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CASE ANALYSIS ON HEWLETT-PACKARD-COMPAQ: THE MERGER DECISION

SUBMITTED TO:

PROF. RAY TITUS

SUBMITTED BY:

GROUP 04

MOHD. ASHRAF BASARIKATTI PREETI CHATTERJEE MOHIUDDEEN KHAN SOWJANYA P SRINIVAS CV

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INTRODUCTION Computer industry is one of the fastest-developing industries in the business history. Competition has always been fierce and stays until now and technological breakthroughs make market dynamically changing thus each company has to be up to date in order to handle the severe competition and stay successful. HP and Compaq come to a consensus to go for a merger of their services so that they could compete with the likes of IBM and Dell which were industry leaders due to their end-to-end and low cost services. Mr Walter Hewlett, board member and son of the founder of HP as it appeared to them that the merger would destroy the shareholder value and dilute the investors exposure to HPs profitable imaging business while significantly increasing the investors exposure to the commodity PC business and was opposing the merger. The merger was designed to create a global technology powerhouse that could provide end-to-end products and services increasingly demanded by lucrative enterprise customers. The merger took place with a thin margin of 51.4% which reflected a high level of uncertainty concerning the merits of the merger. Even though the companies went ahead with the merger there were doubts in various observers minds as to whether the move would truly help or hurt the companys strategic and financial position in the long run. This merger also posed a big question mark about the concept of corporate governance and other issues like appropriate roles of management, board and various advisors and intermediaries when it came to mergers and acquisitions. Carleton Fiorina believed that the Merger would create a full-service technology firm capable of doing everything from selling PCs and printers to setting up complex networks and would eliminate redundant product groups and costs in marketing, advertising, and shipping, while at the same time preserving much of the two companies revenues; it also helps to increase the market share.

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REASON FOR STATE The present CEO Carlys and the Walter B Hewlett proposed points for the merger as follows:

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SWOT ANALYSIS: Strengths: Weaknesses: Compaq-Server category and overall Consulting and outsourcing (low market storage share) HP-High-end storage Overlapping management Strong brand recognition. Overlapping product lines

Opportunities: Merger could improve economics and innovation Economies of scale Strengthen leadership in storage Market growth in IT services.

Threats: Dell increases pressure in the low-end server market IBM, Dell and new entrants erode more market share Economic downturn

OBJECTIVES OF THE MERGER 1) Increase competition with major competitors like IBM and Dell 2) Cut costs by around 3 billion 3) Increase earnings of shareholders 4) Face the challenge of the shrinking market Mission: To provide products, services and solutions of the highest quality and deliver more value to customers. Vision: To view change in the market as an opportunity to grow; to use our profits and our ability to develop and produce innovative products, services and solutions that satisfy emerging customer needs

STRATEGY FORMULATION These strategies are aimed at improving the effectiveness of HPs operations with Compaq thus its ability to attain superior efficiency, quality, profitability and differentiation. In 1999, HPs new CEO Carly Fiorina was appointed to with a mandate for a radical change-to reinvent HP to lead in the Internet age as she had the expertise in the internet domain and had previously overseen large-scale offs Some main initiatives taken were like streamlining the existing decentralised operating model and creating e-services ecosystems and placing HP at the centre by exploiting HPs reputation for being the best

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Carly even brought major changes and advancement in technology for cost reduction and subsequently transforming itself in to a leading provider of integrated solutions. She cut down the sales force wherever possible and integrated 83 independent product lines in to 17 product categories. Even a new and more effective selling organisation was created by establishing 3 front end sales forces, for consumer products, corporate products, and consulting services. She also scrapped the profit sharing plan in favour of a double barrelled pay for performance incentive program for better revenues and profit growth. Accelerating growth in existing businesses Streamlining the existing decentralizes operating model to fuel growth opportunities Implementing a total customer experience approach with the aim of turning the customer experience into a source of competitive advantage Taking advantage of HPs strong balance sheet and cash generating capability to fund new growth initiatives Creating e-service ecosystem and placing HP at the centre by exploiting HPs reputation for being the best partner in industry

MARKETING HP and Compaq now have common channels after their merging. So, the benefits in this concern is that even 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. The advantages of this merger in the field of marketing can be seen in the case of shared branding, sales and service. TECHNOLOGY The technical strategy of the company can also be designed in common now with a common product, process & technology and its strategy would promote highly economical functioning. BUYING The buying strategy of the company will also follow a common mechanism. Here, the raw materials, machinery, and power would be common. Therefore, decreasing the cost once again 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. So that, the infrastructure benefit 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. 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.

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STRATEGY IMPLEMENTATION As per the new strategic objectives, HP was to transform into a web services powerhouse, which would provide all the infrastructure and services that a corporation would need to do services over the internet. Even the organization structure was revamped by changing 83 independent product lines into 17 product categories. HP also scrapped their profit-sharing plan in favor of a doublebarreled pay for performance incentive program which was tied to the revenue and profit growth of the company as a whole. They brought about innovation by implementing a new incentive program. After the advent of recession, HPs cost structure was also renewed. Nearly 80,000 employees were asked to take a pay-cut and about 8,000 employees were laid off. HPs operating model was streamlined by outsourcing PC manufacturing, relocating low-end printer manufacturing to the Asia-Pacific region and rolling out a Build-to-Customer order program which was aimed to match up with Dells low cost model. ASSESSMENT OF OUTCOMES 1. After the merger the divisions have been changed by integrating products under enterprise, access and services division for achieving high levels of efficiency and profit margins 2. The Hewlett and Packard family members shareholding is reduced from 18% to 11.65% after merger 3. The HP paid high price than the expected because of the earnings of 2002 actually they paid 82.6 times of 2002 earnings of Compaq where they calculated only 22.2 times initially. Proven the deal is much costlier 4. After the merger HP-Compaq gained top market share in PC and server business with market share of 18% and 26.1% respectively 5. After merger management consolidate results margin targets for year 2003 are operating margin:8-10% whereas, HP had 3.1% and Compaq has -7.3% premerger less than IBM 13.6% 6. For year 2003 Consolidated EBIT margin target:9% whereas HP has 1.7% and Compaq had -2.3% premerger still less than IBM 13% and Dell 10% 7. HP-Compaq combined segment targets for year 2003are enterprise:9.2% vs. HPs -3.2%, access:3% vs. HPs -4.2% and services:13.7% vs. HPs 4.5% in fiscal year 2001 8. After merger printing, software and services has recorded high margins but margins are affected in PCs and server division 9. The stock prices of HP and Compaq dropped below the stock prices of Dell after announcement of merger 10. After merger HP/Compaq anticipated revenue growth for next five years is less than HP standalone revenue growth rate as HP/Compaq:3.6% vs. HP:7.3% 11. Post-merger HP/Compaq anticipated income margin for next five years is less than HP standalone income margin as HP/Compaq:36.5% vs. HP:8.3% 12. HP/Compaq anticipated profitability growth for next five years is more than HP standalone profit growth rate as HP/Compaq:45.9% vs. HP:32.10% 13. It is anticipated that in next five year HP/Compaq become market leaders in PCs, printers and storage devices market with market share of 39%, 21.1%, 37% respectively and second place in servers with an market share of 26.7% and third place in services with an market share of 2.6%.

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