the hp-compaq merger (1)

8/6/2019 The HP-Compaq Merger (1)

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THE HEWLETT-PACKARD AND COMPAQ

MERGER:

A Case Study in M&A

Group:

Kumar RaunakNikhil Garg Ashish AgarwalSanil GoelKartikeya Sharma


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DEFINITIONS

A merger is a combinationof two or more corporations

in which only onecorporation survives and

the merged corporations goout of business.

Statutory merger is amerger where the acquiring

company assumes theassets and the liabilities of

the merged companies.

A subsidiary merger is amerger of two companieswhere the target companybecomes a subsidiary or

part of a subsidiary of theparent company


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TYPES OF MERGERS

Horizontal Mergers- between competing companies

Vertical Mergers- Between buyer-seller relation-ship companies Conglomerate Mergers

- Neither competitors nor buyer-seller relationship


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MOTIVES AND DETERMINANTS OF

MERGERS Synergy Effect

- Operating Synergy- Financial Synergy Diversification Economic Motives- Horizontal Integration- Vertical Integration- Tax Motives

NAV= Vab (Va+Vb) P E

Where Vab = combined value of the 2 firms

Vb = market value of the shares of firm B.

Va = As measure of its own value

P = premium paid for B

E = expenses of the operation


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HP PRE- MERGER

Established in1936 by 2 Stanford

engineers.

In 1990s HP hadan enviable growth

rate of 20%.

HP was consideredas an one-stop

shop for businessapplications:

Unix serversE-commerceapplication

softwareHosted services

Networkmanagement Integration services

PCs, printers, inkcartridges


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HP : C OM P ETITORS

IBM Servers, PCs, storage and IT servicesDell

PCsCanon Printers, fax, copiers, optical equipmentCompaq Pcs, Servers, Pocket computers


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COMPAQ - PRODUCTS

PC, (desktop andportable)

Manufacturing andselling

Servers Manufacturing,

selling plus services

Pocket Computer(handheld computer)-Manufacturing and

selling

Storage manufacturing,

selling, services andon-line storage


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COMPAQ- PRE MERGER

Branding competition :Compaq was a reference

and standard leader.Founded in 1982.

Acquired TandemComputers in 1997 whichlead to doubling of sales.

Acquired DEC at the costof $9.6 billion which leadto its access to 22,000

people in consulting andservices domain.

Product/service emphasis(strategic partnerships

with Microsoft, Oracle).Client base stable.

In 2000, emphasis on costreduction and increase in

gross margin.Competitor pressure


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C OM PAQ: C OM P ETITORS

IBM Servers, PCs, storage and IT services.Sun Microsystems

ServersDell PCsHP

PCs, IT services and pocket computersPalm

Pocket computers


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PROBLEMS

Pressurized andloosing market

share since 1998.

Integration withTandem and DEC did

not take place assmoothly as thought.

Increasingly loosing market share toDELL.


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Carly Fiorina: Mike Capellas:C.E.O. of Hewlett- Packard C.E.O. of Compaq


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THE MERGER: DEAL STRUCTURE

Structure: Stock-for-stock merger Exchange Ratio: 0.6325 of an HP share per

Compaq share Value: Approximately $25 billion Ownership: HP shareholders 64%; Compaq

shareholders 36%.


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The HP/Compaq merger. By The Numbers:

HIGH-END High-end Unix Servers: Worldwide (2000)

Factory Revenues ($m) Market Share

Hewlett-Packard 512 11.4% Compaq 134 3.0%

Closest Rival: Sun Microsystems with factory revenues of $2.1 billion and a 47.1% market share

High-end Unix servers: US (2000) Factory

Revenues ($m) Market Share Hewlett-Packard 124 6.1% Compaq 66 3.3%

Closest Rival: Sun Microsystems with factoryrevenues of $1.2 billion and a 60.1% market share

MID-RANGE Mid-range Unix servers: Worldwide (2000)

Factory Revenues ($m) Market Share

Hewlett-Packard 3,673 30.3% Compaq 488 4.0%

Closest Rival: Sun Microsystems with $2.8 billion infactory revenue and a 23.5% market share

Mid-range Unix servers: US (2000) Factory

Revenues ($m) Market Share Hewlett-Packard 1552 28.2% Compaq 296 5.4%

Market Leader: Sun Microsystems with revenues of $1.7 billion and a 30.5% market share)

PERSONAL COMPUTERS PC Shipments: Worldwide (in thousands of units)

Hewlett- Packard Compaq

Units (q2/01) 2,065 3,590 Share (q2/01) 6.9% 12.1% Units (q2/00) 2,260 4.011 Share(q2/00) 7.4% 13.2% Growth -8.6% -10.5%

PC Shipments: US(in thousands of units) Hewlett- Packard Compaq

Units (q2/01) 991 1,332 Share (q2/01) 9.4% 12.7% Units (q2/00) 1,221 2,293 Share(q2/00) 10.7% 20.1% Growth -18.8% --21.3%

Market leader: Dell Computer Corp. with a 24% market share and a 9.8% growth in the same period.

