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Executive Summary.
The world’s largest corporate Information Technology merger began in September 2001 when HP announced that they would acquire Compaq in an all
stock purchase valued at $25 billion. Over an 8 month period ending in May 2002, the merger passed shareholder and regulatory approval with the end result
being one company. The new HP has annual sales of approximately $90 billion which is comparable to IBM, and an operating incom e of almost $4 billion.
The merger was led by Carly Fiorina, the chairwoman and CEO of HP. The president of the new HP was Michael Capellas who was the former chairman and
CEO of the old HP and who has recently resigned and is now the CEO of World Com.
Overall, many analysts were critical of the merger from the beginning since both Compaq and HP were struggling companies before the merger. The
common question that has been raised by analysts is: Do two struggling companies make a better merged company? Some analysts have indicated that the
merger is a gamble and that it is difficult to see any focussed logic behind the merge considering that most I.T acquisitions are not successful. Prior to the
merger, Compaq has been unable to grow despite previously buying Digital, while HP was trying to grow internally, without much success. Both companies
were still adjusting to acquisitions they have made in the past and both were adjusting to new leadership (Fiorina and Capellas). The merger deal also means
that there are many overlaps in products, technologies, distribution channels, services, facilities and jobs. Employee morale is a threat to a successful merger as
there has been numerous layoffs -15,000 employees. The claimed annual cost savings of about $2.5 billion dollars by the year 2004 amounts to only 3 % of
the combined costs of both companies. Gartner Group research has indicated that the merged company has failed to do a good enough job of presenting the
benefits of an acquisition of this scale to justify the deal’s risk as it is generally known that technology mergers rarely work. In addition, both companies in the
past have struggled to resolve conflicts between direct and indirect sales channels. The cultural background of both companies is quite different and integration
will take a long time. The culture at HP is based on consensus, Compaq’s culture on the other hand is based on rapid decision making.
From a positive perspective, most botched tech mergers involved companies that were trying to buy their way into new businesses they knew little about,
this is not the case with the HP/Compaq merger. Apart from servers and PC’s, they have several areas where their products overla p. e.g: they are both are
involved in making data -storage equipment and both make hand held computing devices. In addition, both companies also bring different strengths to the
table. Compaq has done a better job in regard to engineering an entire line and HP has been strong in consumer products. The justification provided by HP
senior management suggests that a merger will enable them to com pete with two of their biggest competitors, IBM and Dell.
In conclusion, it is viewed by many analysts that there will be at least 2 more years of bitter infighting which will cause the new HP to lose direction and
good personnel. This is great news for competitors such as IBM and Sun as both of them will be able to pick off the market while the new HP is distracted by
the merger. The new HP may be a threat to IBM but not anytime soon. It could take several years to determine if the largest merger in I.T history will be a
success or a complete flop.
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Presentation Outline
n PRE MERGE
n HP
Presented by:
n Compaq
n MERGE Leo B.
n HP+COMPAQ Hugo P.
Hongqi H.
n POST MERGE
n NEW HP
2
Pre-merge
Compaq: in The Life Cycle
Intro Growth Maturity Decline
3
Pre-merge
Compaq: Products
4
Pre-merge
Compaq: BCG Matrix
Storage Servers
PC ’s :
• Laptops
• Desktop
5
Pre-merge
Compaq: Competitors
n IBM
n Servers, PC’s, storage and IT services.
n Sun Microystems
n Servers
n Dell
n PC’s
n HP
n PC’s, IT services and pocket computers
n Palm
n Pocket computers
6
6
Pre-merge
Hewlett-Packard
Known as a box vendor, a one-stop shop
for business applications:
n Unix servers
n Hosted services
n Network management
n Integration services
7
Pre-merge
HP : Competitors
n IBM
- Servers, PC’s, storage and IT services
n Dell
- PC’s
n Canon
- Printers, fax, copiers, optical equipment
n Compaq
- Pc’s, Servers, Pocket computers
8
8
Pre-merge
HP : Organization Life Cycle
Intro Growth Maturity Decline
9
Pre-merge
HP : BCG Matrix
Pocket Servers
Computer PC’s
Computer repair
Printer supplies
- ink cartridges
- photo paper
10
10
Pre-merge
HP : Leadership - Fiorina
Categories Grade
STRATEGY B
EXECUTION C
CULTURE C+
ORGANIZATION D
INNOVATION B+
DEAL-MAKING D
STRATEGY
For decades, HP was a collection of independent businesses, each selling a
particular kind of product. Fiorina was hired to execute an "e-services"
strategy that would meld these pieces into one powerful, profitable whole. HP
could sell everything from handheld gizmos to back-office servers, with the
high- margin software and consulting to make it all work.
