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Project Report on

Mergers and Acquisitions.

Subject under Study: HP-Compaq Merger

Submitted by: Khaki Audil Rashid (6227)

Submitted to: Prof. Khurshid Bhat

Head Department of Commerce and

Financial Studies, University of Kashmir.

Khaki

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Hewlett-Packard: The Company

In 1938, two Stanford graduates in electrical engineering, William Hewlett andDavid Packard, started their own business in a garage behind Packards Palo Altohome. One year later, Hewlett and Packard formalized their business into apartnership called Hewlett-Packard. HP was incorporated in 1947 and began offering

stock for public trading 10 years later. Annual net revenue for the company grewfrom $5.5 million in 1951 to $3 billion in 1980. By 1997, annual net revenue exceeded$42 billion and HP had become the worlds second largest computer supplier.

The company, which originally produced audio oscillators, introduced its firstcomputer in 1966. In 1972, the company pioneered the era of personal computing byintroducing the first scientific, hand-held calculator. Hewlett-Packard introduced itsfirst personal computer in 1980. Five years later, HP introduced the LaserJetprinter, which would become the companys most successful product ever.

Hewlett-Packard: A brief timeline:1938: William Hewlett and David Packard, both graduates of the electrical engineering program at

Stanford University, start their own business in the garage behind Packards rented house inPalo Alto, CA.

1939: Hewlett and Packard formalize their business into a partnership called Hewlett-Packard Co. (HP)1947: HP is incorporated. Revenue: $851,287. Employees: 111.1957: HP stock is offered for public trading.

1962: HP makes Fortune magazine's list of the top 500 U.S. companies for the first time, entering at

number 460.1964: David Packard is elected chairman of the board and William Hewlett is elected president of the

company. Revenue: $126 million. Employees: 7,092.1966: HP forms Hewlett-Packard Laboratories, which becomes one of the worlds leading electronics

research centers.1972: HP introduces the first scientific, hand-held calculator and also enters the business computer

market with its minicomputer. In 2000, Forbes ASAP will name the calculator one of 20 "alltime products" that have changed the world.

1977: John Young replaces Hewlett as president of HP, and also becomes CEO in 1978.1980: HP introduces its first personal computer. Revenue: $3 billion. Employees: 57,196.

1982: Compaq Computer Corporation (which will merge with HP 20 years later) is formed in Houston,Texas. The company is started by three former Texas Instruments executivesRod Canion,Jim Harris and Bill Murto. On November 4, Compaq introduces its first product, the firstportable PC to run 100 percent compatible IBM software.

1985: HP introduces its LaserJet computer printer, which will become the companys most successfulproduct ever.Compaq is listed on the New York Stock Exchange.

1989: HP celebrates its 50th anniversary and is in the top 50 on Fortune 500 listing. HP Revenue: $11.9billion. HP employees: 95,000.

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1992: Lewis E. Platt succeeds John Young as president of HP.1993: Compaq introduces its first all-in-one Compaq PC, the Presario family.1995: Dave Packard publishes The HP Way, a book that chronicles the rise of HP and gives insight into

the business practices, culture and management style that helped make it a success. HPrevenue: $31.5 billion. HP employees: 105,200.

1997: HP becomes one of the 30 stocks that comprise the Dow Jones Industrial Average.

1998: Compaq acquires Digital Equipment Corporation for $9.6 billionat the time the largestacquisition in computer industry history.

1999: HP's board of directors announces its decision to spin off a new company from the existing HPorganization. Agilent Technologies consists of HP's former measurement, components, chemicalanalysis and medical businesses. HP retains its computing, printing and imaging businesses.Agilent has its initial public offering of common stock on November 18, 1999. HP retains 84.1percent of common stock. It is Silicon Valley's largest-ever IPO.

In July, Lew Platt retires, and HP names Carleton (Carly) S. Fiorina as President and CEO.

In November, HP begins a new brand campaign based on a single concept: invent. Print andtelevision ads focus on the company's history of invention and innovation. The company alsointroduces a new logo.

