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Failure mergers

by Niyati Ojha on November 2, 2008

It‟s no secret that plenty of mergers don‟t work. Those who advocate mergers will argue that themerger will cut costs or boost revenues by more than enough to justify the price premium. It cansound so simple: just combine computer systems, merge a few departments, use sheer size to

force down the price of supplies and the merged giant should be more profitable than its parts. In

theory, 1+1 = 3 sounds great, but in practice, things can go awry.

Historical trends show that roughly two thirds of big mergers will disappoint on their own terms,

which means they will lose value on the stock market. The motivations that drive mergers can be

flawed and efficiencies from economies of scale may prove elusive. In many cases, the problemsassociated with trying to make merged companies work are all too concrete.

Coping with a merger can make top managers spread their time too thinly and neglect their core

business, spelling doom. Too often, potential difficulties seem trivial to managers caught up inthe thrill of the big deal.

The chances for success are further hampered if the corporate cultures of the companies are very

different. When a company is acquired, the decision is typically based on product or market

synergies, but cultural differences are often ignored. It‟s a mistake to assume that personnelissues are easily overcome. For example, employees at a target company might be accustomed to

easy access to top management, flexible work schedules or even a relaxed dress code. These

aspects of a working environment may not seem significant, but if new management removesthem, the result can be resentment and shrinking productivity.

WHAT IS A FAILED MERGER? 

A failed merger can be understood in two ways: Qualitatively, whatever the companies had in

mind that caused them to merge in the first place doesn‟t work out that way in the end.Quantitatively, shareholders suffer because operating results deteriorate instead of improve.

Studies reveal that approximately 40% to 80% of mergers and acquisitions prove to be

disappointing. The reason is that their value on the stock market deteriorates. The intentions and

motivations for effecting mergers and acquisitions must be evaluated for the process to be a

success. It is believed that when two companies merge the combined output will increase the

 productivity of the merged companies. This is referred to as “economies of scale.” However, thisincrease in productivity does not always materialize.

Here‟s a list of notorious failed mergers that evaluated in one way or another: AOL/TimeWarner, HP/Compaq, Alcatel/Lucent, Daimler Benz/Chrysler, Excite/@Home, JDS

Uniphase/SDL, Mattel/The Learning Company, Borland/Ashton Tate, Novell/WordPerfect, and

National Semiconductor/Fairchild Semiconductor.

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Some failed so spectacularly that the combined company went down the tubes, others resulted in

the demise of the executive(s) that masterminded them, some later reversed themselves, andothers were just plain dumb ideas that were doomed from the start.

There are several reasons merger or an acquisition failure. Some of the prominent causes are

summarized below:

  If a merger or acquisition is planned depending on the (bullish) conditions prevailing in

the stock market, it may be risky.

  There are times when a merger or an acquisition may be effected for the purpose of 

“seeking glory,” rather than viewing it as a corporate strategy to fulfill the needs of thecompany. Regardless of the organizational goal, these top level executives are more

interested in satisfying their “executive ego.”

  In addition to the above, failure may also occur if a merger takes place as a defensive

measure to neutralize the adverse effects of globalization and a dynamic corporateenvironment.

  Failures may result if the two unifying companies embrace different “corporate cultures.”

It is traditional to assume that acquisitions fail. In 1987, Harvard professor Michael Porter

observed that between 50 and 60% of acquisitions were failures. There have been several other

studies since then, and the results have continued to support his conclusions. In 1995, forexample, Mercer Management Consulting noted that between 1984 and 1994, 60% of the firms

in the “Business Week 500″ that had made a major acquisition were less profitable than their 

industry. In 2004, McKinsey calculated that only 23% of acquisitions have a positive return oninvestment. Academic research in strategy and business economics have taken these conclusions

further, suggesting that acquisitions destroy value for the acquiring firm‟s shareholders, although

they create value for the shareholders of the target firm, something that was confirmed by a

recent study carried out by the Boston Consulting Group (2007). Of course results varydepending on the type of acquisition, the similarity of the two protagonists‟ industry, theinternational or domestic nature of the operation, etc., but the overall trend remains the same.

It would not be correct to say that all mergers and acquisitions fail. There are many examples of 

mergers that have boosted the performance of a company and addressed the well-being of its

shareholders. The primary issue to focus on is how realistic the goals of the prospective mergerare.

Companies merge when, for one reason or another, their strategic plans indicate they should.

That being the case, there must also be operating synergies between the two companies. In a

nutshell, that means the whole will be financially healthier than the sum of the parts. Said

differently, at some point after the merger is complete and the companies are integrated withredundant functions eliminated, shareholder value increased. It‟s that simple theoretically. 

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Apart from the above mentioned reasons, given below are some more reasons which result in

failed mergers:

1.  Lack of Communication

2.  Lack of Direct Involvement by Human Resources

3.  Lack of Training4.  Loss of Key People and Talented Employees

5.  Loss of Customers6.  Corporate Cultural Clash

7.  Power Politics

8.  Inadequate Planning

While it is true that some of these failures can be largely attributed to financial and

market factors, many studies are pointing to the neglect of human resources issues as the

main reason for M&A failures. A 1997 PricewaterhouseCoopers global study concluded

that lack of management and related organizational aspects contribute significantly to

disappointing post-merger results.

