Stephen Koenig Managerial Principals Professor McLaughlin Beating Dell: Why HP Acquired Compaq Dells dominance of the PC industry

had terrible consequences for rival Compaq, and Dell announced its plans to then go after the lucrative printer market, currently dominated by Hewlett Packard. HP and Compaq decided to merge, in order to better combat this threat. HP CEO Carly Fiorina believed the merger would bring cost savings by eliminating duplication and by increasing economies of scale. Both companies had to seek approval from their shareholders through separate special meetings. While Compaq shareholders unanimously approved the deal, there was a public proxy battle within HP as the deal was strongly opposed by numerous large HP shareholders, including the sons of the company founders, Walter Hewlett and David W. Packard, as well as the California Public Employees Retirement System (Calpers) and the Ontario Teachers Pension Plan. Walter Hewlett only reluctantly approved the merger, in his duty as a member of the board of directors, since the merger agreement "called for unanimous board approval in order to ensure the best possible shareholder reception. While supporters of the merger argued that there would be economies of scale and that the sales of PCs would drive sales of printers and cameras, Walter Hewlett was convinced that PCs were a low-margin but risky business that would not contribute and would likely dilute the old HP's traditionally profitable Imaging and Printing division. David W. Packard in his opposition to the deal "massive layoffs as an example of this departure from HPs core values...[arguing] that although the founders never guaranteed job security, 'Bill and Dave never developed a premeditated business strategy that treated

HP employees as expendable.'" Packard further stated that "Fiorinas high-handed management and her efforts to reinvent the company ran counter to the companys core values as established by the founders". The founders' families who controlled a significant amount of HP shares were further irked because Fiorina had made no attempt to reach out to them and consult about the merger, instead they received the standard roadshow presentation as other investors.[ In 2002, Compaq signed a merger agreement with Hewlett-Packard for $24.2 billion, including $14.45 billion for goodwill, where each Compaq share would be exchanged for 0.6325 of a HewlettPackard share. There would be a termination fee of $675 million USD that either company would have to pay the other to break the merger. Compaq shareholders would own 36% of the combined company while HP's would have 64%. Hewlett-Packard had reported yearly revenues of $47 billion, while Compaq's was $40 billion, and the combined company would have been close to IBM's $90 billion revenues. It was projected to have $2.5 billion in annual cost savings by mid-2004. The expected layoffs at Compaq and HP, 8500 and 9000 jobs, respectively, would leave the combined company with a workforce of 145,000. Fiorina also claimed the merger gives the combined company a broader expertise in both hardware and services. This should enable the firm to differentiate and reduce the threat from costleader Dell, as well as to better compete with other service providers, such as IBM and EDS. Critics of the merger pointed out that the merged firms still cant compete with Dells efficient supply chain management, and that Dells success with a no-services strategy demonstrates that providing services is not necessary for profitability. The proposed merger ran into opposition, and while Fiorina and the two firms were distracted, Dell continued to gain market share. The HP-Compaq merger was made for a number of sound reasons, such as to increase market size and power, to expand the firms product lines, to support cross-selling, to bundle products, to

realize economies of scale, to reduce duplication and to reduce excess capacity. Companies gain bargaining power over buyers and suppliers through horizontal integration, because industry consolidation increases the remaining firms power. This is called market power, or monopoly power. Horizontal integration is not consistent with maximizing stockholder wealth when there are no appropriate prospective targets. This might occur, for example, if prospective targets have organizational cultures or business practices that differ sharply from the firms, then post-merger integration of the two firms may be very difficult or impossible; or, if there simply are no rivals that offer complementary skills or assets. Another drawback to horizontal integration is the possibility of antitrust regulation. When a firm already dominates a significant market share, it may not be possible to increase that share by merger or acquisition due to the opposition of regulatory agencies. Finally, there are a number of reasons that a company might pursue horizontal integration, in spite of its drawbacks. But if these reasons are not present, then a company should not consider horizontal integration. These reasons include the need to realize increased economies of scale or the need to acquire additional assets in order to be competitive in the industry. REFERENCES http://en.wikipedia.org/wiki/Compaq#Acquisition_by_Hewlett-Packard http://www.pcworld.com/article/97944/article.html http://www.hp.com/hpinfo/newsroom/press/2001/010904a.html