hp compaq merger final

HP-Compaq Merger

Presented byAshish Kumar Jain | Indrani Haldar

Needhi Govil| Sandeep Sharma | Vivek Vijayan

Case Analysis

HRM in Mergers & Acquisitions

Introduction to HP

• Well-respected systems vendor• Smaller, but worthy competitor to IBM• Competes mainly in the hardware business with

desktops and servers• Lacking in the services business • Undisputed leader with its line of PC printers

April 10, 2023 The HP-Compaq Merger: Case Analysis

HP logo

Over the Ages….

HP Products

3 Major Business Segments– Imaging and Printing Systems

• 1st in global printer market in 2001– Computing Systems

• 4th in PC and server markets in 2001– Information Technology Services

• 8th in global services market in 2001


Introduction to Compaq

• Compaq sales leveled off with added competition from Dell

• Compaq was best known for its personal computer offerings

• After paying $5.4 billion to finance a merger with Digital Equipment, Compaq eliminated overlap by cutting thousands of jobs worldwide


The HP way

1. Profit, To recognize that profit is the best single measure of our contribution to society and the ultimate source of our corporate strength

2. Customers. To strive for continual improvement in the quality, usefulness, and value of the products and services we offer our customers

3. Field of Interest. To concentrate our efforts, continually seeking new opportunities for growth but limiting our involvement to fields in which we have capability and can make a contribution

4. Growth. To emphasize growth as a measure of strength and a requirement for survival


5. Employees: To provide employment opportunities for HP people that include the opportunity to share in the company's success, which they help make possible

6. Organization: To maintain an organizational environment that fosters individual motivation, initiative and creativity, and a wide latitude of freedom in working toward established objectives and goals

7. Citizenship: To meet the obligations of good citizenship by making contributions to the community and to the institutions in our society which generate the environment in which we operate

page 8April 10, 2023 The HP-Compaq Merger: Case Analysis

The HP way

HP Pre-Merger

• Experienced revenue growth but share price still declined

• Faced recession in 2001• Pay cuts and layoffs• Stock price continued to fall• Began to consider acquisitions


Financial Crisis faced by HP

HP Compaq Deal Overview

In September2001 HP announces the Merger with Compaq

Creates an $87 billion global technology leader, with the industry's most complete set of IT products and services for both businesses and consumers

New HP would be the #1 global player in servers, imaging & printing, and access devices (PCs & hand-helds), as well as Top 3 player in IT services, storage and management software

The combination furthers each company's commitment to open, market-unifying systems and architectures and aggressive direct and channel distribution models


Combined company can create substantial shareowner value through significant cost structure improvements and access to new growth opportunities

Transaction expected to be substantially accretive to pro forma EPS in first full year of combined operations

The merger is expected to generate cost synergies of approximately $2.0 billion in fiscal 2003, the first full year of operations

Fully realized synergies are expected to reach a run rate of approximately $2.5 billion by mid-fiscal 2004

New HP would have operations in more than 160 countries and over 145,000 employees.


HP Compaq Deal Overview

HP Compaq Fact Sheet

Transaction Summary:

Structure: Stock-for-stock merger

Exchange Ratio: 0.6325 of an HP share

per Compaq share

Current Value: Approximately $25 billion

Ownership: HP shareholders 64%;

Compaq shareholders 36%

Accounting: Purchase

Expected Closing: First half of 2002

Key Facts (last 4 qtrs)

HP Compaq Pro Forma Combined

Total Revenues $47.0 billion $40.4 billion $87.4 billion

Assets $32.4 billion $23.9 billion $56.4 billion

Operating Earnings $2.1 billion $1.9 billion $3.9 billion

Leadership: Board of Directors: 5 Compaq directors

to join HP Board

Chairman and Chief Executive Officer: Carly Fiorina

President: Michael Capellas

Chief Financial Officer: Robert Wayman

Imaging & Printing: Vyomesh Joshi

Access Devices: Duane Zitzner

IT Infrastructure: Peter Blackmore

Services: Ann Livermore

Shareholder Opposition

Hewlett’s Rationale• Exaggerated importance of the scale of the

computer business• The merger will expose HP to brutal low profit PC

business• Dilute the value of the lucrative printing business

Packard’s Rationale• The new strategies counter the company’s core

values


Value proposition for the Shareholders

Unique Opportunity: Bolsters enterprise’s position, Accelerates improvement, delivers key benefitsStronger Company: Increased profitability & OPM, Complementary R&D, Improved Project FinancialsCompelling Economics: 13% accretion to HP’s earnings, $2.5 Bn annual synergies, value created by combination outweighs premiumAbility to Execute: focus on value creation, experienced leadership