Michael Capellas is named CEO of Compaq.

2001: In March, HP creates a new business organization, HP Services. The role of the new organizationincludes consulting, outsourcing, support, education and solutions deployment.

On September 4, HP and Compaq announce a merger agreement to create an $87 billion globaltechnology leader. HP revenue: 45.2 billion. HP employees: 88,000.

HP Way (Objectives);

In 1956, Bill Hewlett, Dave Packard, and a handful of other HP executives gathered at

the Mission Inn in Sonoma, California, to create a set of values and principles to guide theircompany. The six objectives that this small group subsequently created not only helped shapea new kind of company, but ultimately became the foundation for what came to be known asthe HP way.

These six objectives, which later became seven, are:1. Recognize that profit is the best measure of a companys contribution to society and

the ultimate source of corporate strength;2. Continually improve the value of the products and services offered to customers;3. Seek new opportunities for growth but focus efforts on fields in which the company

can make a contribution;

4. Provide employment opportunities that include the chance to share in the companyssuccess;

5. Maintain an organizational environment that fosters individual motivation, initiativeand creativity;

6. Demonstrate good citizenship by making contributions to the community;7. Emphasize growth as a requirement for survival.

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Carly Fiorina announced Merger:

Convinced that turning the company around required more than just strategy from within,on September 3, 2001, the newly appointed Chairperson and CEO of HP - Carly Fiorinaannounced HPs plans to acquire Compaq in a stock transaction valued at $25 billion.

The idea for the merger with Compaqa Houston-based PC maker founded in 1982hadgrown out of a phone conversation between Fiorina and Compaq chairman and CEO MichaelCapellas in late June of 2001. The original purpose of the phone conversation between thetwo CEOs, who had met at a policy meeting in Washington 18 months earlier, was to discuss apossible licensing agreement. However, their conversation led to a discussion of competitivestrategy and the idea of a merger between the two companies was broached. By July thebasics of the deal had already been hammered out, and by the first week of September, themerger had been approved by the boards at both companies.

Transaction Summary:

Structure Stock-for-stock merger.

Exchange Ratio 0.6325 of an HP share per Compaq share.

Current Value Approximately $25 billionOwnership HP shareholders 64%; Compaq shareholders 36%.

Accounting Purchase.

Closing First Half of 2002

HPs Position on the merger(position pre-merger): (Exhibit 1 below)Even with the poor reception of the merger from Wall Street and industry analysts,

Fiorina did not back down. She argued that the merger would eliminate one player in anoversupplied PC marketplace. It would also improve HPs market share across the hardware

line and double the size of HPs service unitboth essential steps in being able to competewith industry-giant IBM. In addition, Fiorina argued, the merger would create a full-servicetechnology firm capable of doing everything from selling PCs and printers to setting upcomplex networks. The merger would eliminate redundant product groups and costs inmarketing, advertising, and shipping, while at the same time preserving much of the twocompanies revenues.

Plans for New HP: (Exhibit 2 below)

The proposed merger called for a consolidation of HPs and Compaqs product lines intofour major operating groups: services, imaging and printing, access devices, and information

technology infrastructure. Although the new company would remain competitive in individualproduct segments, the merger would create a full-service technology firm capable ofintegrating hardware and software into solutions while providing services at the same time.

The combined company would have about 145,000 employees, which called for an initialworkforce reduction of 15,000 employees, with further reductions likely. Carly Fiorina wouldbe chairman and CEO of the new HP with Michael Capellas as president. One of the newcompanys main strategies for growth would be to look for opportunities for acquisition in thelucrative area of services, especially consulting.

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Exhibit 1: HPs Position on Merger

Exhibit 2: Plans for New HP(Leadership of the Combined Company).

