hp - compaq
TRANSCRIPT
THE HP-COMPAQ MERGER STORY
Presented By :- Ankit Gupta
Ankita Mandhata
Kapil Rustagi
Kriti Nigam
Robin Asati
HEWLETT-PACKARD (HP) - PRE MERGER
Stanford engineers Bill Hewlett and David Packard started HP in California in 1938 as an electronic instruments company.
In 1963, HP entered into a joint venture agreement with Yokogawa Electric Works of Japan to form Yokogawa-Hewlett-Packard.
In 1966, the company established HP Laboratories, to conduct research activities relating to new technologies and products. During the same year, HP designed its first computer for controlling some of its test-and-measurement instruments.
In 1974, HP launched its first minicomputer. During the 1980s, HP emerged as a major player in the computer
industry, offering a full range of computers from desktop machines to powerful minicomputers.
After the spun off of its test-and- measurement equipment division and the cut-throat competition in the computer industry, HP felt the need for new leadership to cope with the rapidly evolving industry trends.
By 2001, with net revenues of $48.78, HP was ranked 19th in global Fortune 500 list.
Besides computer related products and services the company also made electronic products and systems for measuring computing and communication.
COMPAQ – PRE MERGER
Compaq was founded by Joseph R. Canion along with some Texas
Instruments colleagues in Feb. 1982with a capital of $1.5 million.
Initially it manufactured and sold IBM compatible computers but, soon
came to be seen as a major alternative to IBM for supply of computers.
It offered three broad category of products:
a) The enterprise Computing Group
b) The Commercial PC Group
c) The Consumer PC Group
In 1988, Compaq acquired Digital Equipment Corp. for $9.1 billion to
become ‘full services’ computer company.
In 2001 with revenues of $42.38 billion, it secured 27th rank in Global
Fortune 500 list.
FACTS AND FIGURES
Founded: 1938
Employees: 86,200
2001 Revenues: $45.2bn
2001 profits: $408m
CEO: Carly Fiorina
Founded: 1983
Employees: 63,700
2001 Revenues: $33.5bn
2001 loss: $785m
CEO: Michael Capellas
HP Compaq
PRE MERGER STATS FOR HP & COMPAQ
Company Market share in high end servers
Revenue
Compaq 3% $134 mn
HP 11.4% $512mn
Company Market share in mid-range UNIX servers
Revenue
Compaq 4% $488 mn
HP 30.3% $3,675 mn
Company Market share in laptops for quarter 2 (volume share)
Market share in PCs for quarter 2 (volume share)
Compaq 12.1% 11.6%
HP 6.9% 4.5%
GROWING PROBLEMS AT HP
HP was unable to adapt to technological innovation fast.
Margins lowered day by day.
Printing line was facing strong competition from Lexmark
and Epson who were providing low quality inexpensive
printers.
Need of a strong complementary business line.
Recession, pay cuts and lay offs.
SOLUTION - “ MERGER “
SUMMARY DEAL
Announcement Date September 4, 2001
Name of the merged entity Hewlett Packard
Chairman and CEO Carly Fiorina
President Michael Capellas
Ticker symbol change From HWP to HPQ
Form of payment Stock
Exchange Ratio 0.6325 HPQ shares to each Compaq Shareholder
Ownership in merged company
64% - former HWP shareholders36% - former CPQ shareholders
Ownership of Hewlett and Packard Families
18.6% before merger8.4% after merger
Accounting Method Purchase
Merger method Reverse Triangular Merger
QUESTION 1) THE HP-COMPAQ MERGER HAD MET WITH OPPOSITION FROM VARIOUS PARTIES. ANALYZE THE REASONS FOR THIS OPPOSITION AND CRITICALLY COMMENT ON THE PROS AND CONS OF THE MERGER
PACKARD’S RATIONALE FOR HIS OPPOSITION
Packard, the oldest son of the other late co-founder David
Packerd, claimed that
Fiorina’s high-handed management and her efforts to
reinvent the company ran counter to the company’s core
values as established by the founders.
