quebec hpq merger

8/14/2019 Quebec HPQ Merger

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The HP-COMPAQ Merg er

A h i -tec h g iant or another merger f iasc o

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 $25 billion. Over an 8 month period ending in May 2002, the merger passed shareholder and regulatory approval with the end resultbeing one company. The new HP has annual sales of approximately $90 billion which is comparable to IBM, and an operating income of almost $4 billion.

The merger was led by Carly Fiorina, the chairwoman and CEO of HP. The president of the new HP was Michael Capellas who was the former chairman and

CEO of the old HP and who has recently resigned and is now the CEO of World Com.

Overall, many analysts were critical of the merger from the beginning since both Compaq and HP were struggling companies before the merger. Thecommon question that has been raised by analysts is: Do t wo struggling companies make a better merged company? Some analysts have indicated that the

merger is a gamble and that it is difficult to see any focussed lo gic behind the merge considering that most I.T acquisitions are not successful. Prior to themerger, Compaq has been unable to grow despite previously buying Digital, while HP was trying to grow internally, without much success. Both companieswere still adjusting to acquisitions they have made in the past and both were adjusting to new leadership (Fiorina and Capellas). The merger deal also means

that there are many overlaps in products, technologies, dist ribution channels, services, facilities and jobs. Employee morale is a threat to a successful merger as

there has been numerous layoffs -15,000 employees. The claimed annual cost savings of about $2.5 billion dollars by the year 2004 amounts to only 3 % ofthe combined costs of both companies. Gartner Group research has indicated that the merged company has failed to do a good enough job of presenting the

benefits of an acquisition of this scale to justify the deals risk as it is generally known that technology mergers rarely work. In addition, both companies in the

past have struggled to resolve conflicts between direct and indirect sales channels. The cultural background of both companies is quite different and integrationwill 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 trying to buy their way into new businesses they knew little about,

this is not the case with the HP/Compaq merger. Apart from servers and PCs, they have several areas where their products overla p. e.g: they are both are

involved in making data-storage equipment and both make hand held computing devices. Inaddit ion, both companies also bring different strengths to thetable. Compaq has done a better job i n regard to engineering an entire line and HP has been strong in consumer products. T he justification provi ded by HP

senior management suggests 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 of bitter infighting which will cause the new HP to lose direction and

good personnel. This is great news for competitors such as IBM and Sun as both of them will be able to pick off the market while the new HP is distracted bythe merger. The new HP may be a threat to IBM but not anytime soon. It could take several years to determine if the largest merger in I.T history will be a

success or a complete flop.


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Presentat ion Outlinen PRE MERGE

n HP

n Compaq

n MERGE

n HP+COMPAQ

n POST MERGE

n NEW HP

Presented by :

Leo B.Hugo P.

Hongqi H.


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IntroIntro GrowthGrowth MaturityMaturity DeclineDecline

Compaq: in The Life Cycle

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).

Client base stable.

Distributing dividends (1998).

In 2000, emphasis on cost reduction and increase in gross margin.

Competitor pressure

Scope scale sales (ie, pocket computers)

Pre-merge


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Compaq: Products

n PC, (desktop and portable) Manufacturingand selling

n Servers Manufacturing, selling plusservices

n Pocket Computer (handheld computer) -Manufacturing and selling

n Storage manufacturing, selling, servicesand on-line storage

Pre-merge


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PC s : Laptops

Desktop

Servers

Pocket Computers On-line storage

and IT services

Storage

Compaq: BCG Matrix

Pre-merge


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Compaq: Competitors

n IBMn Servers, PCs, storage and IT services.

n Sun Microystemsn Servers

n Delln PCs

n HPn PCs, IT services and pocket computers

n Palmn Pocket computers

Pre-merge


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Hewlett-Packard

Known as a box vendor, a one-stop shop

for business applications:

n Unix servers

n E-commerce application software

n Hosted services

n Network management

n Integration servicesn PCs, printers, ink cartridges

Pre-merge


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HP : Competitors

n IBM

- Servers, PCs, storage and IT services

n Dell

- PCs

n Canon

- Printers, fax, copiers, optical equipment

n Compaq- Pcs, Servers, Pocket computers

Pre-merge


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IntroIntro GrowthGrowth MaturityMaturity DeclineDeclineHP : Organization Life Cycle