Provided that they have equal or less information than their management, shareholders of eachfirm accept the merger agreement. The merger goes then ahead and fails. This happens becausethe obtained synergy gains do not compensate the costs of merging.

Accordingly, these mergers are unprofitable. Share prices, on the other hand, can

rise at the moment of the merger announcement if markets do not have merging firms‟ 

private information about the synergy gains.

A majority of corporate mergers fail. Failure occurs, on average, in every sense:

acquiring firm stock prices tend to slightly fall when mergers are announced; many acquired

companies are later sold off; and profitability of the acquired firm is lower after the merger(relative to comparable non merged firms).

One of the main difficulties in measuring acquisition performance lies in the assessment methods

used. These methods include measuring the stock market reaction, valuing the whole entity after

acquisition, abnormal returns, synergies and economies of scale, to name just the most common.However, they all lack the capacity to isolate the sole impact of the acquisition on the firm‟svalue from the plethora of events that occur in these circumstances. When one assess the stock 

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market reactions to an acquisition over a 180-day window, a number of other events have

impacted on the share value during this period. At best these methods allow us to measure the

financial markets‟ short-term reaction.

Many business commentators are now acknowledging that failure does not have its roots simply

in financial, monetary and legal issues but in lack of intercultural synergy. Research suggests thatup to 65% of failed mergers and acquisitions are due to „people issues‟, i.e. intercultural

differences causing communication breakdowns that result in poor productivity.

 DAIMLERCHRYSLER MERGER, A CULTURAL MISMATCH? 

A recent example of such intercultural failure has been that of DaimlerChrysler. Both sides in

the partnership set out to show that intercultural hurdles would and could be overcome in their

global merger. Recent articles in the Wall Street Journal and Business Week suggest howeverthat DaimlerChrysler underestimated the influence of culture, and due to culture clash, almost

two years later is still struggling to become a unified global organization.

In the period leading up to the Daimler-Chrysler merger, both firms were performing quite well

(Chrysler was the most profitable American automaker), and there was widespread expectation

that the merger would be successful (Cook 1998). People in both organizations expected that

their “merger of equals” would allow each unit to benefit from the other‟s strengths andcapabilities. Stockholders in both companies overwhelmingly approved the merger and the stock prices and analyst predictions reflected this optimism.

Performance after the merger, however, was entirely different, particularly at the Chrysler

division. In the months it was found that the high rate of turnover among management atacquired firms was not related to poor prior performance, indicating that the turnover was not

due to the pruning of underperforming management at the acquired firm.

Following the merger, the stock price fell by roughly one half since the immediate post merger

high. The Chrysler division, which had been profitable prior to the merger, began losing money

shortly afterwards and was expected to continue to do so for several years. In addition, therewere significant layoffs at Chrysler following the merger (that had not been anticipated prior to

the merger. Differences in culture between the two organizations were largely responsible for

this failure.

Operations and management were not successfully integrated as “equals” because of the entirelydifferent ways in which the Germans and Americans operated: while Daimler-Benz‟s culture

stressed a more formal and structured management style, Chrysler favored a more relaxed,

freewheeling style (to which it owed a large part of its pre merger financial success). In addition,the two units traditionally held entirely different views on important things like pay scales and

travel expenses. As a result of these differences and the German unit‟s increasing dominance,

performance and employee satisfaction at Chrysler took a steep downturn. There were large

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numbers of departures among key Chrysler executives and engineers, while the German unit

became

increasingly dissatisfied with the performance of the Chrysler division. Chrysler employees,

meanwhile, became extremely dissatisfied with what they perceived

as the source of their division‟s problems: Daimler‟s attempts to take over the entire organizationand impose their culture on the whole firm failed.

While cultural conflict often plays a large role in producing merger failure, it is oftenneglected when the benefits of a potential merger are examined. For instance, following the

announcement of the AOL Time Warner deal, a front-page Wall Street Journal article (Murray et

al. 2000) discussed possible determinants of success or failure for the merger (such as synergies,

costs, competitor reaction, and so forth). The only clear discussion of possible cultural conflict is

a single paragraph (out of a 60-column-inch article) revealing how the “different personalities”of AOL‟s Steve Case and Time Warner‟s Gerald Levin reflect cultural differences between the

two firms. A similar article included a single paragraph entitled “What could go wrong with the

synergy strategy.” Moreover, in these sorts of short, cursory, obligatory discussions of possiblecultural conflict, there is rarely discussion of what steps might be taken if there is dramatic

conflict. While culture may seem like a “small thing” when evaluating mergers, compared toproduct-market and resource synergies, we think the opposite is true because culture ispervasive. It affects how the everyday business of the firm gets done — whether there is shared

understanding during meetings and in promotion policy, how priorities are set and whether they

are uniformly recognized, whether promises that get made are carried out, whether the merger

partners agree on how time should be spent, and so forth.

The guiding hypothesis is that an important component of failure is conflict between the merging

firms‟ cultural conventions for taking action, and an underestimation by merger partners of howsevere, important, and persistent conflicts are. Cultural conventions emerge to make individual

firms more efficient by creating a shared understanding that aids communication and action.

However, when two joined firms differ in their conventions, this can create a source of conflict

and misunderstanding that prevents the merged firm from realizing economic efficiency

Such discourse is highlighting the need for more intercultural training both within the framework 

of mergers and acquisitions and for key personnel such as managers and HR departments. Inboth instances culture is being ignored rather than being embraced and used positively.

