Effect of M&A on Stakeholders

Case: The Merger of Hewlett‐Packard and Compaq(A) ‐ Strategy and

valuation

As a Shareholder in HP, Would you Vote your Shares in Favor of the Deal?

What is the Efficiency of HP Board?

Board failed to identify the strategic threats as they were emerging – Now reacting to competitors’ threat

Strategic dilemma: doing the deal and not doing the deal are risky alternatives – outcome of board’s delayed action

HP board had a chance to confront the strategic issues at the time it appointed Fiorina

Annual Pretax Cost Savings as a Result of Proposed Merger

Administrative/IT costs $625 million

Cost-of-goods-sold benefits $600 million Sales-management benefits $475 million Research-and-development efficiencies $425 million Indirect-purchase benefits $250 million Marketing efficiencies $125 million

Leaders in PCsIntel servers & storage

Fault‐tolerant computingHigh performance computing

Global reachEstablished direct‐sales 

capability in response to Dell

Wants to be more like IBM but forced to compete with DellMajority of sales are not 

direct and thus CPQ is unable to match Dell’s cost structure 

in PCs

Continued cost cuttingDirect sales – moving in right 

directionEnterprise consulting and 

financial servicesWeak position in Unix market

Commoditization of core computing businesses

Competition and fragmentation of higher‐margin service business

Strengths Weaknesses

OpportunitiesThreats

Compaq

ImagingBrand and channel clout 

owing to dominant imaging business

Cyclical proof imaging‐supplies businesses provide annuity‐like high‐margin 

revenue streamsSecond only to Sun un UNIX 

market share

PCs and Inter servers: trapped between Dell on the low end and IBM/Sun on the high end

High costs and low R&D productivity

No direct distributionLack of breadth and scale in 

service

Direct distributionCost cutting and realignment 

of R&DLess mature international 

printer marketsCommercial printing system

Continued competition form low‐price/quality competitors

Maturation of corporate printing market

Uncertain growth prospects for Unix market on the heels of dot‐com bust and ongoing 

telecom contraction

Strengths Weaknesses

OpportunitiesThreats

HP

Contest by Walter HewlettAgainst the Merger

Credibility of merger synergies

Strategic rationale for the deal

Impact of specific deal terms

Meaning of merger of equals

What are the Challenges in this Deal?

LayoffExpected integration across 160 countries involving 

150,000 people

High end to now low end customers

Innovation to commodity type business Change in HP way Low margin, low job security 

business

Compaq has struggled for years with layoffs and poor performance ‐‐‐ would send the mood of employees of both the companies further 

south

Is it Really a Merger of Equals?

HP CompaqCEO = Fiorina COO = Capellas

14/20 senior executives 6/20 senior executivesBoard composition 6 = HP 5 = CPQ

Compensation unknown unknownShare of ownership 64% 36%

Layoffs shared sharedBrands HP brand retained Compaq brand retained

Form of transaction Tax-deferred, all stockCorporate name name = Hewlett-Packard

Headquarters location HQ = Palo Alto

Management/CEO

Social Terms and the Merger of Equals

Comparatively low acquisition premium should be viewed as part of the larger deal structure, billed as a “merger of equals”

Almost all will vote for the deal

Most likely it was to save face for the Compaq management team and to preserve for them a partial place at the table in managing the new firm

Challenges

Challenges of integrating global 

operations

International nature of business

Execution of distribution 

model

Development and transition of new Product Mix

Challenges

Exposure to increased competitive pressures

Weak economy may inhibit merger at critical stage

Current and future weakening of credit rating

Customer / Market Uncertainties

Regulatory approval / restrictions

Fixed Ratio of 0.635

Challenges

Competition ‐ As HP and Compaq smooth out their merger, the industry – and their competitors – move on to bigger and better things

Blending in ‐ The merged company needs to be a “hybrid enterprise”

Convincing customers ‐Customers want a clear 

“migration path,” especial with regards to discontinued 

offerings

Meshing cultures ‐ HP: “deliberative, thorough 

decision‐making” Compaq: “fast decision‐making and marketing”Competition

What should be Communication Strategies of HP?

Demonstrate the Value of Acting 

Now

Reduce the Cost of Action

Showcase the Risks of Waiting

Identification of key stakeholder 

groups

Ensuring effective corporate 

communications

Stakeholder Related Failure Factors in this Deal

Failure to secure the goodwill of a range of stakeholder groups common to both 

companies. (shareholders vs. other stakeholders, e.g. 

regulatory bodies)

To focus on the corporate objectives is difficult if people are worried about their own 

position 

Unavoidable because there is necessarily some uncertainty about the final shape of the 

organization

Suggested Communication in a M&A Process

• Forms and channels available for communicating• Reactions need to be tracked throughout the merger process. 

