group 13 - hp_compaq

8/2/2019 Group 13 - HP_Compaq

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The HP- Compaq MergerThe rationale of the merger and implications of value

destruction

April 11th 2012

Catalin Cordos 3451712Kyriakos Malamidis 3738892Stavros Ouzounis 3592634

Mergers, Acquisitions and Restructuring

Utrecht University, Graduate School of Economics


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Introduction

The new millennium signaled some radical changes in the IT sector. Fueled by competition in a constantly

changing market through new product introduction and improvements, firms that were involved in this market

segment had to keep pace in order to be successful. Companies such as HP and Compaq could not make

exception.

In the early 1990s the two companies were struggling with the competition. The information technology

downturn and the transformation of hardware into a commodity convinced the two CEOs of HP and Compaq,

Carly Fiorina1

and Michael Capellas1

respectively, that a drastic change is more than necessary. Fiorina could

not foresee that this transformation implied a more than a within strategic shift. These fa ctors led to HP

announcing, on September 3 of 2001, the acquisition plan for Compaq, in a stock transaction valued at $25

billion2

and exchange ratio of 0.6325 of an HP share per Compaq share. The new entity would have annual

sales of approximately $90 billion and an operating income of about $4 billion3, becoming one of the biggest

players in the IT market.

The actual merger, which primarily included just a licensing agreement and a wide R&D collaboration, was

completed in May 2002, which at that time was the worlds largest corporate IT merger. Neglecting the

questionable growth predictions and the anticipated synergies, the announcement of the merger created a

wave of controversy. Many analysts were wondering whether two struggling companies could create a healthy

one, Todd Kort, principal analyst for Gartner Research said: "This is not a case of 1+1 = 2. It's more like 1+1 =

1.5."Furthermore, many recent examples showed that the most IT transactions were not successful, especially

when the involving parties were large. The difficulty in finding any focused logic behind the merger was

enhanced by the fact that both companies were still adjusting to acquisitions they made in the past and from

the fact that the tie-up would create a cultural clash regarding the divergence in cultural and operational traits

of the two parties.

The rationale behind the merger

Considering the incentives of the merger, one could conclude that the main pillars were the complementarities

in business lines and the synergies the company could realize. Areas were HP was weak would be

complemented by Compaqs stronger presence and vice versa. HP had stronger capabilities on the commercial

side, whereas Compaq was stronger on the consumer side. Combining, also, the presence of Compaq in the PC

industry and HPs dominance on printers, it was anticipated that together would be number one on consumer

products. Moreover, due to high overlap in managed services, the combined overlap and scale advantages

would increase the market presence of the company after the merger.

The clear target for HP was undoubtedly IBM. Fiorina was aiming through this horizontal merger to create a

full service technology company capable of doing everything. Operationally, the merger would eliminate

redundant products and costs by reducing the costs of marketing, shipping and layoffs. The combined

company would have about 145,000 employees, which called for a reduction of about 15,000 jobs, in first

instance.

1See Appendix 2 for further details on the two CEOs

2

HP News Release can be foundhere.3HP and Compaq Combined: In search of Scale and Scope, Stanford Graduate Of Business, Case SM-130, 15 July 2004
http://www.hp.com/hpinfo/newsroom/press/2001/010904a.htmlhttp://www.hp.com/hpinfo/newsroom/press/2001/010904a.htmlhttp://www.hp.com/hpinfo/newsroom/press/2001/010904a.htmlhttp://www.hp.com/hpinfo/newsroom/press/2001/010904a.html


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This trimming in payroll expenses would count for $1.5 billion annually while other redundant administrative

functions were designed to save almost $3 billion by the end of 20044. According to a press release on

September 2001 the cost synergies were expected to reach approximately $2.5 billion from a rationalization in

the cost structure. The new HP would have annual revenues of $87.4 billion with annual operating earnings of

$3.9 billion, results that would establish them as the number one player on the IT industry. A very important

aspect is that the transaction would be tax-free for the shareholders. For this reason, the establishment of aNewCo, named Heloise Merger Corporation

4, would be necessary to facilitate the merger. With this tax free

reorganization, HP would be able to control all the assets of Compaq via a wholly owned subsidiary.

A fierce battle

Despite the negative perception of the deal by many investors and analysts, the top managerial teams of the

companies seemed quite adamant to finish the deal. Apart from the regulatory criteria that had to be met, the

deal was subject to shareholders approval. This seemed to be the most difficult task the executives had to

face. Considering this acquisition as friendly, the role of the two families, Hewlett and Packard, became a

critical factor in the outcome. Their official opposition to the merger led to a proxy fight, with millions of

dollars spent on advertisements and mailings to shareholders in order to swing their votes to yes or no on

the merger. The controversy has led to a lawsuit from the Hewlett family to the HP management for using HP

corporate assets to entice and coerce certain financial institutions to vote in favor of the proposed merger.

