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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