Pre-merge

HP known as a brand name for printers and ink

Held number 1 position in a number of areas, i.e Storage Area Network (SAN),

RAID and disk storage systems

Stable client base

Competitor pressure


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Printer supplies

- ink cartridges

- photo paper

Servers

PCsComputer repair

Pocket

Computer

HP : BCG Matrix

Pre-merge


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HP : Leadership - Fior inaGradeCategories

DDEAL-MAKING

B+INNOVATION

DORGANIZATION

C+CULTURE

CEXECUTION

BSTRATEGY

Business Week Magazine

Pre-merge

STRATEGYFor decades, HP was a collection of independent businesses, each selling a

particular kind of product. Fiorina was hired to execute an "e-services"

strategy that would meld these pieces into 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 the company. But so far, HP is as dependent as ever on its last remaining

gold mine: the $20 billion printing business, which has subsidized losses at the

rest of the $48 billion company for the past three quarters, sayanalysts.

EXECUTION

When Fiorina arrived, HP was two companies: a world-class maker of printersand imaging gear and a mediocre computer company. She set out to pump up

sales and profits in the ailing computer business by becoming stronger in

software, storage, and consulting.

Grade: C

HP is still the same two companies. While it remains the king of printers, the

economic downturn has hurt efforts to improve profits in the computer

business. It has gained market share in Unix servers, but there has been

negligible progress in storage and software. Also, consulting remains small

compared with rivals.


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n Merge champion (Fiorina)

n Horizontal merge

n Initiated Sept 2001,

Completed May 2002

8 month process

n Biggest merger in IT history

n 25B$ all stock purchase

n 1 million working hours spent on mergerintegration

HP and Compaq

Merger


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HPQ : Pros and Consn The Positives:

n COST SAVINGS

n FINANCIAL BULK

n CROSS-SELLING & TECHNOLOGY

n BUYING POWER INCREASING

n The Negatives:n EXECUTION CHALLENGES

n PCs BUSINESS OVERLAPING

n COMPETITIVE POSITIONn MORALE

Merger

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 they are key to landing big contracts with corporations

and governments, analysts say HP may 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

new HP would have the sheer bulk and reach to turn these two troubled

companies into one far healthier one

This will enable HP to leverage Compaq's strong market share and brand

recognition in the commercial PC market.


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HPQ : Objectives

n Increase competition with major

competitors. i.e. IBM, Dell.

n Cut costs by $3 billion annually by 2004

n Increase earnings for shareholders

n Face the challenge of a shrinking market

Merger

HP wants to emulate IBM's push into consulting and other services

The accelerated cost savings come from leveraging HP's new bulk torenegotiate contracts 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.

And investors could benefit big time from huge cost savings. By eliminating

redundant administrative functions, HP cost savings would reach $3 billion a

year by 2004. The company would likely write off most of the more than $1

billion cost of the merger in 2002.

The new HP will exploit its market power for everything from better dealswith suppliers to pressuring software developers such as Oracle Corp.and SAP

to push HP gear. Then, over time, it will develop the consulting and software

smarts to help customers deliver whizzy new offerings.

The accelerated cost savings come from leveraging HP's new bulk torenegotiate contracts 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


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HPQ : SWOT Analysis

Post-merger

Strengths Weaknesses

Confront

Op

portunities

Threats

Innovation

Integration

market share

Customer loyalty

Organizational

Culture conflict

Overlapping

product lines

Overlapping

management

cost savings

Stable growth

Economic downturnCompetitive environment

Avoid

SearchExploit

Employee morale

SWOT stands for Strengths, Weaknesses, Opportunities and Threats. It's a

four-part approach 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 swat the 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 in themarket in relation to its competitors. The goal is to identify all the major

factors affecting competitiveness before crafting a business strategy.