Piero Morosini emphasizes that, “misunderstood national cultural differences have been cited asthe most important factors behind the high failure rate of global JVs [joint ventures] and

alliances.” 

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Morosini argues that when intercultural differences are ignored during the evaluation and

negotiation stages of a merger, integration inevitably fails. He adds that the manner in which anorganization handles intercultural challenges is directly correlated with the performance of the

merger in the post-integration stage and can mean the difference between long-term success or

failure.

If intercultural understanding is to be recognized within the systems of processes of mergers and

acquisitions, staff training is critical. It is the leaders, managers and HR personnel of companiesthat must have intercultural competency. However, it appears that companies are not investing

enough in intercultural, or for that matter any, training.

In the Business Energy Survey, where 1,500 managers were surveyed, only a third had received

training in the last 12 months. If management is receiving such low levels of support one can

assume that other functions are receiving as much or even less.

STEPS TO AVOID FAILURE MERGERS: 

Despite months of work, millions of dollars in fees, and a firm conviction that the transaction

makes all the sense in the world, your merger is going down in flames. The two cultures are not

meshing. Key talent is heading for the door. And everyone knows it.

One of the solutions put forward by researchers is to study acquisition survival. An acquisition is

regarded as successful if, over a certain period of time (generally several years), it has remainedin the hands of the acquiring firm. Studies on survival confirm the previously obtained results, in

other words a failure rate of between 50 and 75%. Divestment as a success criterion poses a

major problem, however: if an acquisition is sold off at the end of 4 years with a large profit, canwe really consider it as a failure? Obviously not.

There are some transactions, such as the marriage of HP and Compaq, which are troubled from

the start. There‟s little anyone can do. Fortunately, this is far from the norm. More than two-

thirds of transactions that fail do so at the execution stage. DaimlerChrysler, for example,

neglected early on to establish a proper set of guiding principles based on the merger‟s strategicintent, and then continued to misfire by failing to align leadership and integrate the cultures of 

the two organizations.

Bringing disparate groups of people together as one company takes real work and represents an

effort that is often largely overlooked. Culture change management is not indulgent; it is a

critical aspect of any transaction. However, simply acknowledging the issue or handing it off to

specialists is not enough. Management must set a vision, align leadership around it, and holdsubstantive events to give employees a chance to participate. Detailed actions and well

articulated expectations of behavior connect the culture plan to the business goals.

Companies must start to become more aware of these deficiencies and their possible future

impacts. If the mergers and acquisitions of the future are to prove fruitful, companies must

design and implement comprehensive intercultural training programs for staff; assess and tacklepossible areas of intercultural difficulties prior to, during and after mergers and put into place

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mutually agreeable intercultural frameworks of understanding to act as guidelines for post-

merger synergy.

These tasks should not be seen as reactive, damage limitation exercises but as a positive,

proactive means of creating cohesion, maximizing efficiency and building a competitive

advantage.

Biggest Merger and

 Acquisition Disasters

Marv Dumon 

Contact | Author Bio

The benefits of  mergers and acquisitions (M&A) include, among others:

  a diversification of product and service offerings

  an increase in plant capacity 

  larger market share   utilization of operational expertise and research and development 

(R&D)

  reduction of financial risk 

If a merger goes well, the new company should appreciate in value as

investors anticipate synergies to be actualized, creating cost savings

and/or increased revenue for the new entity.

However, time and again, executives face major stumbling blocks after

the deal is consummated. Cultural clashes and turf wars can prevent

post-integration plans from being properly executed. Different systems

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and processes, dilution of a company's brand, overestimation of 

synergies and lack of understanding of the target firm's  business can all

occur, destroying shareholder value and decreasing the company's stock 

price after the transaction. This article presents a few examples of busted

deals in recent history. (Learn what corporate restructuring is, why 

companies do it and why it sometimes doesn't work in The Basics Of 

 Mergers And Acquisitions.)

New York Central and Pennsylvania Railroad

In 1968, the New York Central and Pennsylvania railroads merged to

form Penn Central, which became the sixth largest corporation in

 America. But just two years later, the company shocked  Wall Street  by 

filing for  bankruptcy  protection, making it the largest corporate

 bankruptcy in American history at the time. (For related reading, see

Taking Advantage Of Corporate Decline and  An Overview Of Corporate

 Bankruptcy.)

The railroads, which were bitter industry  rivals, both traced their roots

 back to the early- to mid-nineteenth century. Management pushed for a

merger in a somewhat desperate attempt to adjust to disadvantageous

trends in the industry. Railroads operating outside of the northeastern

U.S. generally enjoyed stable business from long-distance shipments of 

commodities, but the densely-populated Northeast, with its

concentration of heavy industries and various waterway shipping points,

created a more diverse and dynamic revenue stream. Local railroads

catered to daily commuters, longer-distance passengers, express freight

service and bulk freight service. These offerings provided transportation

at shorter distances and resulted in less predictable, higher-risk  cash

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flow  for the Northeast-based railroads. (Learn about the importance of 

commodities in the modern market in Commodities That Move The

 Markets.)

Short-distance transportation also involved more personnel hours (thus

incurring higher labor costs), and strict government regulation restricted

railroad companies' ability to adjust rates charged to shippers and

passengers, making cost-cutting seemingly the only way to positively 

impact the  bottom line. Furthermore, an increasing number of 

consumers and businesses began to favor newly constructed wide-lane

highways.