Carly Fiorina,Chairman and

CEO

Web McKinney andJeff Clarke,

Integration Office

Michael Capellas,President

Bob Wayman,Chief Financial

Officer

Vyomesh Joshi,Printing and

Imaging

Duane Zitzner,Access devices

Peter Blackmore,IT Infrastructure

Ann Livermore,Services

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Table Showing Stock Prices before and after the merger: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

01/16/01One and a half years after Fiorinais 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

09/20/01Low point after merger isannounced 14.44 14.05

10/03/01One month after merger isannounced 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 21.8103/19/02 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

indicate the effect of various strategic decisions on the value of stock price

Executive Summary:The worlds largest corporate Information Technology merger began in September 2001

when HP announced that they would acquire Compaq in an all stock purchase valued at $25billion. Over an 8 month period ending in May 2002, the merger passed shareholder andregulatory approval with the end result being one company. The new HP has annual sales ofapproximately $90 billion which is comparable to IBM, and an operating income of almost $4billion. The merger was led by Carly Fiorina, the chairwoman and CEO of HP. The president ofthe new HP was Michael Capellas who was the former chairman and CEO of the old HP andwho has recently resigned and is now the CEO of World Com.

Overall, many analysts were critical of the merger from the beginning since both Compaqand HP were struggling companies before the merger. The common question that has beenraised by analysts is: Do two struggling companies make a better merged company? Someanalysts have indicated that the merger is a gamble and that it is difficult to see anyfocussed logic behind the merge considering that most I.T acquisitions are not successful.Prior to the merger, Compaq has been unable to grow despite previously buying Digital, whileHP was trying to grow internally, without much success. Both companies were still adjusting toacquisitions they have made in the past and both were adjusting to new leadership (Fiorinaand Capellas). The merger deal also means that there are many overlaps in products,

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technologies, distribution channels, services, facilities and jobs. Employee morale is a threatto a successful merger as there has been numerous layoffs -15,000 employees. The claimedannual cost savings of about $2.5 billion dollars by the year 2004 amounts to only 3 % of thecombined costs of both companies. Gartner Group research has indicated that the mergedcompany has failed to do a good enough job of presenting the benefits of an acquisition ofthis scale to justify the deals risk as it is generally known that technology mergers rarelywork. In addition, both companies in the past have struggled to resolve conflicts betweendirect and indirect sales channels. The cultural background of both companies is quitedifferent and integration will take a long time. The culture at HP is based on consensus,Compaqs culture on the other hand is based on rapid decision making.From a positive perspective, most botched tech mergers involved companies that were tryingto buy their way into new businesses they knew little about, this is not the case with theHP/Compaq merger. Apart from servers and PCs, they have several areas where theirproducts overla p. e.g: they are both are involved in making data -storage equipment and bothmake hand held computing devices. In addition, both companies also bring different strengthsto the table. Compaq has done a better job in regard to engineering an entire line and HP hasbeen strong in consumer products. The justification provided by HP senior managementsuggests that a merger will enable them to com pete with two of their biggest competitors,IBM and Dell.

In conclusion, it is viewed by many analysts that there will be at least 2 more years ofbitter infighting which will cause the new HP to lose direction and good personnel. This isgreat news for competitors such as IBM and Sun as both of them will be able to pick off themarket while the new HP is distracted by the merger. The new HP may be a threat to IBMbut not anytime soon. It could take several years to determine if the largest merger in I.Thistory will be a success or a complete flop.

Pre Merge:

in the Life Cycle (Pre-merge):

Intro Growth Maturity Decline

Branding Competition: Compaq was a reference and standard leader.Market maintenance and development of new markets (2000: 58% revenues outside U.S.).Large Market share.Product/Service emphasis (strategic partnerships with Microsoft, Oracle, etc.).Distributing Dividends (1998), Client base stable.Emphasis on cost reduction and increase in gross margin (2000).Competitor pressure, scope scale sales (i.e., pocket competitors).

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in the Life cycle (pre-merge):

Intro Growth Maturity Decline

HP known as a brand name for printers and ink.Held No. 1 position in a number of areas, i.e, Storage Area Network (SAN), RAID anddisk storage systems.Stable client base.Competitor pressure.