At this point it is important to address the significant role of the founding families in shaping strategy, even if

they do not owe majority stakes in the company. The two siblings became fully autonomous in their emotional

stewardship of HP only last year after the death of the last surviving parent, William Hewlett, in January 2001.

As a result, they had apreconceived bias to any strategic change that would diverse or modify the status quo in

their fathers company.

The merger meets with the opposition

There were several issues that rose concern regarding the necessity of the merger. Analysts were skeptic

about the competitiveness of the merged entity causing stock prices of HP and Compaq to fall significantly in

the period following the announcement of the deal. Moreover it was anticipated that the merger could not

enhance the competitive position of HP vis-a-vis IBM, who is a leader in the high margin server, consulting and

service segments. Other opponents believed that competitors would try to swoop in and persuade solution

providers and customers to switch allegiances and product lines

5

. According to the integrationannouncements, the Compaq logo would be phased out, raising concerns about the responsiveness of the

former Compaq customers. Furthermore, blending the two companies, that were operating in different

manners, was a very difficult task, raising issues for a successful cultural due diligence6. HP culture was based

on consensus while Compaqs culture was characterized by rapid decision making.

According to W. Hewlett, Fiorinas confidence about the future growth estimates of the computer business

was exaggerated. The acquisition of Compaq could not create a competitive environment for HP, but rather,

would expose HP to the low-profit PC business, during a period in which PCs were on the road to becoming

4

The proxy filing of the HP Special meeting of Shareholders 2002. For the Edgar online document access the linkhere.5The Hewlett-Packard and Compaq Merger: A case study in Business Communication, Brigham Young University

6Culture Due Diligence based on HP/Compaq, Agata Stankowicz-Stanusch, Journal of Intercultural Management, pp. 66-67
http://google.brand.edgar-online.com/EFX_dll/EDGARpro.dll?FetchFilingHtmlSection1?SectionID=1739747-862474-865961&SessionID=hmZFH6nEJqtBjP7http://google.brand.edgar-online.com/EFX_dll/EDGARpro.dll?FetchFilingHtmlSection1?SectionID=1739747-862474-865961&SessionID=hmZFH6nEJqtBjP7http://google.brand.edgar-online.com/EFX_dll/EDGARpro.dll?FetchFilingHtmlSection1?SectionID=1739747-862474-865961&SessionID=hmZFH6nEJqtBjP7http://google.brand.edgar-online.com/EFX_dll/EDGARpro.dll?FetchFilingHtmlSection1?SectionID=1739747-862474-865961&SessionID=hmZFH6nEJqtBjP7


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low margin commodities. Finally Hewlett addressed the danger of value dilution with respect to the companys

lucrative printing business7.

David Packard, the oldest son of the other co-founder was sharing the same concerns. Driven by sentimental

factors, he was claiming that this strategic shift was running counter the established core values if the

company. His major concern was the massive layoffs that were scheduled in order to achieve the operationalsynergies: Bill and Dave never developed a premeditated business strategy that treated HP employees as

expendable.8

Stock price performance

Figure 1 below illustrates the stock prices of the two companies from January 1999 till July 2001. It is obvious

that both companies experienced high decreases after mid-2000, following the decrease of S&P500 and this of

Dell, their main competitor (in personal computers and servers) as we can see in Appendix 3, but HP still

outperforms both for almost all of the year 2000.

Figure 1: Stock prices before merger

In terms of percentage change, as we observe in Figure 1 in Appendix 4, there are significant fluctuations with

most notable the increase of 21% in 18/11/99 for HP and the one of 16.55% in 3/1/01 for Compaq. As far as

the decreases, the most significant are -13% in 13/11/00 for Hp and the one of - 22.5% in 12/4/99 for Compaq.

For the same period, S&P 500 was fluctuating between 1215 and 1222 units with daily changes very close to 0 .

A couple of months before the merger and through half year after it, as we see in figure 2 below, the stock

prices kept decreasing. As of 2002, a relative stability is observed. A closer look in the percentage changes

(Figure 2 in Appendix 4) reveals that in 3 cases there are noticeable fluctuations. Firstly, a 10% decrease for

Compaq and a 18% decrease for HP on 4/9/2001, the day after the merger was announced (Monday

announcement). Secondly, a sharp decrease of 15% for Compaq and 10% for HP in 17/9/2001, the day that

markets reopened after the tragic incident at World Trade Center. Finally, on 6/11/2001 when William Hewlett

announced his opposition, there is a 17.5% increase for the HP stock and a decrease of 5.5% for Compaq,

revealing that markets agreed with W. Hewlett that HP would be better without Compaq, but on the other

hand the scenario of cancelling the merger was very bad news for Compaq. Overall, the cumulative decreases

in the prices of the two firms were around 30% till the moment of the announcement. This pattern, confirms

7Hewlett family opposes Compaq deal, CNET, November 6, 2001, for the fill article presshere.