The Penn Central case presents a classic case of post-merger cost-cutting

as "the only way out" in a constrained industry, but this was not the only 

factor contributing to Penn Central's demise. Other problems included

poor foresight and long-term planning on behalf of both companies'

management and boards, overly optimistic expectations for positivechanges after the combination, culture clash, territorialism and poor

execution of plans to integrate the companies' differing processes and

systems. (Learn why a merger and acquisition advisor is often the best

choice when selling companies in Owners Can Be Deal Killers In M&A.)

Quaker Oats Company and Snapple Beverage Company 

Quaker Oats successfully managed the widely popular Gatorade drink 

and thought it could do the same with Snapple. In 1994, despite

 warnings from Wall Street that the company was paying $1 billion too

much, the company acquired Snapple for a purchase price of $1.7 billion.

In addition to overpaying, management broke a fundamental law in

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mergers and acquisitions: make sure you know how to run the company 

and bring specific  value-added skills sets and expertise to the operation.

In just 27 months, Quaker Oats sold Snapple to a holding company  for a

mere $300 million, or a loss of $1.6 million for each day that the

company owned Snapple. By the time the divestiture took place, Snapple

had revenues of approximately $500 million, down from $700 million at

the time that the acquisition took place. (Read  Mergers And 

 Acquisitions: Break Ups to learn how splitting up a company can benefit

investors.)

Quaker Oats' management thought it could leverage its relationships

 with supermarkets and large retailers; however, about half of Snapple's

sales came from smaller channels, such as convenience stores, gas

stations and related independent distributors. The acquiring

management also fumbled on Snapple's advertising campaign, and the

differing cultures translated into a disastrous marketing campaign for

Snapple that was championed by managers not attuned to its brandingsensitivities. Snapple's previously popular advertisements became

diluted with inappropriate marketing signals to customers. While these

challenges befuddled Quaker Oats, gargantuan rivals Coca-Cola

(NYSE:KO) and PepsiCo (NYSE:PEP) launched a barrage of competing

new products that ate away at Snapple's positioning in the beverage

market. (Read about the importance of memorable advertising in

 Advertising, Crocodiles And Moats.)

Oddly, there is a positive aspect to this flopped deal (as in most flopped

deals): the acquirer was able to offset its capital gains elsewhere with

losses generated from the bad transaction. In this case, Quaker Oats was

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able to recoup $250 million in capital gains taxes it paid on prior deals

thanks to losses from the Snapple deal. This still left a huge chunk of 

destroyed equity value, however. (To learn how to offset capital gains at

the individual level, read  Seek Out Past Losses To Uncover Future

Gains.)

 America Online and Time Warner

The consolidation of AOL Time Warner is perhaps the most prominent

merger failure ever. Time Warner is the world's largest media and

entertainment corporation, with 2007 revenues exceeding $46 billion.

The present company is a combination of three major business units:

   Warner Communications merged with Time, Inc. in 1990.

  In 2001, America Online acquired Time Warner in a megamerger

for $165 billion - the largest business combination up until that

time.

Respected executives at both companies sought to capitalize on the

convergence of mass media and the Internet. (Read about how the

Internet has changed the face of investing in The History Of Information

 Machines.)

Shortly after the megamerger, however, the dot-com  bubble  burst, which

caused a significant reduction in the value of the company's AOL

division. In 2002, the company reported an astonishing loss of $99

 billion, the largest annual net loss ever reported by a company,

attributable to the goodwill  write-off of AOL. (Read more in  Impairment 

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Charges: The Good, The Bad And The Ugly and Can You Count On

Goodwill? ) 

 Around this time, the race to capture revenue from Internet search-

 based advertising was heating up. AOL missed out on these and other

opportunities, such as the emergence of higher-bandwidth

connections due to financial constraints within the company. At the time,

 AOL was the leader in dial-up Internet access; thus, the company 

pursued Time Warner for its cable division as high-speed broadband

connection became the wave of the future. However, as its dial-up

subscribers dwindled, Time Warner stuck to its Road Runner Internet

service provider rather than market AOL.

 With their consolidated channels and business units, the combined

company also did not execute on converged content of mass media and

the Internet. Additionally, AOL executives realized that their know-how 

in the Internet sector did not translate to capabilities in running a mediaconglomerate  with 90,000 employees. And finally, the politicized and

turf-protecting culture of Time Warner made realizing anticipated

synergies that much more difficult. In 2003, amidst internal animosity 

and external embarrassment, the company dropped "AOL" from its

name and simply became known as Time Warner. (To read more about

this M&A failure, see Use Breakup Value To Find Undervalued 

Companies.)

Sprint and Nextel Communications

In August 2005, Sprint acquired a majority stake in Nextel

Communications in a $35 billion stock purchase. The two combined to

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 become the third largest telecommunications provider, behind AT&T

(NYSE:T) and Verizon (NYSE: VZ). Prior to the merger, Sprint catered to

the traditional consumer market, providing long-distance and local

phone connections and wireless offerings. Nextel had a strong following

from businesses, infrastructure employees and the transportation and

logistics markets, primarily due to the press-and-talk features of its

phones. By gaining access to each other's customer bases, both

companies hoped to grow by cross-selling their product and service

offerings. (Read about the ideal outcome of a M&A deal in What Makes

 An M&A Deal Work? )

Soon after the merger, multitudes of Nextel executives and mid-level

managers left the company, citing cultural differences and

incompatibility. Sprint was bureaucratic; Nextel was more

entrepreneurial. Nextel was attuned to customer concerns; Sprint had a

horrendous reputation in customer service, experiencing the highest

churn rate in the industry. In such a commoditized  business, thecompany did not deliver on this critical success factor and lost market

share. Further, a macroeconomic downturn led customers to expect

more from their dollars.