Identification of key stakeholder 

groups

• Through detailed analysis of the internal environments of both companies and a conscious decision to build on the strengths of each. 

Developing a unified corporate 

identity

• Monitoring the results• Identifying the emergence of potentially damaging issues • Monitoring perceptions pre‐, during, and post‐merger• Revealing conflicting messages emanating from the two companies• Evaluating the financial benefits and drawbacks of the merger

Ensuring effective corporate 

communications

What are the Stakeholders ReactionsExpected in this Deal?

Customer dissatisfaction Employers attrition issuesImpact on the individual or group working in company 

& on work culture

Differences in compensation packages 

and designation 

Ego clashes between the top management 

Separation Anxiety Company wide rumorsEmployees loose faith in 

their organization and tend to become demotivated

What are the Stakeholders ReactionsExpected in this Deal?

Stress level experienced by the CEOs often travels through the chain of command, affecting subordinates as well

Fear of transfer and retrenchment

Loss of position in the hierarchical level 

Process of M&A has a great impact on the work culture during those deal process days as it disturbs whole 

organization of the company

Step child treatment for target employees

Each company has its own set of values which may conflict 

with those of acquired company

Loss of identity, Lack of information & anxiety, Talent is lost, Family repercussions

Managing Reactions!

Organization must effectively develop and implement 

assistance program for displaced employees

Communication from the executive team with employees in the pre‐acquisition phase needs to be consistent so that anxiety levels among the personnel can 

be kept at low level

Need for developing and executing effective employee communication, particularly conveying the employees that how the transaction will impact 

organizational members

Communication between the members of transferor and 

transferee Company should be open, honest and strategic

WALTER 

AND

FAMILY

CARLY

AND

HP

Trading History of Compaq and HP Stock (in $) (surrounding Sept 4, 2001, Announcement Date)

DateHWP

Closing Price

HWP Percentage

Change

CPQ Closing

Price

CPQ Percentage

Change

Implied CPQ Price

Implied Premium for CPQ

8/27/2001 25.02 –0.4 13.27 –2.8 15.83 19.26%8/28/2001 24.61 –1.6 13.32 0.4 15.57 16.86%8/29/2001 23.95 –2.7 13.13 –1.4 15.15 15.37%8/30/2001 23.4 –2.3 12.69 –3.4 14.80 16.63%8/31/2001 23.21 –0.8 12.35 –2.7 14.68 18.87%9/4/2001 18.87 –18.7 11.08 –10.3 11.94 7.72%9/5/2001 18.21 –3.5 10.41 –6.0 11.52 10.64%9/6/2001 17.7 –2.8 10.35 –0.6 11.20 8.17%9/7/2001 18.08 2.1 10.59 2.3 11.44 7.98%9/10/2001 17.89 –1.1 10.35 –2.3 11.32 9.33%9/17/2001 16.02 –10.5 8.75 –15.5 10.13 15.80%

Financial Information on Peers (Data Presented at 2001 Year‐End)

Company Name SIC SalesSales 3-yr

CAGR

Gross Profit

Margin

EBIT Margin

Market Value

1-yr Total Return

Est. 2002 EPS

Growth*P/E Beta D/E ROA ROE ROI

(in $000) (% ) (% ) (% ) (in $000) (% ) (% ) (% ) (% ) (% )Apple Computer Inc 3571 5,363 −3.4 24.9 −6.2 5,441 −39.8 nm nm 1.31 0.08 −0.6 −0.9 −0.9

Cisco Systems Inc 3576 22,293 38.1 55 0.1 140,671 −70.6 −46.0 nm 1.82 0 −2.9 −3.7 −3.7Compaq Computer Corp 3571 33,554 2.5 25.3 1.4 16,592 −34.6 −94.0 nm 1.49 0.05 −2.4 −5.1 −4.8

Dell Inc 3571 31,168 19.5 18.4 7.3 71,666 5.2 −23.0 57.3 2.21 0.11 9.2 26.5 23.9Fujitsu Ltd (ADR) 7373 37,646 −4.6 34.2 −1.5 15,183 −42.2 nm nm 1.12 1.33 −8.3 −44.8 −17.4