8New York Times, HewlettPackards Destiny, November 25, 2001
http://news.cnet.com/2100-1001-275466.htmlhttp://news.cnet.com/2100-1001-275466.htmlhttp://news.cnet.com/2100-1001-275466.htmlhttp://news.cnet.com/2100-1001-275466.html


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the pessimistic view of the markets when big technological firms are merged. Markets did not believe in the

success of the merged entity.

Figure 2: Stock prices around the announcement of merger

Valuation

The valuation method used here is based on an Event Study Analysis. We are going to look at daily changes in

the stock price9

in our effort to point out potential abnormal returns. In general, when there is speculation of a

merger, the price of the concerned companies change as a respond to the expectations of the market. As a

result, the price of the buyer usually drops, when targets price increases.

The analysis consists of the capturing of the trend of the changes of both companies against the S&P 500. In

other words, the regression equation is:

Rit = + i*Rmt, where: Rit is the actual returns of firm i at time t;Rmt is the actual change of S&P 500 at time t;

After obtaining the estimates for and , we are going to substitute them in the Abnormal Return estimation:

ARit = Rit ( + * Rmt).

The time period used, begins on 16/7/01, two months prior to the merger and two years after Fiorina was

hired, and ends in 07/05/02, when the firms officially combined. In total there are 201 daily observations. The

results of the regressions are illustrated in Appendix 1, who also provides details on share price changes and

the abnormal return during the period analysed and links them to specific events that might have triggered

them. In Table 1 below, three chosen dates are illustrated for the determination of abnormal returns.

Table1: Determining the Abnormal Return

No of sharesPrice/share

($)

Market cap

(07/01)

Change in Market value

$ billions (based on AR)

(billion) 16/7/2001 $ billion 3/8/2001 4/9/2001 7/5/2002

HP 2,2 23,15 50,93 -4,58358% -21,3555% -0,1511%

-2,33442 -10,8764 -0,07696

COMPAQ 1,7 15,4 26,18 1,685447% -21,4056% 0,04088%

0,44125 -5,60399 0,010702

COMBINED -1,89 -16,5 -0,067

9Data for HP stock prices are from Yahoo Finance and for Compaq from Datastream.


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The shaded area in the table above indicates that from one and a half month before the merger till the first full

trading day the shareholders of both companies lost $16, 5 billion. Pre and Post takeover the loss was not that

significant and especially the months following the merger the combined entity seems to start recovering,

following the increase of S&P500 and Dell.

In conclusion, the AR-Event study analysis shows that the transaction did not create value for theshareholders, but it deducted the (16.5 out of 77) of the market value of the combined entity in the short

run. It is important to mention that this loss is attributed in a high degree, to the timing of the merger (just

before the incident of the World Trade Center), because as we observe in Appendix 3 that the HP stock

performance follows more or less the performance of S&P500 during the whole period analyzed.

Conclusion

The merger of HP and Compaq has put forth concerns from the beginning. The intuitive synergies and

complementarity of products for a computer manufacturer and a printer manufacturer would bring economiesof scale and the possibility of bundling. HP weaknesses would have been complemented by Compaqs

strengths and vice-versa. This was not the case for the merger of these two companies. By going through the

above analysis we see that it was met with opposition from the beginning, failing to bring shareholder value

and the much expected synergies. The main challenger of the deal was Walter Hewlett, son of the co-founder

Bill Hewlett, who said: "The Compaq merger is a dangerously risky, a very costly, step... The risk is great that

trying to meld two disparate companies and cultures together in the computer business will come to grief."This

was also the case when it came to the analysts: Todd Kort, principal analyst for Gartner Research, said, "This is

not a case of 1+1 = 2. It's more like 1+1 = 1.5."and also IDC analyst Roger Kay said, "Dell must be totally gleeful,

because these guys are going to spend all their time untangling themselves.", completed by Michael Dell, CEO

of Dell Computer, who called it "the dumbest deal of the decade."

Typically, a merger is announced on Friday after the closing of the stock markets in order to allow the

investors time to process the information and reflect it as best as possible in the price once the merger is

completed. This was not the case for HP-Compaq, the announcement was made on Monday 3rd

of September

2004, which might reflected the concerns that the management had regarding the market reaction and the

price it paid for the acquisition10

.

So, if the signals from the stock market (stock price drop on the announcement of the merger and stock price

increase on the date when Hewlett family announced a law suit against the management of HP) and so many

opposing voices, why did it go through? The first answer comes from the determination of then architect of

the merger and CEO of HP, Carly Fiorina, to make the deal. Hubris, empire building and huge bonuses were

stimuli that she could not overlook. She lacked the skills to manage one of the largest technology companies in

the world. The second reason is the poor integration and execution of the merger, who lead to poor

performance and loss of key people from Compaq. This losing battle against past mistakes went on for three

years until the board of HP decided to get rid of Fiorina and bring Mark Hurd as CEO. This was a determinant

step that changed things around for HP. The new CEO was better equipped with the challenge of leading such

a company.