Cultural concerns exacerbated integration problems between the various

 business functions. Nextel employees often had to seek approval from

Sprint's higher-ups in implementing corrective actions, and the lack of 

trust and rapport meant many such measures were not approved or

executed properly. Early in the merger, the two companies maintained

separate headquarters, making coordination more difficult between

executives at both camps.

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Sprint Nextel's (NYSE:S) managers and employees diverted attention

and resources toward attempts at making the combination work at a

time of operational and competitive challenges. Technological dynamics

of the wireless and Internet connections required smooth integration

 between the two businesses and excellent execution amid fast change.

Nextel was simply too big and too different for a successful combination

 with Sprint.

Sprint saw stiff competitive pressures from AT&T (which acquired

Cingular), Verizon and Apple's (Nasdaq: AAPL) wildly popular iPhone.

 With the decline of  cash from operations and with high capital-

expenditure requirements, the company undertook cost-cutting

measures and laid off employees. In 2008, the company wrote off an

astonishing $30 billion in one-time charges due to impairment to

goodwill, and its stock was given a junk status rating. With a $35 billion

price tag, the merger clearly did not pay off. (Read about the implicationsof this label in What Is A Corporate Credit Rating? ) 

Conclusion

 When contemplating a deal, managers at both companies should list all

the barriers to realizing enhanced shareholder value after the transaction

is completed.

  Cultural clashes between the two entities often mean that

employees do not execute post-integration plans.

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   As redundant functions often result in layoffs, scared employees

 will act to protect their own jobs, as opposed to helping their

employers "realize synergies".

   Additionally, differences in systems and processes can make the

 business combination difficult and often painful right after the

merger.

Managers at both entities need to communicate properly and champion

the post-integration milestones step by step. They also need to be

attuned to the target company's  branding and customer base. The new 

company risks losing its customers if management is perceived as aloof 

and impervious to customer needs. (Read about the importance of 

 branding to retaining market share in Competitive Advantage Counts.)

Finally, executives of the acquiring company should avoid paying too

much for the target company. Investment bankers (who work on

commission) and internal deal champions, both having worked on a

contemplated transaction for months, will often push for a deal "just to

get things done." While their efforts should be recognized, it does not do

 justice to the acquiring group's investors if the deal ultimately does not

make sense and/or management pays an excessive acquisition price

 beyond the expected benefits of the transaction.

Mergers and Acquisition - A Case Study and

Analysis of HP-Compaq Merger

Brief Description 

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The following is a brief description of the two companies:

HP

It all began in the year 1938 when two electrical engineering graduates from Stanford University

called William Hewlett and David Packard started their business in a garage in Palo Alto. In ayear's time, the partnership called Hewlett-Packard was made and by the year 1947, HP wasincorporated. The company has been prospering ever since as its profits grew from five and half 

million dollars in 1951 to about 3 billion dollars in 1981. The pace of growth knew no bounds as

HP's net revenue went up to 42 billion dollars in 1997. Starting with manufacturing audio

oscillators, the company made its first computer in the year 1966 and it was by 1972 that itintroduced the concept of personal computing by a calculator first which was further advanced

into a personal computer in the year 1980. The company is also known for the laser-printer

which it introduced in the year 1985.

Compaq

The company is better known as Compaq Computer Corporation. This was company that started

itself as a personal computer company in the year 1982. It had the charm of being called the

largest manufacturers of personal computing devices worldwide. The company was formed bytwo senior managers at Texas Instruments. The name of the company had come from-

"Compatibility and Quality". The company introduced its first computer in the year 1983 after ata price of 2995 dollars. In spite of being portable, the problem with the computer was that itseemed to be a suitcase. Nevertheless, there were huge commercial benefits from the computer

as it sold more than 53,000 units in the first year with a revenue generation of 111 million

dollars.

Reasons for the Merger 

A very simple question that arises here is that, if HP was progressing at such a tremendous pace,

what was the reason that the company had to merge with Compaq? Carly Fiorina, who became

the CEO of HP in the year 1999, had a key role to play in the merger that took place in 2001. Shewas the first woman to have taken over as CEO of such a big company and the first outsider too.

She worked very efficiently as she travelled more than 250,000 miles in the first year as a CEO.