Pre-Merge Products:

:

PC (Desktop and Portable) Manufacturing and Selling.

Servers Manufacturing , sellingand Services

Pocket Computer (handheldComputer) Manufacturing and

Selling. Storage Manufacturing, selling,

services and on-line storage.

Competitors: Pre-merge:

:

IBM Servers, PCs, Storage and IT

services.

Sun Microsystems Servers.

Dell PCs.

HP PCs IT services and Pocket

computers. Palm- Pocket Computers.

:

Known as a box vendor, a one-stop shopfor business applications:

Unix servers. E-commerce application

software. Hosted services. Network management. Integration services. PCs, printers, ink cartridges.

:

IBM Servers, PCs, Storage and IT

services.

Dell PCs

Canon Printers, fax, copiers, optical

equipment. Compaq

PCs, Servers, Pocket Computers

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PRE-MERGE

Compaq: BCG-Matrix:

PRE-MERGE

HP: BCG-Matrix:

On-line storage

and IT services Pocket

Computers

Storage

Servers

PCs

- Laptops- Desktops

Servers

PCs

Computer

RepairsPocket

Computers

Printer Supplies-

- Ink Cartridges- Photo paper

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: Leadership Pre-Merge-Fiorina:

Categories Grades

Strategy B

Execution C

Culture C+Organisation D

Innovation B+

Deal Making D

STRATEGY

For decades, HP was a collection of independent businesses, each selling a particular kind ofproduct. Fiorina was hired to execute an "e-services" strategy that would meld these piecesinto one powerful, profitable whole. HP could sell everything from handheld gizmos to back-office servers, with the high- margin software and consulting to make it all work.

Grade: BThe "e-services" plan looks good on paper and may be the right long-term path for thecompany. But so far, HP is as dependent as ever on its last remaining gold mine: the $20billion printing business, which has subsidized losses at the rest of the $48 billion companyfor the past three quarters, say analysts.

EXECUTION

WhenFiorina arrived, HP was two companies: a world-class maker of printers and imaging gearand a mediocre computer company. She set out to pump up sales and profits in the ailingcomputer business by becoming stronger in software, storage, and consulting.

Grade: CHP is still the same two companies. While it remains the king of printers, the economicdownturn has hurt efforts to improve profits in the computer business. It has gained marketshare in Unix servers, but there has been negligible progress in storage and software. Also,consulting remains small compared with rivals.

HP-Compaq a New Company:

- Fiorina emerged as the Merge Champion and occupied the position of Chairman and CEO.- The Merger was a horizontal merger, which took 8 long months to complete, initiated in

September 2001 and completed in May 2002.- The Merger is the biggest merger in IT history with $25 billion all stock purchase.- The Merger took 1 million working hours to complete the merger integration.

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Merger-Pros and Cons:

Source: Business Week Magazine

HPQ is the new stock symbol for the new HP. The merger alone will require 15,000 job cuts. HPQ has to merge two struggling companies with divergent corporate cultures and the

CEO has a long way to go to win over the many employees who opposed the deal. The merger will double the size of HP's maintenance-and-support business. But it does

little to help HP in other service sectors, such as consulting and outsourcing. These

businesses would make up less than 20% of the company's service revenue. Since theyare key to landing big contracts with corporations and governments, analysts say HPmay still need to do an acquisition, which is unlikely in the wake of the Compaq deal.

Armed with the market-share lead in PCs, back-office servers, and printers, the newHP would have the sheer bulk and reach to turn these two troubled companies into onefar healthier one.

This will enable HP to leverage Compaq's strong market share and brand recognition inthe commercial PC market.

HPQ-Merger: Objectives: Increase Competition with major competitors. i.e., IBM, Dell.

HP wants to emulate IBM's push into consulting and other services. Cut Costs by $3 billion annually by 2004.

The accelerated cost savings come from leveraging HP's new bulk to renegotiatecontracts for supplies such as memory chips and hard drives.