Citing massive layoffs as an example of this departure from
HP’s core values,
Packard argued that although the founders never
guaranteed job security, “Bill and Dave never developed a
premeditated business strategy that treated HP employees
as expendable
HEWLETT’S RATIONALE FOR HIS OPPOSITION
According to Walter Hewlett, the eldest son of Hewlett-
Packard co - founder William R Hewlett.
Fiorina had exaggerated the importance of scale in the
computer business.
In addition, he believed that rather than makeing the
company more competitive, the merger would expose HP to
the brutal, low-profit PC business.
Hewlett believed that the merger would significantly dilute
the value of the company’s lucrative printing business.
EMPLOYEES RESENTMENT
Steps taken for controlling cost.
Forced 5 day vacation for workers in Dec 2000.
The postponement of wages hikes for 3 months.
Layoff of 1700 employees in Jan 2001.
Management sent memos saying that layoffs would continue and that volunteering for pay-cuts would not guarantee continued employment.
Mergers would result to layoff of 15000 to 30000 employees.
PROS HP would become the undisputed worldwide leader in revenues for
server, access devices(PCs) and imaging and printing.
Cross selling and technology.
Economies of scale- volume advantage : Savings of $2.5bn
Cost saving of 3% or 4% on materials.
Direct selling using Compaq sales force.
Have operations in more than 160 countries with over 145,000 employees.
The merger deal also means that there are many overlaps in products, technologies, distribution channels, services, facilities and jobs
Will provide complete set of products and services.
CONS Synergies/integration can not be materialize easily.
Companies were potentially vulnerable to insider information being misused.
PC marker was shrinking in US.
Top management who are against the deal might leave.
Employee faith can get harmed, due to layoffs.
Merger failure will set back the company opting out of the deal by $675 mn in form of a breakup free.
Credibility in stock market will decrease.
Compaq shareholders will get 0.6325 share of the new company for each share of Compaq.
QUESTION 2) ASSUMING THE MERGER IS COMPLETED, DO YOU THINK THE NEW HP WOULD BE ABLE TO COUNTER THE COMPETITION FROM COMPANIES LIKE DELL AND IBM ? GIVE REASONS FOR YOUR ANSWER
REVERSE TRIANGULAR MERGER
A subsidiary Heloise Merger Corporation was created
solely to facilitate the merger
Result : A tax free reorganization in which HP would
control all of Compaq’s assets through a wholly owned
subsidiary Hewlett Packard
Heliose Merger Corp
Compaq Shareholder
s
Compaq
Stock (Cash for fractional shares)
Stock
POTENTIAL IMPACT OF MERGER
Merger would create a full-service technology firm capable
of doing everything from selling PCs and printers to setting
up complex networks
Merger would eliminate redundant product groups and
costs in marketing, advertising, and shipping, while at the
same time preserving much of the two companies’ revenues.
MARKET BENEFITS Merger will creates immediate end to end leadership
Compaq was a clear #2 in the PC business and stronger on the
commercial side than HP, but HP was stronger on the consumer side.
Together they would be #1 in market share in 2001
The merger would also greatly expand the numbers of the company’s
service professionals. As a result, HP would have the largest market
share in all hardware market segments and become the number three in
market share in services.
Improves access to the market with Compaq’s direct capability and low
cost structure
The much bigger company would have scale advantages: gaining
bargaining power with suppliers; and scope advantage: gaining share of
wallet in major accounts .