Her basic aim was to modernize the culture of operation of HP. She laid great emphasis on the

profitable sides of the business. This shows that she was very extravagant in her approach as aCEO. In spite of the growth in the market value of HP's share from 54.43 to 74.48 dollars, the

company was still inefficient. This was because it could not meet the targets due to a failure of 

both company and industry. HP was forced to cut down on jobs and also be eluded from the

privilege of having Price Water House Cooper's to take care of its audit. So, even the job of Fiorina was under threat. This meant that improvement in the internal strategies of the company

was not going to be sufficient for the company's success. Ultimately, the company had to

certainly plan out something different. So, it was decided that the company would be acquiringCompaq in a stock transaction whose net worth was 25 billion dollars. Initially, this merger was

not planned. It started with a telephonic conversation between CEO HP, Fiorina and Chairman

and CEO Compaq, Capellas. The idea behind the conversation was to discuss on a licensing

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agreement but it continued as a discussion on competitive strategy and finally a merger. It took 

two months for further studies and by September, 2001, the boards of the two companiesapproved of the merger. In spite of the decision coming from the CEO of HP, the merger was

strongly opposed in the company. The two CEOs believed that the only way to fight the growing

competition in terms of prices was to have a merger. But the investors and the other stakeholders

thought that the company would never be able to have the loyalty of the Compaq customers, if products are sold with an HP logo on it. Other than this, there were questions on the

synchronization of the organization's members with each other. This was because of the change

in the organization culture as well. Even though these were supposed to serious problems withrespect to the merger, the CEO of HP, Fiorina justified the same with the fact that the merger

would remove one serious competitor in the over-supplied PC market of those days. She said that

the market share of the company is bound to increase with the merger and also the working unitwould double. (Hoopes, 2001)

Advantages of the Merger

Even though it seemed to be advantageous to very few people in the beginning, it was the strongdetermination of Fiorina that she was able to stand by her decision. Wall Street and all herinvestors had gone against the company lampooning her ideas with the saying that she has made

1+1=1.5 by her extravagant ways of expansion. Fiorina had put it this way that after the

company's merger, not only would it have a larger share in the market but also the units of production would double. This would mean that the company would grow tremendously in

volume. Her dream of competing with the giants in the field, IBM would also come true. She

was of the view that much of the redundancy in the two companies would decrease as the

internal costs on promotion, marketing and shipping would come down with the merger. Thiswould produce the slightest harm to the collection of revenue. She used the ideas of competitive

positioning to justify her plans of the merger. She said that the merger is based on the ideologies

of consolidation and not on diversification. She could also defend allegations against the changein the HP was. She was of the view that the HP has always encouraged changes as it is about

innovating and taking bold steps. She said that the company requires being consistent with

creativity, improvement and modification. This merger had the capability of providing exactly

the same. (Mergers and Acquisitions, 2010)

Advantages to the Shareholders 

The following are the ways in which the company can be advantageous to its shareholders:

Unique Opportunity: The position of the enterprise is bound to better with the merger. The

reason for the same was that now the value creation would be fresh, leadership qualities would

improve, capabilities would improve and so would the sales and also the company's strategicdifferentiation would be better than the existing competitors. Other than this, one can also access

the capabilities of Compaq directly hence reducing the cost structure in becoming the largest in

the industry. Finally, one could also see an opportunity in reinvesting.

Stronger Company: The profitability is bound to increase in the enterprise, access and services

sectors in high degrees. The company can also see a better opportunity in its research and

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development. The financial conditions of the company with respect to its EBIT and net cash are

also on the incremental side.

Compelling Economics: The expected accumulation in IIP gains would be 13% in the first

financial year. The company could also conduct a better segmentation of the market to forecast

its revenues generation. This would go to as much as 2 and a half billion dollars of annualsynergy.

Ability to Execute: As there would be integration in the planning procedures of the company, the

chances of value creation would also be huge. Along with that the experience of leading a

diversified employee structure would also be there. (HP to buy Compaq, 2001)Opposition to the Merger

In fact, it was only CEO Fiorina who was in favor of going with the merger. This is a practicalapplication of Agency problem that arises because of change in financial strategies of the

company owners and the management. Fiorina was certain to lose her job if the merger didn't

take effect. The reason was that HP was not able to meet the demand targets under herleadership. But the owners were against the merger due to the following beliefs of the owners:

The new portfolio would be less preferable: The position of the company as a larger supplier of PCs would certainly increase the amount of risk and involve a lot of investment as well. Another

important reason in this context is that HP's prime interest in Imaging and Printing would notexist anymore as a result diluting the interest of the stockholders. In fact the company ownersalso feel that there would be a lower margin and ROI (return on investment).

Strategic Problems would remain Unsolved: The market position in high-end servers andservices would still remain in spite of the merger. The price of the PCS would not come down to

be affordable by all. The requisite change in material for imaging and printing also would notexist. This merger would have no effect on the low end servers as Dell would be there in the lead

and high-end servers either where IBM and Sun would have the lead. The company would alsobe eluded from the advantages of outsourcing because of the surplus labor it would have. So, the

quality is not guaranteed to improve. Finally, the merger would not equal IBM under any

condition as thought by Fiorina.

Huge Integrated Risks: There have been no examples of success with such huge mergers.

Generally when the market doesn't support such mergers, don't do well as is the case here. WhenHP could not manage its organization properly, integration would only add on to the difficulties.

It would be even more difficult under the conditions because of the existing competitions

between HP and Compaq. Being prone to such risky conditions, the company would also have to

vary its costs causing greater trouble for the owner. The biggest factor of all is that to integratethe culture existing in the two companies would be a very difficult job.

Financial Impact: This is mostly because the market reactions are negative. On the other hand,the position of Compaq was totally different from HP. As the company would have a greater

contribution to the revenue and HP being diluted at the same time, the problems are bound to

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develop. This would mean that drawing money from the equity market would also be difficult for

HP. In fact this might not seem to be a very profitable merger for Compaq as well in the future.