10For a short analysis on overpayment see Appendix 5.


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Appendix 1 Cumulative percentage changes - AR regression results

Date Compaq* HP* dCompaq dHP AR-HP AR_Cpq Notes

16-07-01 15.4 23.2

17-07-01 15.81 23.2 2.662 0 -1.22 0.923

18-07-01 15.66 23 -0.949 -0.605 0.145 -0.004

19-07-01 15.78 23.3 0.766 1.043 0.32 -0.29520-07-01 14.7 23.2 -6.844 -0.344 0.138 -6.264

23-07-01 13.6 23 -7.483 -0.863 1.262 -4.665

24-07-01 13.85 22.6 1.838 -1.698 0.415 4.639

25-07-01 14.12 22.5 1.949 -0.266 -2.262 -0.846

26-07-01 14.5 21.1 2.691 -6.528 -7.809 0.869 Issue of mid-term bonds

27-07-01 14.28 21.4 -1.517 1.473 1.214 -1.947

30-07-01 14.5 21.2 1.541 -0.609 -0.426 1.713

31-07-01 14.94 21.6 3.034 1.837 1.176 2.057

01-08-01 15.39 22.4 3.012 3.469 3.022 2.327

02-08-01 15.83 22.7 2.859 1.565 1.107 2.159

03-08-01 15.85 22.2 0.126 -2.377 -1.665 1.019 1 month before merger

06-08-01 15.6 22.1 -1.577 -0.271 1.226 0.385

07-08-01 14.98 22 -3.974 -0.407 -0.776 -4.553

08-08-01 14.6 21.7 -2.537 -1.498 0.749 0.447

09-08-01 14.69 21.7 0.616 -0.184 -0.128 0.617

10-08-01 15 22 2.11 1.616 0.94 1.112

13-08-01 14.85 21.8 -1 -0.909 -0.983 -1.178

14-08-01 14.5 21.8 -2.357 -0.046 0.486 -1.709

15-08-01 13.97 21.1 -3.655 -3.073 -2.095 -2.399

16-08-01 13.99 21.2 0.143 0.142 -0.204 -0.405

17-08-01 14.11 21.1 0.858 -0.331 1.831 3.726

20-08-01 13.98 21.7 -0.921 2.845 1.859 -2.341

21-08-01 13.55 21.7 -3.076 -0.138 1.442 -1

22-08-01 13.36 21.5 -1.402 -0.831 -1.668 -2.62

23-08-01 13 21.1 -2.695 -2.002 -1.605 -2.231

24-08-01 13.65 22 5 4.703 2.253 1.586

27-08-01 13.27 21.9 -2.784 -0.454 0.205 -1.963

28-08-01 13.32 21.6 0.377 -1.641 0.311 2.96

29-08-01 13.13 21 -1.426 -2.688 -1.226 0.488

30-08-01 12.69 20.5 -3.351 -2.286 -0.08 -0.423

31-08-01 12.35 20.4 -2.679 -0.828 -1.294 -3.39 The day before the merger is announced04-09-01 11.08 16.7 -10.283

-18.133

-18.015

-10.2 The day after the merger is announced (div)

05-09-01 10.41 16 -6.047 -4.142 -3.961 -5.878

06-09-01 10.35 15.5 -0.576 -2.818 0.072 3.283

07-09-01 10.59 15.9 2.319 2.126 4.539 5.529

10-09-01 10.35 15.7 -2.266 -1.009 -1.754 -3.357

17-09-01 8.75 14.1 -15.459 -10.07 -3.774 -6.959Reopening day of markets post 9/11HP and Compaq unveil stock buyback plans for $1.8 billionand $550 million, respectively

18-09-01 8.52 14.3 -2.629 1.134 1.917 -1.638

19-09-01 8.13 13.6 -4.577 -4.975 -2.883 -1.804

20-09-01 7.85 12.8 -3.444 -5.826 -1.835 1.915 Low point after the merger

21-09-01 7.99 13.2 1.783 3.211 5.674 5.062

24-09-01 8.54 14.2 6.884 7.587 2.682 0.126 Acquisition of StorageApps

25-09-01 8.85 14.1 3.63 -0.564 -1.634 2.095

26-09-01 8.4 14.1 -5.085 -0.071 0.631 -4.205

27-09-01 8.56 14.3 1.905 1.278 -0.136 -0.097

28-09-01 8.31 14.1 -2.921 -0.911 -3.649 -6.727

01-10-01 8.33 13.7 0.241 -2.829 -2.491 0.624

02-10-01 8.16 13.4 -2.041 -2.256 -3.773 -4.184

03-10-01 8.65 14.1 6.005 4.914 2.43 2.544 Compaq scores storage software win

04-10-01 8.85 14.1 2.312 0 0.36 2.726

05-10-01 8.82 14.5 -0.339 2.839 2.677 -0.636

08-10-01 9.05 14.9 2.608 3.037 4.142 4.037

Heirs of HP co-founder William Hewlett and the William R.Hewlett Revocable Trust say they'll vote against the mergerHP's board, except Walter Hewlett, reaffirms its support forthe merger and Fiorina's leadership.David Packard, son of HP co-founder David Packard, tellsCNBC he plans to vote against the merger.