A big chunk of the savings--$1.5 billion annually--will come from trimming the payroll. Increase earnings for shareholders.

Investors could benefit big time from huge cost savings. By eliminating redundantadministrative functions, HP cost savings would reach $3 billion a year by 2004. Thecompany would likely write off most of the more than $1 billion cost of the merger in2002.

Face the challenges of a shrinking market. The new HP will exploit its market power for everything from better deals with

suppliers to pressuring software developers such as Oracle Corp. and SAP to push HPgear. Then, over time, it will develop the consulting and software smarts to helpcustomers deliver whizzy new offerings.

Pros Cons Cost Saving.

Financial Bulk. Cross-Selling & Technology. Buying Power increasing

Execution Challenges.

PCs Business Overlapping. Competitive Position. Morale.

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# The accelerated cost savings come from leveraging HP's new bulk to renegotiatecontracts for supplies such as memory chips and hard drives. A big chunk of the savings -$1.5billion annually--will come from trimming the payroll.

HPQ-SWOT Analysis:

Competitive Environment

Employee Morale

Economic Downturn

Organisational Culture Conflict

Innovation

IntegrationCustomer LoyaltyCost Savings

Market ShareStable Growth

Overlapping management

Overlapping Product lines

SWOT stands for Strengths, Weaknesses, Opportunities and Threats. It's a four-partapproach to analyzing a company's overall strategy or the strategy of its business units. All

four aspects must be considered to implement a long range plan of action. In order to swatthe competition you need to understand SWOT. SWOT stands for Strengths, Weaknesses,Opportunities and Threats. It's a way to analyze a company's or a department's position inthe market in relation to its competitors. The goal is to identify all the major factorsaffecting competitiveness before crafting a business strategy.

Post-Merger:

HPQ Product lines and Competitors:

Products Market Share (%) Main Competitors

PCs (-) 19% Dell (+)Printers (+) 15% Canon, Lexmark

Low-end Servers 37% IBM (+)

High-end Servers LAG IBM (+), Sun

Low Level Services 62% IBM (high level)

Storage (+) LEAD EMC, Sony

Software (-) LAG MS, CA, IBM

Exploit

AvoidConfront

Search

Strengths Weaknesses

Opportu

nities

Threats

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HPQs Objectives and the Strtegies: The new HP will feature Compaq's corporate PCs, low-end servers, and its iPAQ

handhelds, along with HP printers and UNIX servers. Consumer PCs from both sideswill also remain, though HP's business PCs and Jornada handhelds will not.

Fiorina:We'll continue to organically grow, particularly the outsourcing and consultingends of the business. We'll be looking for strategic opportunities for acquisition.

Capellas:We believe we can be brutally competitive in the individual product segments.But we can also integrate hardware and software into solutions.

The company must cut costs to the bone to beat Dell in PCs while pouring money intoresearch and development and consulting to take on IBM and others on the high end.

Although HP enjoys the biggest share of the PC market now, the combined company'sshare is expected to remain flat, while Dell grows 30% a year.

Sensing a possible vulnerability as HP merges with Compaq, Dell recently reached anagreement with Lexmark International to have printers and ink cartridgesmanufactured under the Dell name.

HPQs Product life Cycle:

Intro Growth Maturity Decline

FOR PCs: HP needs flawless execution and cost-cutting--especially with more-focusedrivals such as Dell and Sun fighting for every deal in this down economy costleadership

Capellas:First and foremost you've got services growth, the fastest-growing segmentof the whole IT market. Managed services and outsourcing is growing fastest. Thecustomer service side is growing slower but is very profitable.

A more focused HP might also make more of its franchise printer operation. HP hasbuilt a thriving business in photo printers and all- in-one printer-copier fax gizmos.

These categories brought in 32% of HP's $5 billion in printer sales in its most recentquarter. Since photos require more ink than plain documents, the photo printers drivesales of highly profitable ink cartridges.

And while PC sales help the top line, profits from the printer-supplies unit held up thebottom line.