The basic problem that the owners of the company had with this merger was that it would

hamper the core values of HP. They felt that it is better to preserve wealth rather than to risk it

with extravagant risk taking. This high risk profile of Fiorina was a little unacceptable for theowners of the company in light of its prospects.

So, as far as this merger between HP and Compaq is concerned, on side there was this strong

determination of the CEO, Fiorina and on the other side was the strong opposition from the

company owners. This opposition continued from the market including all the investors of thecompany. So, this practical Agency problem was very famous considering the fact that it

contained two of the most powerful hardware companies in the world. There were a number of 

options like Change Management, Economic wise Management, and Organizational

Management which could be considered to analyze the issue. But this case study can be solvedbest by a strategy wise analysis. (HP-Compaq merger faces stiff opposition from shareholders

stock prices fall again, 2001)

Strategic Analysis of the Case 

Positive Aspects

A CEO will always consider such a merger to be an occasion to take a competitive advantageover its rivals like IBM as in this case and also be of some interest to the shareholders as well.

The following are the strategies that are related to this merger between HP and Compaq:

* Having an eye over shareholders' value: If one sees this merger from the eyes of Fiorina, it

would be certain that the shareholders have a lot to gain from it. The reason for the same is theincrement in the control of the market. So, even of the conditions were not suitable from thefinancial perspective, this truth would certainly make a lot of profits for the company in the

future.

* Development of Markets: Two organizations get involved in mergers as they want to expand

their market both on the domestic and the international level. Integration with a domestic

company doesn't need much effort but when a company merges internationally as in this case, achallenging task is on head. A thorough situation scanning is significant before putting your feet

in International arena. Here, the competitor for HP was Compaq to a large degree, so this merger

certainly required a lot of thinking. Organizations merge with the international companies in

order to set up their brands first and let people know about what they are capable of and alsowhat they eye in the future. This is the reason that after this merger the products of Compaq

would also have the logo of HP. Once the market is well-known, then HP would not have to

suffer the branding created by Compaq. They would be able to draw all the customers of 

Compaq as well.

* Propagated Efficiencies: Any company by acquiring another or by merging makes an attemptto add to its efficiencies by increasing the operations and also having control over it to the

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maximum extent. We can see that HP would now have an increased set of employees. The only

factor is that they would have to be controlled properly as they are of different organizationalcultures. (Benefits of Mergers:, 2010)

* Allowances to use more resources: An improvised organization of monetary resources,

intellectual capital and raw materials offers a competitive advantage to the companies. Whensuch companies merge, many of the intellects come together and work towards a common

mission to excel with financial profits to the company. Here, one can't deny the fact that even thetop brains of Compaq would be taking part in forming the strategies of the company in the

future.

* Management of risks: If we particularly take an example of this case, HP and Compaq entering

into this merger can decrease the risk level they would have diversified business opportunities.

The options for making choice of the supply chain also increase. Now even though HP is a

pioneer in inkjet orienting, it would not have to use the Product based Facility layout which ismore expensive. It can manage the risk of taking process based facility layout and make things

cheaper. Manufacturing and Processing can now be done in various nations according to the costviability as the major issue.

* Listing potential: Even though Wall Street and all the investors of the company are against the

merger, when IPOs are offered, a development will definitely be there because of the flourishingearnings and turnover value which HP would be making with this merger.

* Necessary political regulations: When organizations take a leap into other nations, they need to

consider the different regulations in that country which administer the policies of the place. As

HP is already a pioneer in all the countries that Compaq used to do its business, this would not be

of much difficulty for the company. The company would only need to make certain minor

regulations with the political parties of some countries where Compaq was flourishing more thanHP.

* Better Opportunities: When companies merge with another company, later they can put up for

sale as per as the needs of the company. This could also be done partially. If HP feels that it

would not need much of warehouse space it can sell the same at increased profits. It depends onwhether the company would now be regarded a s a make to stock or a make to order company.

* Extra products, services, and facilities: Services get copyrights which enhances the level of trade. Additional Warehouse services and distribution channels offer business values. Here HP

can use all such values integrated with Compaq so as to increase its prospects. (Berry, 2010)

Negative Aspects

There are a number of mergers and acquisitions that fail before they actually start to function. Inthe critical phase of implementation itself, the companies come to know that it would not be

beneficial if they continue as a merger. This can occur in this merger between HP and Compaq

due to the following reasons.

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Conversations are not implemented: Because of unlike cultures, ambitions and risk profiles;

many of the deals are cancelled. As per as the reactions of the owners of HP, this seems to beextremely likely. So, motivation amongst the employees is an extremely important consideration

in this case. This requires an extra effort by the CEO, Fiorina. This could also help her maintain

her position in the company.

Legal Contemplations: Anti-competitive deals are often limited by the rules presiding over the

competition rules in a country. This leads to out of order functioning of one company and theytry to separate from each other. A lot of unnecessary marketing failures get attached to these

conditions. If this happens in this case, then all that money which went in publicizing the venture

would go to be a waste. Moreover, even more would be required to re-promote as a single entity.Even the packaging where the entire inventory from Compaq had the logo of HP would have to

be re-done, thus hampering the finance even further. (Broc Romanek, 2002)

Compatibility problems: Every company runs on different platforms and ideas. Compatibilityproblems often occur because of synchronization issues. In IT companies such as HP and

Compaq, many problems can take place because both the companies have worked on differentstrategies in the past. Now, it might not seem necessary for the HP management to make changesas per as those from Compaq. Thus such problems have become of greatest concern these days.

