HP – COMPAQ:

A FAILED MERGER?

Annadurai Anbarasu

CONTENTS

• Background HP & Compaq

• Why Merger ? Reasons?

• Does it make sense? Positives and Negatives of Merger

• Merger Strategy

• Challenges & SWOT Analysis

• Achieved Benefits for Shareholders and Customers

• Present status – Leadership across portfolio

• Conclusion

BACKGROUND – HP

1939 A new

company; HP inventsfirst product

1994Planet

Partners program launched

1999

Agilent Spin-off

1957Going Public

1966 HP enters computer industry;HP Labs opens

1st HP Computer

1972 Replacing the slide rule—HP

invents the pocket

calculator

1980 Our first PCs

1984 A print

revolution: HP

introduces both the

ThinkJet and the LaserJet

2002HP-

Compaq merger

2005Halo

Collaboration Studio

2008Commitment

to cloud computing

30s 00s90s80s70s60s50s

1959Going global

BACKGROUND – COMPAQ

1982 1984 1990 1997 1998 2000 2002

Rod, Jim and Bill Founded COMPAQ

Introduced Deskpro 286/386 based systems

Entered Server Market

Tandem Acquisition

DEC Acquisition

No 1 in PC worldwide

HP Acquired Compaq

WHY MERGER?HP and Compaq suffer similar risks of ‘Standing still’• Not able to respond to the changing customer requirements with smaller product mix

Increase competition with major competitors like IBM, DELL

Cut Costs by US$3 billion annually within 3 years & Increase earnings for shareholders

Merger will enhance business segments as individual and complimentary each other like supply chain

Face the challenge of a Shrinking market.

HP-COMPAQ MERGER - POSITIVES

Improved Economics and Innovation• Combined company creates economies of scale• Direct sales channel • More flexible distribution model

Complementary Leadership in Key Markets• Industry leading product line in entire server category• Industry leader in enterprise storage segment and

storage area networks• Broader portfolio of products and services

Strengthened Business Provides Critical Mass in Key Growth Market• 65,000 IT architects in 160 countries accelerates

growth• Better customer loyalty• Leading position in mission-critical services, and

multivendor supportFinancial Benefits• Estimated $2.5 billion in annual cost savings by mid-

2004• Would allow HP to increase investment in the imaging

and printing business

HP-COMPAQ MERGER - NEGATIVES

HP’s Business Portfolio Will Be Worse

• Increased exposure in unprofitable PC business• PC market was expected to shrink

The Integration Risk of the Proposed Merger is Substantial• No significant merger involving computer companies

had ever met expectations: ex. Compaq/Digital, Tandem..

• HP management had no experience with large mergerNegative Financial Impact on HP Stockholders• Dramatic drop in stock price after proposed merger

was announced• Wall Street predicted low estimates for future financial

performance

HP’s Strategic Position Will Not Materially Improve• Neither company had a profitable PC business model• Neither company had successfully transitioned to a

direct distribution model

MERGER TRANSACTION SUMMARYItem Proposal

Structure Stock-for-Stock merger

Exchange Ratio 0.6325 of an HP share per Compaq share

Current Value Approx. US 25 Billion

Ownership Hp Shareholders 64%; Compaq shareholders 36%

Accounting Purchase

Expected Closing First half of 2002

KeyFigures

FY02

FY02 – in US$ billion HP Compaq Combined

Revenue 47.0 40.4 87.4

Assets 32.4 23.9 56.4

Operating earnings 2.1 1.9 3.9

Market Capitalization 45.11 20.99 66.10

HP & COMPAQ

WHAT IS STRATEGY?

MARKET REACTION

• US $ 13 Billion lost in first 2 days (HP & COMPAQ combined)

• 17% loss in next 2 weeks

• At the same time the competitors like:

• DELL went up by 80%• Lexmark went up by 60%

PRE-MERGER BCG MATRIX

Storage

Laptops & Desktops

Servers

On-line storage and IT services

Pocket computers (PDA)

Pocket computers (PDA)

Laptops & Desktops

Servers

Printers, Printer supplies

Ind

ust

ry G

row

th

Rate

Hig

hLo

w

Relative Market shareLow High

Hig

hLo

w

POST-MERGER BCG MATRIX

Software

PC’s/Desktops

Servers

Printers, Printer supplies

Storage

Laptop/Notebooks

Services

Ind

ust

ry G

row

th

Rate

Hig

hLo

w

Relative Market shareLow High

CHALLENGESCompetition : As HP and Compaq smooth out their merger, the industry – and their competitors – move on to bigger and better things

Blending in : The merged company needs to be a “hybrid enterprise

Meshing cultures : INCREASE MORALE & AVOIDING CULTURE CLASHES HP: “deliberative, thorough decision-making”Compaq: “fast decision-making and marketing”

CHOOSING PRODUCTS

• Fix the PC business• Optimize the server

business• Enhance the service &

consulting

Convincing customers: Customers want a clear “migration path,” especial with regards to discontinued offerings

Cost: Cut Costs while monitoring revenues (about 3B)

Internal IT: Integrating internal IT applications

SWOT ANALYSIS – POST MERGERTh

reats

Op

port

un

itie

s

Strengths Weaknesses

Confront Avoid

Exploit Search

Competitive EnvironmentEmployee Morale

Economic Downturn

Organizational Culture conflict

Innovation

Integration

Customer Loyalty

Cost Saving

Market Share

Overlapping ManagementOverlapping product lines

ACHIEVED BENEFITS FOR CUSTOMERSHP now offers a one-stop shopping experience for global

corporate customers

The economies of scale have helped

HP focus on its legacy of

manufacturing innovation

Ease of doing business –

Enhanced supply and demand

visibility

Elimination of non-value-added steps, such as administration, and costs

Direct selling capabilities

Broader product portfolio

ACHIEVED BENEFITS FOR SHARE HOLDERS

In mid-July 2007, Five years after the merger announcement, –

Shareholder returns were up 46 percent.

Over the same period:The Standard & Poor's IT index had sunk 9 percent

Competitors like:IBM was down 23 percentDell was up only 2 percent

Worldwide market share data for calendar Q4 2010LEADERSHIP ACROSS THE PORTFOLIO

MARKET SHARE POSITION

Blade Servers 53.4% #1x86 based Servers 38.5% #1Unix + Linux + Windows Servers 34.2% #1Branded Tape Drives 38.0% #1Automated Software Quality 39.0% #1Distributed System Management Software 13.6% #1

Inkjet printers 47.7% #1Laser printers 36.2% #1Workstations 44.5% #1Notebooks 20.2% #1Desktops 18.3% #1Thin Clients 28.5% #1

MARKET SHARE POSITION

IT Asset Management Software 18.3% #2IT Services 6.0% #2Outsourcing 8.6% #2Ethernet Switches 10.6% #2

CONCLUSION"The merger accomplished what HP and Compaq set out to do

in the first place, providing the critical mass and reach needed to ensure a long-term role in an industry undergoing

a fundamental transition,“ "This deal enabled the merged company to grow revenue and

profits in an increasingly competitive marketplace.“Jean S. Bozman, VP–Research, International Data Corporation. 8th Nov 2006

Many predicted HP+Compaq would be 1 + 1 = 1

Some predicted HP+Compaq would be 1 + 1 = 2

Very few predicted the reality HP+Compaq would

be 1 + 1 = 3A SUCCESSFUL MERGER

Q & A