HP Compaq
HP Compaq
HP Compaq
Compaq pre-merger
Compaq Founded in 1982
than US Market leader in fault tolerant computing and industry standard servers
Compaq pre-merger
Compaq had successfully created a direct model
in PCs #2 in the PC business, stronger on the commercial side Continuously weakening performance made Compaq directors impatient Dell became strong competitor through cost efficiency Compaq missed the online bus and its made-toorder system through its retail outlets failed to take off due to bad inventory management
Compaq pre-merger
To bring Compaq to the online market, Capellas
(CEO) bought Digital Equipment (AltaVista) Acquisition was incohesive resulting in 15000 layoffs and loss in 1998 New management lacked the cutting edge to maintain stability Bad investments Got caught in a cycle of cost cutting and layoffs Firm was too small and poorly run to maintain its wide array of products and services
William Hewlett and David Packard. HP incorporated in 1947 HP introduced its first PC in 1980 and the LaserJet (companys most successful product) in 1985 In 2000, HP had 85,000 employees and revenues of $48.8 bn Ranked 13th among Fortune 500
Growing problems at HP
HP was not adapting to technological innovation
fast enough Margins were going down IPG (HPs Imaging and Printing Group) was the leader in its market segment but did not rank anywhere among top 3 in servers, storage or services Printing line was facing competition from Lexmark and Epson which were selling lower-quality inexpensive printers Needed to build strong complementary business
excite a complacent HP Cut salaries, laid off employees Wanted to make high end computers HPs focus According to her, home and business PCs, UNIX servers were the biggest areas of growth
Compaq
HP Company
3%
11.4% Market share in midrange UNIX servers
$134 mn
$512mn Revenue
Compaq
HP Company
4%
30.3%
$488 mn
$3,675 mn
Market share in laptops Market share in PCs for for quarter 2 (volume quarter 2 (volume share) share) 12.1% 6.9% 11.6% 4.5%
Compaq HP
meeting growth targets became difficult for HP and it was forced to cut jobs and scrap plans As a result HP stock price dropped drastically. Turning the company around required more than just strategy from within
Back
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
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 companys 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 Compaqs 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
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
commodity like business, hence merging with Compaq is a strategic misfit. Larger PC position resulting from the merger is likely to increase risk and dilute shareholders interest in imaging and printing Lower growth prospects on invested capital Market position in key attractive segments remain same Services remain highly weighed to lower margin segment No precedent for success in big technology transactions
Summary of Deal
Announcement Date Name of the merged entity Chairman and CEO President Ticker symbol change Form of payment Exchange Ratio Ownership in merged company Ownership of Hewlett and Packard Families Accounting Method Merger method September 4, 2001 Hewlett Packard Carly Fiorina Michael Capellas From HWP to HPQ Stock 0.6325 HPQ shares to each Compaq Shareholder 64% - former HWP shareholders 36% - former CPQ shareholders 18.6% before merger 8.4% after merger Purchase Reverse Triangular Merger
solely to facilitate the merger Result : A tax free reorganization in which HP would control all of Compaqs assets through a wholly owned subsidiary
Compaq Hewlett Packard
Compaq Shareholders
8/28/2001 8/29/2001
8/30/2001
8/31/2001
23.40
23.21
-2.3%
12.69
12.35
-3.4%
-2.7%
-0.8%
-18.7% -3.5% -2.8% 2.1%
9/4/2001
9/5/2001 9/6/2001 9/7/2001
18.87
18.21 17.70 18.08
11.08
10.41 10.35 10.59
-10.3%
-6.0% -0.6% 2.3%
Deal Valuation
The final Exchange Ratio Exchange ratio implied by the market as on 31 Aug, 2001 Exchange ratio implied by the 12 month market performance of HP and Compaq stocks 0.6325 HPQ shares per Compaq share 0.5356 HPQ shares per Compaq share 0.596 HPQ shares per Compaq share
Compaqs Valuation by the $20.995 billion market pre-merger announcement Compaqs Valuation by HP as $24.995 billion implied by the final exchange ratio
economy overall and the tech sector in particular circa 2001 Volatile trading activity : NASDAQ suffered a 30% drop in the 12 months preceding the merger announcement Valuation multiples for comparable companies and recent comparable transactions were broadly distributed.
Valuation of Synergies
$2.5 billion pre-tax cost savings in year 2004
NPV of Cost savings estimated at $5 to $9/share of the
combined entity
The result is based on the following estimations : P/E multiples ranged from 15x to 25x Weighted cost of equity of HP-Compaq 15% Effective tax rate of the combined entity 26% Pre-tax profit decline of close to $500 million in 2004 resulting from overall revenue loss of approximately $4.1 billion for the combined entity Weighted average contribution margin of 12%
EV/Sales
0.72
0.60
Value of Synergies > Price of Synergies HPs Valuation of a Compaq share at the time of deal announcement : $14.68 Compaqs share price at the time of announcement : $12.35 Price paid for Synergies as per market valuation : $ 2.33 Synergies valued at $5-$9 per share !!
August 14,2001
ESOP :279,538,000 shares of Compaq Common Stock
are subject to issuance pursuant to outstanding options to purchase Compaq Common Stock
partners, customers Both companies are in similar businesses: Combine Product road maps
12 months They don't need two Unix or NT development teams 15,000 Jobs Eliminated HP:6000 Compaq: 8500 Problems with sackings: Even talent packs their bags Achieving the integration will be tied to peoples compensation packages
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
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
Shareholder value
Myth: A strategically poor integration will be reflected by the stock markets 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.
Link
PC business
Myth: HP, even after combining with Compaq, cannot fight Dells direct-sales model with their retail (indirect) plus direct model Fact : HPs 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
Printer business
Myth: HP is pursuing only market share in printers instead of ROI Fact : In HPs 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 pricecutting 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 Vendor : Fact
IBM HP Sun 2007 Revenue (Mn US $) 4069 3707 1711 2007 Share (%) 31 28.2 13 2007 Revenue (Mn US $) 3824 3424 1620 2007 Share (%) 30.9 27.8 13.1 Growth (%) 6.4 8.0 5.6
Dell
Fujitsu/Siemen s
1526
542
11.6
4.1
1270
554
10.3
4.5
20.2
-2.3
4000
3000
from PDAs to commercial printers and servers from the same source
The economies of scale have helped HP focus on
collaboration with HP, simplifying suppliers interaction with HP, increasing business collaboration, and lowering costs for both parties.
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
References
Buchanan, Anna D., The Merger of HP and Compaq,
Case (A) and (B), Darden Business Publishing, 2004 Hoopes, Charlotte L., The Hewlett-Packard and Compaq Merger: A Case Study in Business Communication, Marriott School of Management Supply Chain Management for the adaptive enterprise, HPs Internal Document www.nasdaq.com Strategic Analysis: The Integration of Hewlett-Packard and Compaq, Tiffany Adams and Renee Poutous Compaq and Hewlett-Packard, Mergent Online, www.mergent.com Burgelman, Robert A. and Webb McKinney, Managing the Strategic Dynamics of Acquisition Integration: Lessons from HP and Compaq, Aug 2005
Contributions
Simeen Mirza Premerger Scenario
Thank You