LAPTOPS/NOTEBOOKS SMART HANDHELDS

Worldwide shipments of portable computers(thousands of units)

Hewlett- Packard Compaq

Units(q4/00) 318 817 Share(q4/00) 4.5% 11.6% Units(q4/99) 139 739

Shipments(in 000s)

Share2000 Rank

Hewlett-Packard 254 3.8% 4 Compaq 129 1.9% 9

Market Leader: Palm with a 52.9% market share and

3.53 million units.


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TIMELINE OF T H E HP A ND C OM PAQMERGER

2001/06/22 Carly Fiorina visits Michael Capellas for licensing HP software issue,but wound up a merger talking.

2001/09/03 Hewlett- Packard announces it will buy Compaq Computer in a dealworth $25 billion.

2001/11/07 The Compaq Board of Directors meets and reaffirms its strong support for the proposed merger.

2002/01/17 Compaq shareowners vote on the merger proposal. 2002/03/05 The proposed merger gets a positive recommendation from

Institutional Shareholder Services report. 2002/03/19 HP shareholders vote on the merger; HP declares victory in Compaq

merger base on preliminary vote. 2002/03/28 Walter Hewlett files a lawsuit asking the Delaware Chancery Court to

overturn the vote by HP shareholders to approve the deal.

2002/04/30 WalterH

ewlett abandons his opposition after a Delaware judge rulesthat Hewlett- Packard's shareholder vote was legal 2002/05/01 HP announces final results of vote count; 838,401,376 HP shares

were voted in favor of the deal, compared with 793,094,105 sharesvoted against the proposal.

2002/05/03 HP completed merger by acquiring Compaq Computer, valued at anestimated $19 billion.


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QUESTIONS

Objective of the merger Risks involved in the merger

Fiorina Vs Mark Hurd If you were Hurd what decisions would you have

taken


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OBJECTIVES OF MERGER

Achieve Economies of Scale and generate

cost savings.

Have a greater saywith the suppliers.

HPQ would becomethe biggest in servers

category.

2nd largest in the PCmarket behind Dell.

HPQ combinedexpertise in the highend storage wouldbecome biggest in

the world.

Merger would createhuge customer basewhich in turn would

create a stablestream of cash flow.

Cost cutting in termsof labor costs by

removing redundantprofiles.


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THREATS

Neither of company hada strong low end PC

business.

Neither had as strong adirect selling network like

Dell.

Had potential risk in

terms of directing resources from profitablebusiness(imaging) toweak business( PCs).

Historical precedents of integration problems and

failure of technologyrelated M&A.


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CHALLENGES: POST MERGER

Choosing P roducts Fix the PC business

Optimize the server business Enhance the service & consulting CUT COSTS WHILE MONITORING REVENUES Cut costs by $3b Keep revenues from shrinking more than 5 %INCREASE MORALE & AVOIDING CULTURE CLASHES


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TRACKING THE STOCK PRICES


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HPQ FROM 2002-2004

Despite refining the value chain HPQ failed toleverage the resources at its disposal.

The companys US inkjet printer market share fell

to 48% the end of 2004 from 57.4% in thepreceding year, and its US laser printer marketshare declined to 38% from 45.7% in the sameperiod.

In the fiscal year ending October 31st 2004 thecompany posted operating profit margins of only6.3% and the PSG division reported margins of only 1.2%.


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FIORINA VSHURD

In terms of strategy Fiorina hadsome good plans withintegrating different businessesof HP into one.

Execution of the strategies wereweak and couldnt yield thedesired synergy and results.

Deal that was struck wasexpensive for HP in terms of theresults expected.

Fiorina missed the opportunityof inculcating a new culture inthe new organization.

In terms of strategy Hurdwas more into damagecontrol and tried focusing on HPQ s strength.

Execution of thesestrategies were strong asbifurcated the imaging andthe PC business.

Hurd focused onconsolidating the dealmade and worked onachieving maximumsynergy.


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IF YOU WERE HURD WHAT YOU WOULDHAVE DONE

HPQ currently is pursuing both direct selling as well

as the indirect selling channel. As Hurd I would

choose the direct selling model and save costs.

HPQ still has a smallpresence in the lucrativeConsulting business as

Hurd I would focus more

on the consulting business.

Move out of the PCbusiness and focus moreon the mobile notebook

business.

Divert resources from

less profitable businessto more profitablebusiness like P rinting &

Imaging

the hp-compaq merger (1)

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