09-10-01 9.01 14.7 -0.442 -1.34 -0.613 0.471

10-10-01 9.5 15 5.438 1.629 -1.238 1.456

11-10-01 9.89 15.9 4.105 6.48 4.594 1.46

12-10-01 9.92 16.2 0.303 1.38 2.095 1.20115-10-01 9.8 16 -1.21 -1.238 -0.997 -0.959

16-10-01 10.18 16.3 3.878 2.13 1.295 2.664


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17-10-01 9.76 15.9 -4.126 -2.699 -0.287 -0.916

18-10-01 9.52 15.5 -2.459 -2.27 -1.224 -1.111

19-10-01 9.8 16.1 2.941 3.935 3.403 2.139

22-10-01 9.65 16.1 -1.531 0.062 -1.835 -4.191

23-10-01 9.4 15.8 -2.591 -2.109 -1.467 -1.792

24-10-01 9.74 15.9 3.617 0.57 0.567 3.536

25-10-01 9.78 16 0.411 0.693 -1.003 -1.977

26-10-01 9.5 15.7 -2.863 -1.627 -2.103 -3.588

29-10-01 9.2 15.3 -3.158 -2.481 0.59 0.949

30-10-01 9 15 -2.174 -2.479 -0.253 0.782

31-10-01 8.75 14.8 -2.778 -0.87 -0.822 -2.79

01-11-01 9.15 15.2 4.571 2.834 -0.034 0.587

02-11-01 9.11 14.9 -0.437 -2.231 -2.548 -0.946

05-11-01 8.99 14.9 -1.317 -0.134 -1.915 -3.82

06-11-01 8.5 17.5 -5.451 17.272 15.473 -7.978 Hewlett family announces its opposition

07-11-01 7.99 16.9 -6 -3.209 -2.816 -5.541

08-11-01 7.99 16.2 0 -4.322 -4.588 -0.439

09-11-01 7.73 16.7 -3.254 3.527 3.372 -3.542

12-11-01 7.66 17 -0.906 1.614 1.884 -0.614

13-11-01 8.8 17.8 14.883 4.824 2.512 11.657 HPTelefonica-Samsung agreement

14-11-01 10 19.5 13.636 9.147 8.957 13.3 4th quarter results

15-11-01 10.7 19.5 7 0.051 -0.017 6.83

16-11-01 10.3 18.9 -3.738 -2.672 -2.227 -3.209

19-11-01 10.35 19 0.485 0.211 -1.127 -1.41420-11-01 9.63 18.5 -6.957 -2.792 -1.82 -5.708

21-11-01 9.67 18.1 0.415 -2.06 -1.388 1.254

23-11-01 9.8 18.4 1.344 2.048 0.607 -0.695

26-11-01 9.94 18.6 1.429 0.922 0.186 0.35

27-11-01 9.52 17.9 -4.225 -3.923 -3.008 -3.056

28-11-01 9.06 17.8 -4.832 -0.615 1.749 -1.688

29-11-01 9.6 18.9 5.96 6.078 4.809 4.156Walter Hewlett officially launches anti-merger effort by filingpapers with the SEC

30-11-01 10.15 19.4 5.729 2.759 2.888 5.829

03-12-01 10.15 18.9 0 -2.272 -1.161 1.436

04-12-01 10.79 19.8 6.305 4.702 3.073 4.01

05-12-01 11.65 20.5 7.97 3.633 0.844 4.095

06-12-01 11.11 20.6 -4.635 0.049 0.447 -4.169

07-12-01 11.32 20.7 1.89 0.827 1.83 3.179Compaq and HP issue join statement addressing PackardFoundations opposition

10-12-01 9.7 20.3 -14.311 -2.22 -0.159 -11.5811-12-01 9.49 19.4 -2.165 -4.393 -3.994 -1.698

12-12-01 9.79 19.2 3.161 -0.826 -0.815 3.1

13-12-01 9.39 18.6 -4.086 -3.384 -1.362 -1.408

14-12-01 9.48 18.5 0.958 -0.323 -0.698 0.371

17-12-01 9.49 18.4 0.105 -0.757 -1.985 -1.645 Dividends

18-12-01 9.11 18.1 -4.004 -1.253 -2.165 -5.324

19-12-01 9.02 18.3 -0.988 0.938 0.246 -2.007Fiorina and Capellas send letter to HP and Compaqshareholders to urge their support of the merger.