OPERATIONAL BENEFITS OF MERGER
HP and Compaq have highly complimentary R&D capabilities
HP was strong in mid and high-end UNIX servers, a
weakness for Compaq; while Compaq was strong in low-
end industry standard (Intel) servers, a weakness for HP
Top management has experience with complex organizational
changes
Merger would result in work force reduction by around 15,000
employees saving around $1.5 billion per year
FINANCIAL BENEFITS
Merger will result in substantial increase in profit
margin and liquidity
2.5 billion is the estimated value of annual synergies
Provides the combined entity with better ability to
reinvest
OPERATIONAL EFFICIENCIES• Achieved merger-related cost savings of more than $1.3B annually
• Restructured direct material procurement to save $450M annually
• Redesigned products & re-qualifying components to save $300M
• Consolidated multiple mfg sites achieving $120M in annualized savings
• Achieved manufacturing savings of $200M annually
• Reduced supply chain headcount by 2,700
• Realized logistics savings of $100M+ annually
• Indirect Procurement negotiated annual savings of $220M
STRATEGIC INTEGRATION
Out-compete Dell: The new HP needed a highly competitive direct
sales model
- 50% of retail shelf space was occupied by HP & Compaq
- Direct sales model benefited from Compaq direct sales model
Out-compete IBM
- Manage the high level relationships with global enterprise
customers
- With help of Compaq consultants managed 40 big deals in
competition with IBM
SHAREHOLDER VALUE
Myth:
A strategically poor integration will be reflected by the stock
market’s pushing the combined company's stock price down ,
an illustration of how mergers can destroy value
Fact :
In mid-July 2007, five years after the merger announcement,
HP's total shareholder returns were up 46 percent. Over the
same period, the Standard & Poor's IT index had sunk 9
percent, rival IBM was down 23 percent, and even Dell was up
only 2 percent.
PC BUSINESS Myth:
HP, even after combining with Compaq, cannot fight Dell’s
direct-sales model with their retail (indirect) plus direct model
Fact :
HP’s PC business has steadily improved and is bringing
competition to Dell that Dell has not seen for the past 5 or 10
years
Dell's PC shipments worldwide share fell to 15.2 % from 18.2 %
last year, a particularly sharp decline given that the overall
market grew 10.9 percent
Hewlett-Packard holds 19.1 percent of the world PC market
Even in the US, HP and Dell have 24.2 and 26.8 % of the PC
market in 2007
PRINTER BUSINESS
Myth:
HP is pursuing only market share in printers instead of ROI
Fact :
In HP’s printer business, “good” share consists of devices
that deliver color, photos, lots of output, and perform multiple
functions. Those characteristics lead to more pages printed,
and more profitability. HP has extended that business, leaving
low-end, single-function printers to competitors.
The company also refused to respond to Dell price-cutting
intended to weaken HP's market share in printers
SERVER BUSINESS
Myth:
Pursuing more market share in PCs will divert resources and
distract attention from its strengths in printers and servers
Fact :
Vendor 2007 Revenue (Mn US $)
2007 Share(%)
2006Revenue(Mn US $)
2006Share(%)
Growth (%)
IBM 4069 31 3824 30.9 6.4
HP 3707 28.2 3424 26.0 22.2
Sun 1711 13 1620 13.1 5.6
Dell 1526 11.6 1270 10.3 20.2
Fujitsu/Siemens
542 4.1 554 4.5 -2.3
The merger wasn't the problem; it was the Management. All that
HP needed was a strong management in order to realize the latent
potential of the merged company.
HP, hired Mark Hurd to replace Fiorina. Only then did the company
acquire the management skills needed to take the raw material
that was there and transform it into a world leader in technology.
In the three years since Hurd became CEO, the results have been
truly remarkable. He took the pieces assembled by Fiorina, applied
his management skills to them, and created a growing, profitable
and increasingly valuable company.
CONCLUSION
HP VS. IBM : LAST 5 YEARS
HP VS. DELL : LAST 5 YEARS
HP VS. SUN : LAST 5 YEARS
ACHIEVED BENEFITS FOR CUSTOMERS
HP now offers a one-stop shopping experience for global
corporate customers—
The company has the ability to procure everything from
PDAs to commercial printers and servers from the same
source
The economies of scale have helped HP focus on its legacy of
manufacturing innovation
It can build and deliver precisely the product that
customers need and want to buy.
ACHIEVED BENEFITS FOR CUSTOMERS
Ease of doing business
The supply chain strategy allows a single point of collaboration
with HP, simplifying suppliers’ interaction with HP, increasing
business collaboration, and lowering costs for both parties.
Enhanced supply and demand visibility
This visibility improves participants’ ability to predict demand.
It also enables suppliers to build purchasing, manufacturing,
and logistical efficiencies into their own supply chains. Further,
it enables suppliers to pass associated discounts onto
customers such as HP
Elimination of non-value-added steps, such as administration, and
costs
THANK YOU