Resulting business portfolio is worse than existing HP portfolio

Acquisition will not solve HP’s Strategic problems

Integration-risk substantial

Financial impact on HP stakeholders in unattractive


Management’s Reasons For Merger

1. Improved Economics and Innovation

2. Complementary Leadership in Key Markets

3. Strengthened Business Provides Critical Mass in Key Growth Market

4. Financial Benefits


Reasons Against the Merger

1. HP’s Business Portfolio Will Be Worse

2. The Integration Risk of the Proposed Merger is Substantial

3. Negative Financial Impact on HP Stockholders

4. HP’s Strategic Position Will Not Materially Improve


Strategic dynamics of Acquisition Integration


Process 2: Creating the integration plan

Process 1: Formulating the Integration Logic and Performance

goals

Process 3:Executing Operational Integration

Process 3:Executing Strategic Integration

Short term performance

Long term performance

Changing Environment

Time

• Merger would create potential competitive advantages from integration, greatly improving its product-market position across the computing business

• HP was strong in mid-range and high end UNIX servers, a weakness for Compaq; while Compaq was strong in low end industry standard(Intel) servers, a weakness for HP

• Compaq was clear #2 in the PC business and stronger on the commercial side, but HP was stronger on the consumer side. Together they would be #1 in market share

• HP will become #3 in services

• The merged entity would have scale advantages; gaining bargaining powers with suppliers

• With the stronger portfolio , HP would gain “scope” advantages by selling across the board portfolio

Formulating the Integration Logic and Performance goals


HP SegmentOperating Profit

Margin

Enterprise 9.20%

PCs 3.00%

Services 13.70%

Imaging and Printing (no estimate)

Estimated 2004 Operating margins

projected by HP pre-Merger

HP Segment

2004 Projected Operating

Earnings((million$)

Enterprise 246800.00%

PCs 1068.00%

Services 2678.00%

Imaging and Printing 2482.00%

Estimated 2004 Earnings projected by HP Pre-Merger

Financial performance projections at the time of merger announcement


Selling the Integration logic externally and internally

• Initial response to the intent to merge was mostly negative

• Michael Dell – “ The dumbest deal of the decade….”

• Opposition from Walter Hewlett, David Packard and other family members

• There were financial risks associated with the integration as cost of capital would increase because of greater volatility of PC business

• Mgmt. had to convince HP’s shareholders to vote in favor of logic based on scale and scope, convince U.S. government and the European Commission of the legality of the proposed merger


The Integration plan

• The top executive positions for the combined companies named prior to the announcement of the merger

• Integration team formed to work with the new company’s executive committee to agree on – Short term and long term goals, – Define how the new company would work, – Develop plans for strategic and operational integration

• Integration team to start multi year initiatives to develop– HP’s direct distribution model(to compete with Dell) and – Global solution delivery capability (to compete with IBM)

• Pre merger HP and Compaq offered retention bonuses to selected employees to ensure success of the merger


Executing Operational Integration

• Integration team presented a monthly report to all executive committee members and was reviewed at their meetings

• Short term synergy goal of $2.5 billion $ was exceeded by over $1billion

• Tasks related to people selection, reduction plan, pay systems were implemented on schedule

• Procurement savings plan was also implemented rapidly. $1.1 billion saved in first 6 months in procurement

• Failure to pick up key customer concerns• Failing to revise original assumptions cause of internet

bust because of no clear feedback loop to the preceding part of the process

• HP falling short of its long term goalsApril 10, 2023 The HP-Compaq Merger: Case Analysis

HP Segment

2002OPM

2003 OPM

2004 OPM

2004Estimated

OPM

Enterprise

-2.00%

0.97% 1.14% 9.20%

PCs-

1.70%0.10% 0.85% 3.00%

Services11.10

%9.17%

11.02%

13.70%

Actual Operating profit margin

HP Segment2004

Projected OE(million $)

2004 Actual OE

Enterprise 2468 173

PCs 1068 210

Services 2678 1263

Imaging & Printing

2482 3847

Reduced Earnings

Financial performance results - 2004


Executing strategic integration

• Failed to adjust goals in light of changing environment

• Remaining operational integration tasks related to corporate culture, IT integration

• Competing with Dell- Top management should have driven HP’s direct business model more aggressively to measure against Dell’s projected capabilities by 2004

• Competing with IBM- Top management should have looked to acquire the necessary expertise as part of a more aggressive plan to close the gap with IBM’s capabilities. It needed to develop capabilities to serve global accounts.