20-12-01 9.12 18.3 1.109 0 1.11 2.544HP's and Compaq's Canadian subsidiaries announce thatthe Canadian Competition Bureau has reviewed the mergerdeal and found no anti-competitive concerns.

21-12-01 9.94 18.6 8.991 1.475 0.969 8.224

24-12-01 9.67 18.4 -2.716 -1.131 -1.058 -2.694

26-12-01 9.78 18.5 1.138 0.654 0.176 0.41

27-12-01 9.93 18.4 1.534 -0.487 -1.298 0.352

28-12-01 9.89 18.4 -0.403 0.109 -0.272 -0.998

31-12-01 9.76 18.2 -1.314 -1.358 0.104 0.6

02-01-02 10.48 19.1 7.377 5.396 4.713 6.37 Introduces new wireless products

03-01-02 10.96 20.3 4.58 6.061 4.941 2.978

04-01-02 11.39 20.5 3.923 0.887 0.144 2.834

07-01-02 11.68 20.4 2.546 -0.635 0.237 3.656

In response to a "Dear Walter" letter that the HP board filedwith the SEC, Walter Hewlett issues statement saying thathe was advised by company counsel that the merger wouldbe approved with or without his board vote and that he couldOK the deal as a director and still reject it as a stockholder.Hewlett also stated that the merger "is clearly bad forstockholder value."

08-01-02 11.29 20.1 -3.339 -1.032 -0.53 -2.732

09-01-02 10.8 20.7 -4.34 2.979 3.635 -3.524

10-01-02 11 20.6 1.852 -0.53 -0.645 1.619

11-01-02 11.5 20.2 4.545 -1.939 -0.685 6.177

14-01-02 11.14 19.9 -3.13 -1.582 -0.739 -2.059

15-01-02 11.4 20.4 2.334 2.511 1.689 1.138 Walter Hewlett sends letter to HP stockholders saying thathe and the William R. Hewlett Revocable Trust don't supportthe merger and that shareholders should nix the deal.

16-01-02 11.1 19.8 -2.632 -2.891 -0.782 0.165


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17-01-02 11.8 20.8 6.306 4.945 3.717 4.557HP and Compaq report that company shareholders ofrecord as of Jan. 28, 2002, will be eligible to vote on theproposed merger.

18-01-02 11.52 20 -2.373 -3.894 -2.588 -0.67

HP board sends letter to shareholders saying that theplanned merger with Compaq makes sense because it willcreate a stronger company that better reflects the evolvinghigh-tech industry.

22-01-02 10.94 19.3 -5.035 -3.552 -2.574 -3.78

23-01-02 11.37 19.6 3.931 1.608 0.647 2.546

24-01-02 12.05 20 5.981 2.144 1.743 5.358

25-01-02 11.95 19.9 -0.83 -0.7 -0.78 -1.017

28-01-02 11.88 19.5 -0.586 -1.812 -1.741 -0.566

29-01-02 11.22 18.5 -5.556 -5.126 -1.446 -0.62

HP launches Web site, www.votetheHPway.com, to conveyinformation about the merger to the public. The movecounters www.votenohpcompaq.com, a site launched byWalter Hewlett.

30-01-02 11.99 19.4 6.863 4.916 3.47 4.816

Strategic alliance with DreamworksWalter Hewlett files report with SEC that's titled "LargeComputing Mergers Have Consistently Failed." He statesthat the report "clearly illustrates the extreme risk involved inthe proposed HP-Compaq merger."

31-01-02 12.35 19.6 3.003 0.669 -1.181 0.405 EC clears merger

01-02-02 12.1 19.5 -2.024 -0.512 0.433 -0.814

04-02-02 12.2 19.5 0.826 0.206 3.393 5.092

05-02-02 12 18.9 -1.639 -2.976 -2.417 -0.955

HP schedules shareholder vote on the merger for March 19.Compaq sets its shareholder vote on the deal for March 20.

HP files registration statement with SEC that contains adefinitive joint proxy statement/prospectus regarding themerger.Walter Hewlett begins mailing definitive proxy materials toshareholders plus a letter urging them to vote against themerger.HP unveils new channel initiative called partnerOne, whichintegrates all of its disparate channel contracts and partnerdesignations into a single program.

06-02-02 11.93 18.4 -0.583 -2.485 -1.682 0.434

07-02-02 11.66 18.4 -2.263 -0.271 0.168 -1.742

08-02-02 11.59 18 -0.6 -1.903 -3.744 -3.185

11-02-02 11.54 18.4 -0.431 2.217 0.441 -2.928

12-02-02 11.12 18.4 -3.64 -0.434 0.12 -2.961

13-02-02 11.4 18.6 2.518 1.035 -0.183 0.783

14-02-02 11.4 18.5 0 -0.485 -0.208 0.302

15-02-02 10.95 18 -3.947 -2.492 -1.047 -2.055

19-02-02 10.56 17.5 -3.562 -2.944 -0.501 -0.31

In a study submitted as part of an SEC filing, Walter Hewlettsays new investment in HP's printing/imaging, midrange andhigh-end computing businesses could boost the company'sshare price by $14 to $17 without a Compaq merger.Responding to Hewlett's filing, HP issues a statementsaying that "the merger with Compaq represents the singlebest way to create sustainable shareowner value across ourbusinesses."

