-end Super dome serverline in September.

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H P-2001

March: a new business unit, H P Services,reporting directly to the C EOMay: systems and services based on the new

I tanium processor jointly developed by H P andI ntel.I ndustry stumbled, meeting growth targetsbecame difficult.

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H P-P RODU C T PORTFOL I O

Laptops/NotebooksPalmtops/PDA Printers & printing consumables

DigicamsScannersMonitersMainframes

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C OMPAQ

Joseph R. C anion,Jim H arris & Bill Murto inFeb 1982I nitial investment $1.5mn.

Manufactured & sold I BM compatible computers

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C OMPAQ -PRODU C T PORTFOL I O

Enterprise computing groupMainframes servers workstationsI nternet products networking productsC ommercial desktopsPortablesSmall and medium business solutions

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H URDLES FOR H P

Overall industry struggling Adapting to the innovationsC ompetition in printingI PG business not gaining tractionShrinking margins

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W H Y MERGE ??

Eliminate one player in an oversupplied P C MarketTo compete with I BM and other companiesReduce C osts.

1990s I T recessionary phase.Merger expected to yield savings projected to reach $2.5bnannually by 2004.

Advantage of more volume of sales.

Development of direct distribution capability.Strengthen sales force .I mprove customer base

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W H Y C OMPAQ ??

No 2 in the P C business and stronger on thecommercial side than H P. H P was stronger ontheconsumer side. Together they would be No 1 inmarket share in 2001 .C ompaq was strong in low-end industry standard(I ntel) servers.Best known for its P C s, also had enterprisebusinesses that it had built up through earlieracquisitions of its own.

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E XPE C TED RESULTS

Superior customer valueGenerate cost synergies reaching approximately$2.5 bn annually.

Adds up to world-class innovation and quality.Larger P C position resulting from the mergerlikely to increase risk and dilute shareholdersinterest

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C ONT I NUED ..

Assets of $56.4 billionannual revenues of $87.4 billionannual operating earnings of $3.9 billion

operations in 162 countries and 145000employeesI mproves access to the market with C ompaqsdirect capability and low cost structure .

Work force reduction by around 15,000 employeessaving around $1.5 billion per year .

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ROLE OF F I OR I NA I N MERGER

I nitiative taken for the merger.More expectations from the merger.

Relied on institutional shareholders vote infavour of deal.

I nspite of oppositions, went ahead with themerger.

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P ROBLEM DUR I NG TH E DEAL

Opposition-Walter H ewlett-The largest shareholder The David & LucilePackard Foundation(10.4%)-Employees

Negative Reaction of Stock Market- Pair lost US$ 13bn in market cap- I n contrast,stock prices of their competitorsincreased. 16


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TERMS AND C OND I T I ONS

H P will retain its nameFiorina will be the C EO and C hairmanC apellas then C EO C ompaq will be the president

0.6325 of an H P share per C ompaq shareDeal size Approx. $25 billionH P shareholders 64%; C ompaq shareholders 36%

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K EY HI GH L I GH TS

H orizontal merger.

Merger initiated on Sept 2001, completed on May

2002(8 month process).

Biggest merger in I T history.

$25bn all stock purchase.

1mn working hours spent on merge.

H PQ is the new stock symbol for the new H P18


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C R I T ICI SM

Strategic blunder.

Dumbest deal of the decade Michael Dell

One bad P C business merged with another bad

P C business does not make a good P C company

This is not a case of 1 + 1 = 3. More

like 1+1=1.5

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W ALTER H E W LETT

1. Resulting Business Portfolio is worse than theexisting H P Portfolio

2. Acquisition will not solve H Ps strategic

problems

3. I ntegration risk is substantial

4. Financial impact on H P shareholders isunattractive

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F I OR I NAS REPLY

1. I nformation technology industry continues toundergo rapid change an H P must continue toaddress challenges of new environment

2. C ompaq merger is unique compelling strategicalternative no other option offers suchcomprehensive benefits and opportunities

3. C ombination addresses industry dynamics andcustomer requirements, creates strongercompany and is financially compelling

4. Management is experienced and focused onexecution, and integration planning is ahead of schedule. 21


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C ULTURAL D I FFEREN C ES

H P saw itself, and the

evidence supportedthat view, as a cultureof consideration,thoughtfulness, andplanning a more

careful culture.

C ompaq saw itself,

more as a culture of ready, shoot ,aim- much quicker to act- debated less

- considered lessbefore took action

HP Comapaq

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A LLEGED ROLE OF DEUTS CH E BANK

Proxy warMerger was approved with narrow marginsI t was disclosed H P had ties with Deutsche

banks investment banking branchH P agreed to pay $1 mn and another 1 mn ascontingencyUS SE C charged Deutsche bank with failing to

disclose material conflict of interestDeutsche bank was imposed $ 750000 penaltyDeutsche bank consented without admitting ordenying the findings 23


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I NTEGRAT I ON

New leadership

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Product mapintegration details

Financials

PR

Integration TasksCustomer strategy

Retention

Battling egos

Goals aligned

Governance decisions

Extended uncertainty

Employee Communication

Selection

Stay Separation(Transitions)

How do people act?New HP people & businessleadership principles

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FY 2002-03I mproved position in every category in which they

compete.Became a leader in customer support services.Leader in I PG, through commitment to innovation inproduct design, manufacturing and business models.Being a technology company, the introduction of theword invent in their logo.I n the last 6 mths of fiscal 2002, introduced morethan 100 products & 1400 patents to their portfolioyr 2002 solid balance sheet with more than $11 bn incash & short term investments.

The acquisition of C ompaqs commercial pc &consumer pc business allowed improvement in theirposition in this category.Reduced their workforce through combination of layoffs, early retirements & attrition

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S YNERGY

C ost leadershipRaw material costs reduced by 3-4%Strong growth

Merging technology bases Adoption of direct selling approach of C ompaqDownsizing

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O VER C OM I NG T H E FA I LURE ..

Fiorina resigned 2005.

New C EO: Mark H urd

Where Fiorina failed and where H urd excels :

Educating H P managers and employees.

Exploiting the possibilities of the mergerTook initiatives to cut down costs, lay off employees

Understanding the market properly and aligning H Ps

corporate strategy to reality.

C reating a performance oriented culture to pursue commongoals shared throughout the organization

Fiorina wanted to imitate I BM services, which was service

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S ALES AND EXPENSES

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S ELL I NG AND GEN EXPENSE RAT I O

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PROF I TS V /S DELL C OMPUTERS

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EPS

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C ON C LUS I ON

The merger suffered from autocratic leadershipand initial financial stressSuccessful integration is the key

Operational integration and strategic integrationboth should take place simultaneouslyOver the time the synergy strategy gives fruitfulresults

The benefits of economies of scale and scope canbe exploited in I T industry .

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Thank You

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hpq - hp and compaq merger

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