Process 2: Creating the integration plan

Process 1: Formulating the Integration Logic and Performance

goals

Process 3:Executing Operational Integration

Process 4:Executing Strategic Integration

Strong

Strong

Strong

Strong

Weak

Weak

• Exceeded short term performance goals

• Failed to revise long term performance goals

• Failed to maintain effective strategic change capability

• Missed long term performance goals

Changing Environment

Time

Role of HR in HP – Compaq merger

• Set up clear, open & regular communication Intranet portal started to disseminate information quickly “Fast start” – face-to-face new team discussion meetings

• People Strategy program Stabilize – new HP foundation Mobilize – high performance workplace Energize – best place to work

• “Clean room” discussions – planning the integration

• Culture included in overall integration

• Linking organization design with overall business strategy

Employee selection process


Role of HR in HP – Compaq merger

• Adopt & go methodology no dual systems, processes or policies swift decisions regarding HR practices

• Creating a global job structure common system of job codes, titles & functions

• Creating a global grade structure common pay ranges across all countries

• New reward system introduced that acted as a motivator

• “Voice of the workforce” survey evaluates level of employee engagement


Recap of what happened in the background

page 30April 10, 2023 The HP-Compaq Merger: Case Analysis April 10, 2023 The HP-Compaq Merger: Case Analysis

What happened after 2005


HP Timeline (2005 – 2006)

2005• Acquired Snapfish, online photo service company• Acquired Scitex Vision, industrial wide-format digital printing

2006• Acquired VoodooPC, high-end gaming PC provider• Acquired Mercury Interaction, IT management software and services

company• Legal investigations –board members leaked confidential information

to media• Formal inquiry from Securities and Exchange Commission• Shareholder lawsuits


HP TimeLine (2007)

2007• HP & Wataniya Telecom Algeria – advanced billing solution to support

new mobile services

• Established research lab in St. Petersburg, Russia (growing economy)

• Expansion of printing, PC & software businesses

• Removed itself from NASDAQ listing to reduce the cost of fees and admin duties

• Filed patent infringement lawsuits against Acer

• Filed Print cartridge and ink formulation patent infringement case against Pelikan Hardcopy

• Awarded 7-year contract for technology services with NASA worth $5.6 billion

• Entered into agreements with 30 content providers for their media libraries (4,000 movies, TV, films, etc) for production & distribution through HP Video Merchant Services


HP TIMELINE (2008)

2008• HP & Unilever signed a 7-year outsourcing contract for the

management of Unilever’s technology infrastructure• Sara Lee renewed its infrastructure outsourcing services contract for

7-years and from 10 countries to 35• HP & Foxconn started constructing a manufacturing facility in Russia

for the production of HP PCs with an investment of $50 million• Created HP & Novell alliance for identity and security management

solutions – HP sells Novell products, Novell manages technology• HP & Acer resolved all claims between them• New radio frequency identification (RFID) technology to secure and

improve audit controls in the data center• US Air Force contract for desktop, laptop, and services• Joined with Intel & Yahoo, created a cloud computing research and

education data center• Acquired Electronic Data Systems Corp (EDS), global technology

services, for $13.9 billionApril 10, 2023 The HP-Compaq Merger: Case Analysis

HP Timeline (2009 – Present)

2009• HP & Sun Microsystems agreement – HP to distribute and provide

software support for Sun’s OS on HP’s server• 10-year contract with Avivia (insurance) to manage 2 data centers for

$1 billion• 12-year contract with British Columbia Ministry of Labour and Citizens’

Services for hosting and data center services for $586 million• 11/11 – Acquires 3COM, global enterprise networking solution, for $2.7

billion


HP Today

• Total Revenue: $118,364 million (2008)– 13.5% growth over prior year

• Net Income: $8,329 million (2008)– 14.7% growth over prior year

• CEO: Mark Hurd– Started on April 1, 2005


HP Market Share

• Leading global PC market for shipments– 2006 – Took market

leadership from Dell– 18% HP, 14% Dell, 11%

Acer, 7% Lenovo (2008)

• Leading global server market– 30% market share in 2008

• Leading blade servers segment– 47% HP, 26% IBM (2008)

• Leading global printers market– 40% market share in 2008– Competitors: Xerox, Canon

• Storage market– EMC, HP (2008)

• IT services– 2nd largest player (EDS

acquisition in 2008)– Competitors: Accenture, IBM

• Branding– #12 in Top 100 Best Global

Brands (Interbrand, 2008)– #1 in US, #10 in world for

Environment, Social Impact Ratings (The Economist, 2008)


PC Shipments for 3Q09 (US & INT’L)

Source: IDC Worldwide, Quarterly PC Tracker 10/09


HP Structure Now

7 business segments Technology Solutions Group• Enterprise Storage and Servers (ESS)• HP Services (HPS)• HP Software

Personal Systems Group (PSG)

Imaging and Printing Group (IPG)

HP Financial Services (HPFS)

Corporate Investments


So what’s the Verdict?

• They did manage to save $3 billion with the merger, successfully accomplishing their main goal of reducing costs of $2.1 billion

• However, that came at the price of firing 44,000 employees over the last 3 years– Original estimate: 15,000-17,000

• Success/ Failure? Let time decide…


Thank You


hp compaq merger final

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