Gateway Inc 3571 5,938 −7.4 21.1 −3.5 2,605 −55.3 nm nm 2.04 0 −33.9 −74.1 −57.5Hewlett-Packard Co 3570 45,226 −1.3 28.6 4.5 32,651 −63.3 4 52.6 1.48 0.27 1.9 4.5 3.5

Hitachi Ltd (ADR) 3570 60,104 −3.0 29.3 −1.5 24,550 −15.4 nm nm 1.15 0.78 −4.9 −21.0 −9.9IBM Corp 7371 85,866 1.7 41.9 10.8 208,371 43 −2.0 25.8 1.24 0.68 8.7 32.7 19.5

NEC Corp (ADR) 3571 38,354 −1.7 27.6 −1.3 13,830 −46.8 nm nm 1.69 2.83 −6.2 −54.8 −13.5Silicon Graphics Inc 3571 1,854 −15.7 41 −16.7 272 −62.9 nm nm 0.98 nm −38.5 nm −186.9

Sun Microsystems Inc 3571 18,250 23.1 51.9 10.1 51,197 −65.4 nm 52.4 1.82 0.14 5.4 9.3 8.1Unisys Corp 7373 6,018 −5.8 30 4.5 4,002 −14.3 −54.0 nm 1.2 0.35 −0.9 −2.4 −1.7

Averages 30,126 3.2 33 0.6 45,156 −35.6 −35.8 47 1.5 0.55 −5.6 −11.2 −18.6

Information on Recent Computer‐Related Transactions (Completed Transactions; Acquisition of 100% Interest)

Consideration

Offered1/26/1998 Digital Equipment Compaq Computer $9,124 $9,063 0.69 34.67 15.45 32.99 na na na None Cash, Stock

8/3/1998 Stratus Computer Ascend Comm. $970 $835 1.2 9.97 5.08 10.9 19.1 53.3 33.4 None Stock

11/11/1998 Sulcus Hospitality Eltrax Systems $71 $71 1.22 nm 26.16 nm 159.6 149.6 260.5 None Stock

5/11/1999 Meridian Data Quantum Corp $94 $93 5.08 nm nm nm 168.9 189.6 213.8 None Stock

5/24/1999 Texas Micro RadiSys Corp $120 $120 1.44 37.63 24.68 34.38 68.7 66.6 75.5 Lockup Stock

6/22/1999 Diamond Multimedia S3 Inc $183 $183 0.32 nm nm nm −13.9 21.6 4.5 None Stock

7/12/1999 Sequent Computer Sys. IBM Corp $809 $811 1.02 nm 166.5 nm 3.3 6.7 52.4 None Cash

7/27/1999 Mylex IBM Corp $261 $258 1.77 nm nm nm 20 17.8 108.7 None Cash

8/9/1999 Data General EMC Corp $1,410 $1,409 0.97 186.2 13.68 74.8 72.8 63.5 31.1 Lockup Stock

9/20/1999 Nichols Research Computer Sciences $401 $396 0.87 18.51 13.93 30.18 6.9 9 24.6 None Stock

7/26/2000 Telxon Corp Symbol Technologies $571 $571 1.57 nm nm 2.21 27.9 40 32.1 None Stock

2/21/2001 Blue Wave Systems Motorola Inc $120 $119 3.24 33.19 25.42 30.63 −2.2 −4.2 −12.4 Lockup Stock

4/2/2001 General Semiconductor Vishay Intertechnology $890 $660 1.37 8.74 6.21 20.25 43 40.6 40.9 None Stock

7/16/2001 SCI Systems Sanmina Corp $6,336 $4,812 0.55 20.88 11.18 48.17 19.6 27.8 44.5 None Stock, Liabs

9/4/2001 Compaq Computer Hewlett-Packard $25,263 $25,175 0.62 13.51 7.66 nm 18.9 10.2 −2.0 None Stock

12/7/2001 IKOS Systems Mentor Graphics $115 $116 1.91 nm nm nm 36.7 46.7 111.5 None Cash

Averages $2,921 $2,793 1.49 40.36 28.72 31.61 43.3 49.3 67.9

Averages w/o DG/EMC $3,022 $2,886 1.52 22.14 30.23 26.21 41.2 48.2 70.6

Defensive Tactics

Deal Multiples Premium over Stock Price (%

Ann Date Target Name Acquirer NameTrans

Value ($ mil)

Equity Value* ($

mil)

Equity Value/ Net

Sales

Equity Value/ EBIT

Equity Value/ Target

Cash Flow

Equity Value/ Net

Inc

1 day prior

1 wk prior 4 wks prior

Information on Recent “Jumbo” Deals (Transaction Value > $25 Billion)