20-02-02 10.65 17.5 0.852 0.286 -1.384 -1.5

21-02-02 10.29 17.2 -3.38 -1.769 0.246 -0.711

22-02-02 10.5 17.1 2.041 -0.872 -1.87 0.604

HP board sends letter to shareholders stating that WalterHewlett's arguments against the merger containinconsistencies and that he offers no viable alternative forboosting HP shareholder value. The letter came as Hewlettran ads in major U.S. newspapers with the heading, "TheMore You Know About the HP-Compaq Merger, the MoreYou'll Want to Vote No."

25-02-02 10.6 17.7 0.952 3.576 1.339 -2.171

26-02-02 10.4 17.7 -1.887 0.113 0.165 -1.893

27-02-02 10.2 17.7 -1.923 0.113 0.101 -2.017

28-02-02 10.14 17.8 -0.588 0.452 0.859 -0.11

HP and Compaq issue statements to deny claims by WalterHewlett, made in an SEC filing, that Fiorina and Capellaswould receive lavish pay packages if the merger goesthrough.

01-03-02 10.44 17.9 2.959 0.45 -2.379 -0.971

04-03-02 10.65 18.2 2.011 2.071 -0.359 -1.375

DividendsReuters reports that L.A. law firm Weiss & Yourman said itasked a judge to stop the shareholder vote on the HP-Compaq merger, and HP denied that an injunction had beenfiled to stop the vote.

05-03-02 10.58 18.3 -0.657 0.274 1.168 0.483Proxy firm Institutional Shareholder Services endorses theproposed HP-Compaq merger. Institutional investors standas the swing vote in the merger battle.

06-03-02 10.98 17.9 3.781 -2.078 -3.874 1.257Federal Trade Commission approves HP-Compaq merger,saying the deal wouldn't impair competition.

07-03-02 11.15 17.8 1.548 -0.893 -0.276 2.312


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08-03-02 11.8 18.3 5.83 2.986 2.289 4.804

California Public Employees Retirement System (Calpers),the biggest U.S. pension fund, says it will vote against theHP-Compaq merger. Calpers owns 7.6 million HP sharesand 6.5 million Compaq shares, or less than 1 percent of theoutstanding shares of each company.

11-03-02 11.27 18.6 -4.492 1.86 1.475 -5.092

12-03-02 11.12 18.3 -1.331 -1.987 -1.647 -0.944

13-03-02 11 17.9 -1.079 -2.192 -0.897 0.608

Putnam Investments, Compaq's largest single shareholderand one of HP's biggest shareholders, says it will vote forthe merger. Putnam owns 3.99 percent of Compaq's sharesand 2.5 percent of HP's shares.Banc of America Capital Management, one of HP's largestshareholders, says it will vote against the merger. The Bankof America investment arm owns about 6 million HP shares.

14-03-02 10.7 17.2 -2.727 -3.529 -3.368 -2.584

15-03-02 10.33 16.9 -3.458 -1.8 -3.21 -5.455

In an SEC filing, HP said that if the merger is approved, itexpects to incur charges of $450 million to $700 million "forseverance or relocation costs related to Compaqemployees, costs of vacating some facilities (leased orowned) of Compaq, or other costs associated with exitingactivities of Compaq" plus another $450 million to $700million in charges for similar issues involving HP employeesand facilities.The New York State Common Retirement Fund, the nation'sthe second-largest state pension fund, said it would vote its6 million HP shares against the merger. The fund's stakerepresents about 0.36 percent of HP's outstanding shares.

18-03-02 10.36 17.1 0.29 1.064 1.188 0.382

19-03-02 11.14 16.7 7.529 -2.341 -2.811 6.811

Fiorina claims victory for merger deal in unofficial HPshareholder vote. Hewlett calls result too close to call.Independent firm to issue certified ballot count in severalweeks.

20-03-02 10.82 16.2 -2.873 -3.176 -1.128 -0.161 By a 9-1 margin, Compaq shareholders approve the merger.