HP develops and markets products in a broad range of printing and imaging categories.We lead the market in inkjet printers, all- in-one devices, laser printers, wide- formatplotters, scanners, print servers and ink.

SoftwareNotebook

Service

Server

Storage

PrintersPCs

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HPQ-BCG Matrix:

Relative Market Share (Cash Generation) Today, a third of HP's server business--its powerful Unix machineshas healthy

profit margins and is tied with Sun Microsystems (SUNW ) for top market share. Butmost analysts expect Sun and IBM (IBM ) to outpace HP in this sector when techspending recovers because rivals are offering newer Unix models. At the same time,

HP's $1.6 billion Intel-based server business continues to bleed red ink. While higher-end Unix systems now bring in most of the industry's profits, over time,

less expensive machines based on Intel Corp.'s (INTC ) new Itanium chip and eitherWindows or the Linux software will take over many jobs. While the Unix market isexpected to grow around 6%, Fiorina says the market for Windows and Linux modelswill grow 20% a year as these systems prove their mettle at tougher computing jobs.Indeed, market researcher International Data Corp. estimates that worldwide revenuefrom sales of Windows and Linux servers will outpace Unix machines by 2005.

The company says the printer business will grow by 10% in 2003 and 2004. Bycontrast, personal computer sales will fall this year and grow less than 2% next year.

Software

Service

Notebook

Server

Storage

Image

Printer

PCs

LowHigh

High

LowI

ndustr

GrowthRate

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HPQ: Directional Policy Matrix

High

Low

Unattractive Average Attractive

Post Merger:

HPQ: Financial Ratio Profile:

Profitability: Low High

Liquidity: Very Tight Too much Slack

Leverage: High Debts No debt

Activity: Too Slow Too fast

Industry Standard

Diversification MarketSegmentation

MarketLeadership

Innovation

PhasedWithdrawalmerger

Maintenance ofpositionMarketpenetration

Expansion,ProductDifferentiation

Divest

InflationPhased withdrawal

Cash Generation

PCs

Server

Notebook

Service

Printer

StorageCapability

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HPQ: Financial Ratio Profile: Source: Yahoo Finance

HPQ Industry Average

Profitability

Gross Margin: 26.36 29.87

Gross Margin - 5 yr. Average 28.82 31.33

EBITD - 5 yr. Average 10.73 13.12

Operating Margin 5 yr Average 7.73 9.14Pre-tax Margin 5 Yr. Average 8.07 10.13

Net Profit Margin 5 Yr. Average 5.98 7.04

Effective Tax Rate 5 Yr. Average 23.42 29.49

Liquidity:

Quick Ratio: 0.91 1.01

Current Ratio: 1.46 1.33

Leverage:

LT Debt to Equity: 0.18 0.45

Total Debt to Equity: 0.23 0.63

Activity:Receivable Turnover: 7.39 7.07

Inventory Turnover: 7.36 32.84

Asset Turnover: 1.32 1.43

Post-Merge:

HPQ: SPACE CHART:

Company Financial Strength

+

Company - + Industry

Competitive StrengthAdvantage

-Environmental

Stability

Aggressive in printer market

Aggressive

Conservative inStorage Market

Defensive in PC marketNew HP competitive inServer market

HPQ

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HPQ-Space Chart Scores:# Competitive advantage: ( 3.8 / 5 )

Market share: 5 Product quality: 5 Product life cycle: 3 Customer loyalty: 4 Know how: 5 Vertical integration: 1

# Financial strength:( 2.8 / 5 ) ROI: 2 Leverage: 1 Liquidity: 3 Easy of exit from market: 2 Inventory turnover: 5 Economies of scale and experience: 4

# Environmental stability: ( 3.2 / 5 ) Technological changes: 4 Rate of inflation: 1 Demand variability: 3 Price range of competing products: 2 Barriers to entry into market: 4 Competitive pressure/rivalry: 5

# Industry strength:( 2.5 / 5 )

Growth potential: 2 Profit potential: 3 Financial stability: 1 Technological know-how: 4 Capital intensity: 3 Ease of entry into market: 2

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HPQ-Organisational Life Cycle:

Even though both HP and Compaq were mature companies before the merge, it can beconsidered that the merged company is under redevelopment/restructuring, as a result thecompany has lost some ground as a Mature company.