(%)Trans Value

Equity Value*

($mil) ($mil)

10/1/1997 MCI Communications WorldCom $41,907 $37,407 2.45 33.46 13.17 68.26 102.99 100.99 94.29 None Stock, Liabs

4/6/1998 Citicorp Travelers Group $72,558 $72,185 2.03 12.4 10.91 19.72 7.9 10.4 19 None Stock

4/13/1998 BankAmerica NationsBank $61,633 $61,415 2.54 11.38 9.8 18.81 0 –0.3 2.8 None Stock

4/13/1998 First Chicago NBD BANC ONE $29,616 $29,421 2.86 12.96 np 19.26 26.5 38 34.1 Lockup Stock

5/7/1998 Chrysler Daimler-Benz AG $40,466 $40,467 0.65 7.26 4.89 14.31 48.8 54.3 45.7 None Newly Issued Ord Sh

5/11/1998 Ameritech SBC Communications $62,593 $62,554 3.84 16.5 9.83 27.78 np np np None Stock

6/24/1998 Tele-Communications AT&T $53,592 $60,192 7.9 196.07 30.55 Nm np np np None Stock, Other

7/28/1998 GTE Bell Atlantic $53,415 $53,451 2.19 10.95 6.11 23.52 –2.7 –2.7 –4.9 Lockup Stock

8/11/1998 Amoco British Petroleum Co $48,174 $47,902 1.4 14.57 8.16 22.84 np np np Lockup Newly Issued Ord Sh

12/1/1998 Mobil Exxon Corp $78,946 $78,907 1.25 4.82 np 27.31 26.3 34.7 32.2 Lockup Stock

1/18/1999 AirTouch Communications Vodafone Group $60,287 $60,212 12.9 65.45 34.77 89.74 40.6 50.2 71.5 None Cash, Ord Sh

4/1/1999 ARCO BP Amoco $27,224 $27,224 2.52 nm 107.61 nm 27.2 29.9 54.4 None Newly Issued Ord Sh

4/22/1999 MediaOne Group AT&T Corp $49,279 $44,768 15.53 nm 47.48 31.31 12.1 13 22.8 None Cash, Stock, Liabs

6/14/1999 US WEST Qwest Commun Intl $56,307 $46,298 3.69 15.3 8.74 31.47 32.5 50.1 49.8 None Stock, Liabs

9/7/1999 CBS Viacom Inc $39,434 $39,434 5.78 62.5 31.88 579.92 –0.1 4 8.5 None Stock Type B

11/4/1999 Warner-Lambert Pfizer Inc $89,168 $99,710 7.71 38.61 33.86 57.53 25.3 29.7 40.8 None Stock

12/20/1999 Pharmacia & Upjohn Monsanto $26,486 $26,521 3.7 31.02 np 37.3 –1.1 –5.5 –13.5 Lockup Stock

1/10/2000 Time Warner America Online $164,746 $164,800 6.03 27.31 15.18 84.08 70.9 55.8 70.2 None Stock

5/2/2000 Bestfoods Unilever PLC $25,065 $20,895 2.41 15.44 12.95 28.51 42.3 35.7 53.3 None Cash

7/10/2000 SDL Inc JDS Uniphase $41,144 $35,172 188.09 1056.21 781.6 1395.71 77.2 68.6 106.3 None Stock

7/24/2000 VoiceStream Wireless Deutsche Telekom AG $29,404 $29,104 12.14 nm nm nm –25.4 –20.3 –20.2 None Cash, Ord Sh, Liabs

9/6/2000 Associates First Capital Citigroup $30,957 $30,938 2.36 4.85 4.78 20.57 50.8 52.8 45.6 None Stock

9/13/2000 JP Morgan & Co Chase Manhattan $33,555 $33,716 1.72 10.48 7.45 15.9 14.7 21.5 32.4 Lockup Stock

10/16/2000 Texaco Chevron $42,872 $35,993 0.78 10.25 6.92 15.55 17.7 22.6 17.5 None Stock

9/4/2001 Compaq Computer Hewlett-Packard $25,263 $25,175 0.62 13.51 7.66 nm 18.9 10.2 –2.0 None Stock

Averages – Total Sample $51,364 $50,555 11.72 75.97 56.87 125.21 27.88 29.71 34.57

Averages – without JDS/SDL $51,790 $51,195 4.38 25.63 17.19 51.4 22.34 24.37 27.26