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HPQ : PRODUCT LINES & COMPETITORS

MS, CA, IBMLAGSOFTWARE (-)

EMC, SONYLEADSTORAGE (+)IBM (HIGH LEVEL)62%LOW LEVEL SERVICES

IBM (+), SUNLAGHIGH-END SERVERS (-)

IBM (+)37%LOW-END SERVERS

CANON, LEXMARK15%PRINTERS (+)

DELL ( + )19%PCs (-)

MAINCOMPETITORS

MARKET

SHARE (% )PRODUCTS

Post-merger

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 sides will also remain, thoughHP's business PCs and Jornada

handhelds will not.

Fiorina: We'll continue to organically grow, particularly the outsourcing and

consulting ends 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 into research 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's share is expected to remain flat, while Dell grows 30% a year.

Sensing a possible vulnerability as HP merges with Compaq, Dell recently

reached an agreement with Lexmark International to have printers and ink

cartridges manufactured under the Dell name.


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HPQ : PRODUCTS GROWTH

* Data: Gartner Inc., IDC, Credit Suisse First Boston

0

5

10

15

20

25

30

35

40

45

PRINTERS P CS SERVERS STORAGE SERVI CES

MARKET SHARE /

RANK

INDUSTRYWIDE

ANNUAL GROWTH

RATE

INDUSTRYWIDE

GROSS PROFIT

MARGINS

HP/COMPAQ

Post-merger


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HPQ: Product Life Cycle

pcs

server

Storage

Printers

software

Service

Notebook

Post-merger

FOR PCs:

HP needs flawless execution and cost-cutting--especially with more-focused

rivals such as Dell and Sun fighting for every deal in this down economy

cost leadership

Capellas: First and foremost you've got services growth, the fastest-growing

segment of the whole IT market. Managed services and outsourcing is growing

fastest. The customer service side is growing slower but is veryprofitable.

A more focused HP might also make more of its franchise printer operation.

HP has built 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 recent quarter. Since photos require more ink than plain documents,

the photo printers drive sales of highly profitable ink cartridges.

And while PC sales help the top line, profits from the printer-supplies unit

held up the bottom 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-format plotters, scanners, print servers and ink.


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HPQ : BCG Matrix

Relative market share ( Cash generation )

High

Low

Industrygrowthrate

High

Low

Image

printer

Software

PCs

Servers

Service

Storage

Notebook

Post-merger

Today, a third of HP's server business-- its powerful Unix machines--has

healthy profit margins and is tied with Sun Microsystems (SUNW ) for top

market share. But most analysts expect Sun and IBM (IBM ) to outpace HP in

this sector when tech spending 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 either Windows or the Linux software will take over many

jobs. While the Unix market is expected to grow around 6%, Fiorina says the

market for Windows and Linux models will grow 20% a year as these systems

prove their mettle at tougher computing jobs. Indeed, market researcher

International Data Corp. estimates that worldwide revenue from 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.

By contrast, personal computer sales will fall this year and grow less than 2%

next year.


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HPQ : Directional Policy M atrix

innovationMarket Segmentation Market leadership

Unattractive Average Attractive

Maintenance ofPosition;

Market penetrationServer

Productt

Cash GenerationCapability

Phased withdrawal;merger

Expansion,

Differentiation

High

Low

Diversification

Divest

Imitation;

phased withdrawal

PCs

Service

printer

Storage

Notebook

Post-merger

Matrix obtained from page 257 of Strategic Management Book


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Profitability

Leverage

Liquidity

Activity

HPQ : Financial Ratio Profile

Low Industry standard High

Very tight Industry standard Too much slack

High Debts Industry standard No Debt

Too slow Industry standard Too fast

Post-merger

HPQIndustry Average

Profitability:

Gross Margin: 26.36 29.87

Gross Margin 5 yr. Avg. 28.82 31.33

EBITD 5 yr.Avg. 10.73 13.12

Operating Margin 5 Yr. Avg. 7.73 9.14

Pre-Tax Margin

5 yr. Avg. 8.07 10.13

Net Profit Margin

5Yr. Avg. 5.98 7.04

Effective Tax Rate

5 yr. Avg. 23.42 29.49

Liquidity:

Quick Ratio: 0.91 1.01

Current Ratio: 1.461.33

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: 1.321.43

Data Source: Yahoo Finance


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HPQ : SPACE CHART

Conservative instorage market

Environmental

Stability

Industry

Strength

Company Financial Strength

Company

Competitive

Advantage

Defensive in PCs market

- +- +

-

+

New HP competitive inserver market

Aggressive

Aggressive in printer marketAggressive in printer market

HPQ

Post-merger

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: 2Barriers 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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Maturity

HPQ: Organization Life Cycle

Effort & Time

Introduction

Development

DeclinePerformance

HP

Post-merger

Even though both HP and Compaq were mature companies before the merge,

it can be considered that the merged company is under re-

development/restructuring, as a result the company has lost some ground as a

Mature company.


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HP: CHALLENGES

n CHOOSING PRODUCTSn Fix the PC business

n Optimize the server business

n Enhance the service & consulting

n CUT COSTS WHILE MONITORINGREVENUESn Cut $3b

n Keep revenues from shrinking more than

5 %

n INCREASE MORALE & AVOIDINGCULTURE CLASHES

Post-merger

Workers from HP and Compaq have spent more than 1 million hours planning

their merger. Here's how they're doing.

Their merger faces huge challenges. One top problem may be morale.

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 sides will also remain, thoughHP's business PCs and Jornada

handhelds will not.

Most of the $2.5 billion in reduced costs will come from eliminating

overlapping corporate functions, from legal and marketing to human resources

and sales management.

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 more than 5%, as rivals swoop in to grab customers.


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HPQ : ETOP Profile

Factors Impact Importance Threat

Economic 8 9 72

Political 6 4 24

Social 8 8 96

Tech. 10 9 90

Competitive 9 9 81

Geographic 2 2 4

Total 367

Post-merger

Enviromental Threat and Opportunity profile (ETOP) for the new HP/Compaq

identifies a very 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 due primarily to the merger of both

companies. There are political issues arising due to the agressiveness of the

merger. The Social threat is rated high due to an employee morale issue withinthe company due to the number of layoffs that have occurred. The Competitive

nature of 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.


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HPQ : Strategic Profile Design Factors

n Sustainability The new HP must retain and grabadditional market share

n Uniqueness Largest I.T company in the world

n Value added Merger must demonstrate success

n Enhancement Increased product line

n Flexibilty Adaptation to market forces

n

Stability Retention of customer/client base

Post-merger

These design factors were obtained from slide 5-28


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HPQ : Strategic Profile Design Factors cont

Fit Was the merger of HP/Compaq a good strategic

move? Only time will tell!!!!

Performance Results of merger to be monitored over along period of time, i.e: 12 24 months and continuously

benchmarked against competitors

Consistency HP must demonstrate in new corporatestructure

Stretch CEO and Chairman Fiorina to lead merged

company aggressively

Post-merger


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Conclusion - HP Strategyn Balance between the innovation/being first

to the market and pure, raw, low cost.

n Maintaining both company brands and

strength.

n Adjust and optimize product line.

n Enhance high-end Service.

Post-merger

Capellas: There is very clearly a balance between innovation and being first

to market on one hand, and pure, raw, low cost on the other hand. If you don't

spend any money in R&D you will by definition have a couple of points on the

bottom line, but you'll also never lead in any new product 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 ability for consumers to do interesting things in their homes.

But the reason for buying isn't going to be to get the hottest box at the lowest

price. You've got things like digital imaging, digital music. It's something that

does something for a consumer. This is what the industry is missing. It's

innovation. That's what Dell can't do.

Compaq has compelling offerings for home/wireless networking and HP has

strength in digital imaging solutions. Maintaining both brands will enable HP

to leverage existing brand awareness and preferences and give customers the

opportunity to continue to buy the brand and products that best meet their

needs.

quebec hpq merger

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