21-03-02 10.77 16.4 -0.462 1.609 1.463 -0.737

22-03-02 10.65 16.1 -1.114 -1.888 -1.304 -0.395

25-03-02 10.63 16.1 -0.188 -0.124 1.783 2.333

26-03-02 10.85 16.1 2.07 -0.249 -0.945 1.044

27-03-02 10.6 15.8 -2.304 -1.745 -2.378 -3.244

28-03-02 10.45 15.9 -1.415 1.015 0.749 -1.854

01-04-02 10.42 15.9 -0.287 -0.251 -0.111 -0.173

02-04-02 10.2 15.5 -2.111 -2.517 -1.388 -0.65

03-04-02 9.82 15.4 -3.725 -0.452 0.863 -2.011

04-04-02 9.58 15.3 -2.444 -0.713 -0.773 -2.602

05-04-02 9.56 15.1 -0.209 -1.502 -1 0.39908-04-02 9.59 15.2 0.314 0.796 0.502 -0.163

09-04-02 9.28 15.5 -3.233 1.645 2.536 -2.095

10-04-02 9.76 15.7 5.172 1.812 0.419 3.197

11-04-02 9.86 15.9 1.025 1.017 4.072 5.109

12-04-02 9.98 15.8 1.217 -0.566 -1.363 0.056

15-04-02 10.1 15.9 1.202 0.443 1.456 2.506

16-04-02 10.4 16.5 2.97 4.033 1.105 -1.095

17-04-02 10.68 16.6 2.692 0.303 0.608 3.031

18-04-02 10.82 16.2 1.311 -2.415 -2.189 1.543

19-04-02 11.13 16.6 2.865 2.661 2.628 2.743

22-04-02 10.73 16.2 -3.594 -2.23 -0.227 -0.942

23-04-02 10.2 16 -4.939 -1.295 -0.461 -3.881

24-04-02 10.36 15.3 1.569 -4.56 -3.612 2.783

25-04-02 10.46 15.4 0.965 0.982 1.221 1.214

26-04-02 10.15 15.1 -2.964 -2.398 -0.588 -0.575

29-04-02 10.3 15.1 1.478 0 1.329 3.211

30-04-02 10.15 15.2 -1.456 0.797 -0.524 -3.333

01-05-02 10.65 15 4.926 -1.383 -2.462 3.38

02-05-02 10.76 15.2 1.033 1.336 1.604 1.321

03-05-02 11 15.5 2.23 2.044 3.393 3.992

06-05-02 11 16.2 0 4.457 6.96 3.332

07-05-02 11 16.3 0 1.051 1.481 0.509 Combination day

* Source: HP-Compaq: The Merger Saga,crn.com

Date dCompaq dHP AR-HP AR_Cpq

Cumulative till 1 month before merger (3/8/01) 3.6869 -3.902 -4.58358 1.68544678

Cumulative till first day of full trading (4/9/01) -21.3555 -21.405633

Cumulative all period (7/5/02) -18.32 -24.88 -0.1511 0.04088038
http://www.crn.com/news/channel-programs/18818769/hp-compaq-the-merger-saga.htm;jsessionid=ezgNLKCURBljXy1JQ+QjEw**.ecappj03http://www.crn.com/news/channel-programs/18818769/hp-compaq-the-merger-saga.htm;jsessionid=ezgNLKCURBljXy1JQ+QjEw**.ecappj03http://www.crn.com/news/channel-programs/18818769/hp-compaq-the-merger-saga.htm;jsessionid=ezgNLKCURBljXy1JQ+QjEw**.ecappj03http://www.crn.com/news/channel-programs/18818769/hp-compaq-the-merger-saga.htm;jsessionid=ezgNLKCURBljXy1JQ+QjEw**.ecappj03


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Regression results

ERHP = - 0.051 + 1.278 RSP50

(0.19) (0.17) R2

= 0.22

ERCQ = 0.014 + 1.73 RSP500

(0.23) (0.20) R2

= 0.265

Appendix 2 HP and Compaq CEOs background information

Carleton S. (Carly) Fiorina was president and chief executive officer of Hewlett-Packard Company from 1999 to

2005. She served as chairman of the board from 2000 to 2005. Prior to joining HP, Fiorina spent nearly 20

years at AT&T and Lucent Technologies, where she held a number of senior leadership positions and directed

Lucent's initial public offering and subsequent spin-off from AT&T.

Capellas was President of Hewlett-Packard Company from May 2002 to November 2002. Before the merger of

Hewlett-Packard and Compaq Computer Corporation in May 2002, Mr. Capellas was President and Chief

Executive Officer of Compaq, a position he had held since July 1999, and Chairman of the Board of Compaq, a

position he had held since September 2000. Mr. Capellas held earlier positions as Chief Information Officer

Appendix 3 HP, SP500 and Dell stock price comparison chart


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Appendix 4 HP and Compaq percentage daily changes in stock prices

Figure 1

Figure 2


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Appendix 5 Did HP overpay for Compaq?

In order to see if HP overpaid in this acquisition, we compared the share exchange rate used in the merger

(0.6325 HP share to one Compaq share) to an average for 3 periods: 3 months, 6 months and 1 year. We usedthe average stock price of the HP and Compaq shares for the above mentioned periods multiplied with the

number of outstanding shares at the time of the merger. In the table below we can see that the overpayment

is 0.1442 higher when we look at a 3 months interval and it drops to 0.1047 for 1 year.

group 13 - hp_compaq

Documents