HPQ: Challenges:# Choosing Products Fix the PC business. Optimize the server business. Enhance the service and consulting. The new HP will feature Compaq's corporate PCs, low-end servers, and its iPAQ

handhelds, along with HP printers and UNIX servers. Consumer PCs from both sideswill also remain, though HP's business PCs and Jornada handhelds will not.

# Cut Costs while monitoring Revenues Cut $3billion costs. Most of the $2.5 billion in reduced costs will come from eliminating overlapping

corporate functions, from legal and marketing to human resources and salesmanagement.

Keep Revenues from Shrinking more than 5%. The team's biggest task: finding financial synergies. It has been dispatched to hit two

targets: $2.5 billion in cost savings by 2004 and keeping revenues from shrinking morethan 5%, as rivals swoop in to grab customers.

# Increase Morale and avoiding cultural clashes.

Performance

Effort and time

Introduction

Development

Maturity

DeclineHPQ

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HPQ-ETOP Profile:

Enviromental Threat and Opportunity profile (ETOP) for the new HP/Compaq identifies avery high score of 367. This scoring is based on of the 3 individuals drafting this case study.

The Threat value is based on the product of Impact X Importance. The high score is dueprimarily to the merger of both companies. There are political issues arising due to theagressiveness of the merger. The Social threat is rated high due to an employee morale issuewithin the company due to the number of layoffs that have occurred. The Competitive natureof the hi-tech industry and technological changes also strongly impact the new HP.

As indicated in this ETOP, the new HP is critically vunerable due to Economic, Social,Technological and Competitive threats.

HPQ: Strategic Profile Design Factors:

Sustainability: The new HP must retain and grab additional market share.

Uniqueness: Largest IT company in the World.Value added: Merger must demonstrate success by adding to the value of theshareholders.Enhancement: Increased product line.Flexibility: Adaptation to the market forces.Stability: Retention of customer/client base.Fit: Was the merger of HP-Compaq a good strategic move? Only time will tell.Performance: Results of merger to be mentioned over long period of time andcontinuously benchmarked against competitors.

Consistency: HP must demonstrate in new corporate structure.Stretch: CEO and Chairperson Fiorina to lead merged company aggressively.

Factors Impact Importance Threat

Economic 8 9 72

Political 6 4 24

Social 8 8 96

Technical 10 9 90

Competitive 9 9 81

Geographic 2 2 4

Total 367

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Conclusion:

HPQ must strike balance between the innovation/being first to the market tointroduce a product or a service, be pure and do it efficiently at a low cost.HPQ must maintain the brands of both the Companies and cash on thestrengths/Competitive advantages each possesses.

HPQ must adjust and optimize product lines.HPQ should enhance its High-end Service.

Capellas:There is very clearly a balance between innovation and being first to market on onehand, and pure, raw, low cost on the other hand. If you don't spend any money in R&D you willby definition have a couple of points on the bottom line, but you'll also never lead in any newproduct categories, so you won't get the margins there.:

Fiorina: People are declaring the PC business dead because it has had a couple of rough

quarters. That's incredibly shortsighted. It's clear that this is a critical part of the abilityfor consumers to do interesting things in their homes. But the reason for buying isn't goingto be to get the hottest box at the lowest price. You've got things like digital imaging, digitalmusic. It's something that does something for a consumer. This is what the industry ismissing. It's innovation. That's what Dell can't do.

Compaq has compelling offerings for home/wireless networking and HP has strength in digitalimaging solutions. Maintaining both brands will enable HP to leverage existing brandawareness and preferences and give customers the opportunity to continue to buy the brandand products that best meet their needs.