Fiscal catastrophes: Both the companies after signing an agreement hope to have some return onthe money they have put in to make this merger happen and also desire profitability and

turnovers. If due to any reason, they are not able to attain that position, then they develop a

abhorrence sense towards each other and also start charging each other for the failure.

Human Resource Differences: Problems as a result of cultural dissimilarities, hospitality and

hostility issues, and also other behavior related issues can take apart the origin of the merger.

Lack of Determination: When organizations involve, they have plans in their minds, they have a

vision set; but because of a variety of problems as mentioned above, development of thecombined company to accomplish its mission is delayed. Merged companies set the goal and

when the goal is not accomplished due to some faults of any of the two; then both of them

develop a certain degree of hatred for each other. Also clashes can occur because of biasreactions. (William, 2008)

Risk management failure: Companies that are involved in mergers and acquisitions, become overconfident that they are going to make a profit out of this decision. This can be seen as with

Fiorina. In fact she can fight the whole world for that. When their self-confidence turns out into

over-confidence then they fail. Adequate risk management methods should be adopted which

would take care of the effects if the decision takes a downturn. These risk policies should rulefiscal, productions, marketing, manufacturing, and inventory and HR risks associated with the

merger.

Strategic Sharing 

Marketing

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Hp and Compaq would now have common channels as far as their buying is concerned. So, the

benefits in this concern is that even for those materials which were initially of high cost for HPwould now be available at a cheaper price. The end users are also likely to increase. Now, the

company can re frame its competitive strategy where the greatest concern can be given to all

time rivals IBM. The advantages of this merger in the field of marketing can be seen in the case

of shared branding, sales and service. Even the distribution procedure is likely to be enhancedwith Compaq playing its part. Now, the company can look forward to cross selling, subsidization

and also a reduced cost.

Operations

The foremost advantage in this area is that in the location of raw material. Even the processingstyle would be same making the products and services synchronized with the ideas and also in

making a decent operational strategy. As the philosophical and mechanical control would also be

in common, the operational strategy would now be to become the top most in the market. In this

respect, the two companies would now have co-production, design and also location of staff. So,the operational strategy of HP would now be to use the process based facility layout and function

with the mentioned shared values.Technology

The technical strategy of the company can also be designed in common now. There is a

disadvantage from the perspective of the differentiation that HP had in the field of inkjet printersbut the advantages are also plentiful. With a common product and process technology, the

technological strategy of the merged company would promote highly economical functioning.

This can be done through a common research and development and designing team.

Buying

The buying strategy of the company would also follow a common mechanism. Here, the raw

materials, machinery, and power would be common hence decreasing the cost once again. Thiscan be done through a centralized mechanism with a lead purchaser keeping common policies in

mind. Now Hp would have to think with a similar attitude for both inkjet printers as well as

personal computers. This is because the parameters for manufacturing would also run on equalgrounds.

Infrastructure

This is the most important part of the strategies that would be made after the merger. The

companies would have common shareholders for providing the requisite infrastructure. The

capital source, management style, and legislation would also be in common. So, the

infrastructure strategies would have to take these things into account. This can be done by havinga common accounting system. HP does have an option to have a separate accounting system for

the products that it manufactures but that would only arouse an internal competition. So, the

infrastructural benefits can be made through a common accounting, legal and human resourcesystem. This would ensure that the investment relations of the company would improve. None of 

the Compaq investors would hesitate in making an investment if HP follows a common strategy.

HP would now have to ensure another fact that with this merger they would be able to prove

competitors to the present target and those of competitors like IBM as well. Even the operations

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and the output market needs to be above what exists at present. The company needs to ensure

that the corporate strategy that it uses is efficient enough to help such a future. The degree of diversification needs to be managed thoroughly as well. This is because; the products from the

two companies have performed exceptionally well in the past. So, the most optimum degree of 

diversification is required under the context so that the company is able to meet the demands of 

the customers. This has been challenged by the owners of HP but needs to be carried by the CEOFiorina. (Bhattacharya, 2010)

I am a pre final year student at the Indian Institute of Information Technology and Management,

Gwalior, India pursuing a five year integrated course (dual degree) leading to the award of 

B.Tech (Information Technology) and MBA. I am currently in the 9th Semester. ABV-IIITMGwalior, a Deemed University, is an apex Institute, established by the ministry of HRD (Human

Resource Development), Government of India.

The competitive environment at my Institute coupled with my inherent trait of trying to learnsomething new from each experience has made me come a long way in these four years. I have

not only learnt to work under pressure and intense competition with some of the brighteststudents in the country but have also worked with an esteemed KPO called CBI Solutions in themeanwhile. This has given me the experience to get exposed to some of the most challenging

marketing traits in the business. Moreover, I have been awarded first rank for IT and

Entrepreneurship at the end of my 7th Semester.

I have been privileged to work at Polaris Retail Infotech Limited, Gurgaon from May to July'08.

This taught me the practical application of relationship marketing as I saw the preparation of customer interfaces through their software Smart Store. This is visible at billing counters at retail

stores of the fame of Shopper's Stop. Also, I've been in the editorial board of my college

magazine, La Vista for the past 3 years and eventually I hold the responsibility of the Chief 

Editor.