1 wk prior 4 wks prior

Defensive Tactics

ConsiderationO ffered

Deal Multiples Premium over Stock Price

Equity Value / Target Cash Flow

Equity Value / Net Inc 1 day priorAnn Date Target

Name Acquirer Name Equity Value / Net Sales Equity Value / EBIT

Compaq Triangulation Diagram

Net Sales Mult

DCF

Implied Equity Value at 2/4/02

Valuation Method High Low DifferenceNet Sales Multiple (0.5× to 1.5×) $50.30 $16.80 $33.50DCF (Stand-alone) $20.80 $15.90 $4.90Cash Flow Multiple (6× to 26×) $31.80 $7.30 $24.50Latest Mkt. Price ($12.00 to $12.40/share) $21.10 $20.40 $0.70LTM Mkt. Price ($12 to $20/share) $34.10 $20.40 $13.60

Hewlett‐Packard Triangulation DiagramNet Sales Mult

DCF

EBIT Mult

Valuation Method High Low DifferenceNet Sales Multiple (0.5× to 1.5×) $67.50 $22.50 $45.00DCF (Stand‐alone) $42.50 $34.10 $8.40EBIT Multiple (9x to 40x) $46.70 $10.50 $36.20Cash Flow Multiple (6× to 26×) $46.20 $10.70 $35.50Latest Mkt. Price ($22.00 to $23/share) $44.60 $42.70 $1.90LTM Mkt. Price ($22 to $31/share) $60.20 $42.70 $17.50

Monthly Stock PricesRatio of CPQ to HWP

Ratio of CPQ to HWP

Price Beta Price Beta Price Price Beta Price Beta PriceSep-98 31.63 na 26.47 na 1.19 Sep-00 27.58 1.04 48.50 1.21 0.57Oct-98 31.63 na 30.13 na 1.05 Oct-00 30.41 1.05 46.50 1.24 0.65Nov-98 32.50 1.07 31.28 1.34 1.04 Nov-00 21.50 1.25 31.63 1.44 0.68Dec-98 42.00 1.15 34.16 1.35 1.23 Dec-00 15.05 1.28 31.56 1.44 0.48Jan-99 47.63 1.15 39.19 1.36 1.22 1-Jan 23.71 1.37 36.85 1.46 0.64Feb-99 35.38 1.36 33.22 1.47 1.06 1-Feb 20.20 1.40 28.85 1.53 0.70Mar-99 31.69 1.35 33.91 1.45 0.93 1-Mar 18.20 1.40 31.27 1.43 0.58Apr-99 22.31 1.29 39.44 1.47 0.57 1-Apr 17.50 1.33 28.43 1.34 0.62May-99 23.69 1.25 47.16 1.35 0.50 1-May 15.99 1.33 29.32 1.34 0.55Jun-99 23.69 1.15 50.25 1.34 0.47 1-Jun 15.32 1.34 28.60 1.33 0.54Jul-99 24.06 1.13 52.34 1.30 0.46 1-Jul 14.94 1.40 24.66 1.33 0.61

Aug-99 23.16 1.12 52.69 1.28 0.44 1-Aug 12.35 1.45 23.21 1.32 0.53Sep-99 22.88 1.06 45.38 1.33 0.50 1-Sep 8.31 1.55 16.05 1.41 0.52Oct-99 19.13 0.95 37.09 1.21 0.52 1-Oct 8.75 1.54 16.83 1.43 0.52Nov-99 24.44 0.95 47.44 1.23 0.52 1-Nov 10.15 1.55 21.99 1.47 0.46Dec-99 27.06 0.97 56.88 1.28 0.48 1-Dec 9.76 1.55 20.54 1.46 0.48Jan-00 27.25 0.94 54.13 1.28 0.50 2-Jan 12.35 1.48 22.11 1.46 0.56Feb-00 25.13 0.98 67.25 1.16 0.37 High 47.63 1.55 67.50 1.53 1.23Mar-00 27.00 0.96 66.44 1.06 0.41 Average 23.60 1.20 39.92 1.32 0.62Apr-00 29.19 0.91 67.50 1.04 0.43 Low 8.31 0.90 16.05 1.04 0.37May-00 26.25 0.95 60.09 1.08 0.44 Volatility 18.30% 15.40%Jun-00 25.56 0.94 62.44 1.08 0.41 0.6325Jul-00 28.06 0.90 54.59 1.11 0.51

Aug-00 34.06 0.94 60.38 1.13 0.56

Proposed Exchange Ratio

CPQ HWPCPQ HWP

DCF Valuation of Merger SynergiesThis image cannot currently be displayed.

Application of Leadership to the M&A Process