HP+COMPAQ

In search of scope and scale

HISTORIC EVENT
 A merger as big and bold as Hewlett-Packard’s $ 19
billion acquisition of Compaq Computer in 2002 had
never taken place before in Technology Industry.

 Carly Fiorina ,HP’s CEO, believed it was the right move

for HP

 “ The leading technology company in the world ”

HP
 William (Bill) Hewlett and David (Dave) Packard
originated a company in a garage in nearby Palo
Alto,california
 1939, Packard and Hewlett established Hewlett-Packard
(HP) in Packard's garage with an initial capital
investment of US$538.
 Kickstarted the silicon valley’s progress
PREMERGER POSITION OF HP-2000
 Ranked 13th in fortune 500
 Turnover US $48.8

 85500 employees

 Carly fiorina: Chairman (September 22)

 2nd largest computer manufacturer

 leader in Desktop computers, Servers, Peripherals & services.

 Internet infrastructure,high-end Super dome server line in

September.
HP-2001
 March: a new business unit, HP Services, reporting
directly to the CEO
 May: systems and services based on the new Itanium
processor jointly developed by HP and Intel.
 Industry stumbled, meeting growth targets became
difficult.
HP-PRODUCT PORTFOLIO
 Laptops/Notebooks
 Paltops/PDA

 Printers & printing consumables

 Digicams

 Scanners

 Moniters

 Mainframes
COMPAQ
  Joseph R. Canion,Jim Harris & Bill Murto in Feb 1982
 Initial investment $1.5mn.

 Manufactured & sold IBM compatible computers

COMPAQ-PRODUCT PORTFOLIO
 Enterprise computing group
 Mainframes servers workstations

 Internet products networking products

 Commercial desktops

 Portables

 Small and medium business solutions

HURDLES FOR HP
 Overall industry struggling
 Adapting to the innovations

 Competition in printing

 IPG business not gaining traction

 Shrinking margins
 WHY MERGE??

 Eliminate one player in an oversupplied PC Market

 To compete with IBM and other companies

 Reduce Costs.

 1990’s IT recessionary phase.

 Merger expected to yield savings projected to reach $2.5bn

annually by 2004.
 Advantage of more volume of sales.

 Development of direct distribution capability.

 Strengthen sales force .

 Improve customer base

WHY COMPAQ??
 No 2 in the PC business and stronger on the
commercial side than HP. HP was stronger on the
consumer side. Together they would be No 1 in market
share in 2001 .
 Compaq was strong in low-end industry standard (Intel)
servers.
 Best known for its PCs, also had enterprise
businesses that it had built up through earlier
acquisitions of its own.
EXPECTED RESULTS
 Superior customer value
 Generate cost synergies reaching approximately $2.5 bn
annually.
 Adds up to world-class innovation and quality.

 Larger PC position resulting from the merger likely to

 increase risk and dilute shareholders interest

CONTINUED..
 Assets of $56.4 billion
 annual revenues of $87.4 billion

 annual operating earnings of $3.9 billion

 operations in 162 countries and 145000 employees

 Improves access to the market with Compaq’s direct

capability and low cost structure .
 Work force reduction by around 15,000 employees
saving around $1.5 billion per year .
ROLE OF FIORINA IN MERGER
  Initiative taken for the merger.
  More expectations from the merger.

 Relied on institutional shareholders vote in favour of

deal.
  Inspite of oppositions, went ahead with the merger.

 Opposition

-Walter Hewlett
-The largest shareholder – The David & Lucile
Packard Foundation(10.4%)
-Employees
-stock markets ($13 bil)
TERMS AND CONDITIONS
 HP will retain its name
 Fiorina will be the CEO and Chairman

 Capellas then CEO Compaq will be the president

 0.6325 of an HP share per Compaq share

 Deal size Approx. $25 billion

 HP shareholders 64%; Compaq shareholders 36%

KEY HIGHLIGHTS

 Horizontal merger.
 Merger initiated on Sept 2001, completed on May
2002(8 month process).
 Biggest merger in IT history.
 $25bn all stock purchase.
 1mn working hours spent on merge.
 HPQ is the new stock symbol for the new HP
CRITICISM

 Strategic blunder”.
 “Dumbest deal of the decade” – Michael Dell
 “One bad PC business merged with another bad PC
business does not make a good PC company”
 “This is not a case of 1 + 1 = 3. More like 1+1=1.5”
WALTER HEWLETT

1. Resulting Business Portfolio is worse than the existing

HP Portfolio

2. Acquisition will not slove HP’s strategic problems

3. Integration risk is substantial

4. Financial impact on HP shareholders is unattractive

FIORINAS REPLY
1. Information technology industry continues to undergo
rapid change an HP must continue to address challenges
of new environment

2. Compaq merger is unique compelling strategic

alternative no other option offers such comprehensive
benefits and opportunities
3. Combination addresses industry dynamics and customer
requirements, creates stronger company and is
financially compelling

4. Management is experienced and focused on execution,

and integration planning is ahead of schedule.
CULTURAL DIFFERENCES
HP Comapaq

 HP saw itself, and the  Compaq saw itself, more

evidence supported that
view, as a culture of
consideration,
thoughtfulness, and
planning – a more careful
culture.
as a culture of “ready,
shoot ,aim”
- much quicker to act
- debated less
- considered less before
took action
INTEGRATION
 New leadership
integration details PR Product map

Financials Integration Tasks Customer strategy

Selection
Retention Governance decisions
Stay Separation
Battling egos
(Transitions)
Goals aligned Employee Communication

New HP people & business How do people act?

leadership principles
Extended uncertainty
FY 2002-03
 Improved position in every category in which they compete.
 Became a leader in customer support services.

 In IPG, through commitment to innovation in product design,

manufacturing and business models.
 Being a technology company, the introduction of the word
‘invent’ in their logo.
 In the last 6 mths of fiscal 2002, introduced more than 100
products & 1400 patents to their portfolio
 yr 2002 solid balance sheet with more than $11 bn in cash &
short term investments.
 The acquisition of Compaq’s commercial pc & consumer pc

 business allowed improvement in their position in this category.

 Reduced their workforce through combination of layoffs, early

retirements & attrition
SYNERGY
 Cost leadership
 Raw material costs reduced by 3-4%

 Adoption of direct selling approach of Compaq

 Downsizing
 Fiorina resigned 2005.
 New CEO: Mark Hurd

 Where Fiorina failed and where Hurd excels :

Educating HP managers and employees.
Exploiting the possibilities of the merger
Took initiatives to cut down costs, lay off employees
 Understanding the market properly and aligning HP’s
corporate strategy to reality.
 Creating a performance oriented culture to pursue

 common goals shared throughout the organization

SELLING AND GEN EXPENSE RATIO
PROFITS V/S DELL COMPUTERS
CONCLUSION
 The merger suffered from autocratic leadership and
initial financial stress
 Successful integration is the key

 Operational integration and strategic integration both

should take place simultaneously
 Over the time the synergy strategy gives fruitful results