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INDIAN INSTITUTE OF MANAGEMENT KOZHIKODE

Globalizing Indian Thought

Executive Post Graduate Programme


Batch 2014-2016
MASA-SM08-10

HP COMPAQ VALUATION
Assignment 2

Submitted To: Prof. Jijo Lukose P.J.

Submitted By:
Name
Umesh Tambare

Roll number
EPGP07 089

Q.1: What would a SWOT analysis reveal?


The SWOT analysis of HP and Compaq is as below-

HP COMPAQ VALUATION
HP SWOT analysis:
Strengths

Weaknesses

1. Long term dominance in imaging


& printing
2. Strong in UNIX market
3. Strong in high end servers

1. Did not rank in the Top 3 in PCs,


storage and services
2. Only 15% of HP PCs shipped
directly to customers

Opportunities
1. End-to end solutions strategy for
servers.
2. A merger with Compaq would able
HP as a market leader

Threats
1. Slimming industry margins
2. Strong competition from Dell

Compaq SWOT analysis:


Strengths

Weaknesses

1. Market leader in PCs


2. Worlds leading supplier of storage
systems

1. Constant poor performance


2. Not strong in UNIX market

Opportunities

Threats

1. As the cost of making portable


and desktop computer decreases,
new markets for these products
will open including smaller
business and consumers
2. A merger with HP would achieve
positive operating margins
through economies of scale

1. Slimming industry margins


2. A rapidly changing environment
3. Strong competition from Dell

Q.2: Was the merger strategy sound?


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HP COMPAQ VALUATION
Yes, the merger strategy is sound.
Considering SWOT analysis of both HP and Compaq, the merger strategy has
Strategic and financial benefits.
Strategic benefits:

The new company will be a dominant leader in servers.


The new company will be well positioned to exploit the fast growing trend of

storage area networks in the storage market.


Combination of complementary server and storage lines could reduce costs,

offer a comprehensive array of products for enterprise customers.


New company will allocate more effectively R&D for growth in its enterprise
computing business.

Financial benefits:

The merger would deliver significant financial benefits to shareholders.


Through major cost savings and improved profitability of business lines,

substantial earnings improvements for shareholders would be realized.


Management projected recurring, annual, pretax cost savings of $2.5 billion

by mid-2004.
This will have a value of $5 to $9 per share.

Q.3: What was the value of synergies?


For any firm to merge with any other firm the main motive is that the value of the
combined entity should be greater than sum of the individual entities and the
transaction cost.
This excess value is referred to as synergy.
As per exhibit 7, by DCF (stand-alone) method Compaq Value is $20.8 billion.
As per exhibit 8, by DCF (stand-alone) method HP Value is $44 billion.
Total combine value is = $20.8 + $44 = $64.8 billion
After merger Compaq will own 36% of the combination= $64.8*0.36=$23.328 billion
And HP to be indifferent before and after merger its value should be
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HP COMPAQ VALUATION
= $44 / 0.64= $68.75 billion
So merger is producing = $ 68.75 - $ 64.8 =$3.95 billion synergy.
Synergy by DCF method,
Assumptions1. Revenue growth rate = 11%
2. Perpetual growth rate = 3%
3. Discount rate = 15%
All numbers in $ billion
2002

2003

2004

2005

Revenue

92.8

103.008

Revenue

-0.5

3.61

Cost savings

2.5

2.575

Total gain

2.0

6.18

Terminal value

53.05+6.18=59.2

gain/loss

of Synergy

Post tax value

1.52

of Synergy

Therefore 2002 value of synergy=


=1.52/ (1+0.15) ^3+45.01/ (1+0.15) ^4= $ 26.74 billion
Synergy value of $26.74 billion is achieved.

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45.01

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