Grade: B
The "e-services" plan looks good on paper and may be the right long-term path
for the company. But so far, HP is as dependent as ever on its last remaining
gold mine: the $20 billion printing business, which has subsidized losses at the
rest of the $48 billion company for the past three quarters, say analysts.
EXECUTION
When Fiorina arrived, HP was two companies: a world-class maker of printers
and imaging gear and a mediocre computer company. She set out to pump up
sales and profits in the ailing computer business by becoming stronger in
software, storage, and consulting.
Grade: C
HP is still the same two companies. While it remains the king of printers, the
economic downturn has hurt efforts to improve profits in the computer
business. It has gained market share in Unix servers, but there has been
negligible progress in storage and software. Also, consulting remains small
compared with rivals. 11
Merger
HP and Compaq
n Merge champion (Fiorina)
n Horizontal merge
n Initiated Sept 2001,
Completed May 2002
8 month process
n Biggest merger in IT history
n 25B$ all stock purchase
n 1 million working hours spent on merger
integration
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12
Merger
HPQ : Pros and Cons
n The Positives:
n COST SAVINGS
n FINANCIAL BULK
n CROSS-SELLING & TECHNOLOGY
n BUYING POWER INCREASING
n The Negatives:
n EXECUTION CHALLENGES
n PCs BUSINESS OVERLAPING
n COMPETITIVE POSITION
n MORALE
Business Week Magazine
13
HPQ has to merge two struggling companies with divergent corporate cultures
and the CEO has a long way to go to win over the many employees who
opposed the deal.
Armed with the market-share lead in PCs, back-office servers, and printers, the
new HP would have the sheer bulk and reach to turn these two troubled
companies into one far healthier one
This will enable HP to leverage Compaq's strong market share and brand
recognition in the commercial PC market.
13
Merger
HPQ : Objectives
14
The accelerated cost savings come from leveraging HP's new bulk to
renegotiate contracts for supplies such as memory chips and hard drives.
And investors could benefit big time from huge cost savings. By eliminating
redundant administrative functions, HP cost savings would reach $3 billion a
year by 2004. The company would likely write off most of the more than $1
billion cost of the merger in 2002.
The new HP will exploit its market power for everything from better deals
with suppliers to pressuring software developers such as Oracle Corp.and SAP
to push HP gear. Then, over time, it will develop the consulting and software
smarts to help customers deliver whizzy new offerings.
The accelerated cost savings come from leveraging HP's new bulk to
renegotiate contracts for supplies such as memory chips and hard drives.
A big chunk of the savings--$1.5 billion annually--will come from trimming
the payroll
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Post-merger
HPQ : SWOT Analysis
Economic downturn
Competitive environment
Threats
Organizational
Employee morale
Culture conflict
Confront Avoid
Opportunities
Exploit Search
Innovation Overlapping
Integration management
Strengths Weaknesses
15
15
Post-merger
HPQ : PRODUCT LINES & COMPETITORS
The new HP will feature Compaq's corporate PCs, low-end servers, and its
iPAQ handhelds, along with HP printers and UNIX servers. Consumer PCs
from both sides will also remain, though HP's business PCs and Jornada
handhelds will not.
The company must cut costs to the bone to beat Dell in PCs while pouring
money into research and development and consulting to take on IBM and
others on the high end
Although HP enjoys the biggest share of the PC market now, the combined
company's share is expected to remain flat, while Dell grows 30% a year.
45
40 MARKET SHARE /
RANK
35
30 INDUSTRYWIDE
ANNUAL GROWTH
25 RATE
20 INDUSTRYWIDE
GROSS PROFIT
15 MARGINS
10 HP/COMPAQ
0
PRINTERS PCS SERVERS STORAGE SERVICES
17
Post-merger
HPQ: Product Life Cycle
pc’s
Printers
Storage
s erver
Service
software
Notebook
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FOR PC’s:
HP needs flawless execution and cost-cutting--especially with more- focused
rivals such as Dell and Sun fighting for every deal in this down economy –
cost leadership
Capellas: First and foremost you've got services growth, the fastest-growing
segment of the whole IT market. Managed services and outsourcing is growing
fastest. The customer service side is growing slower but is very profitable.
A more focused HP might also make more of its franchise printer operation.
HP has built a thriving business in photo printers and all- in-one printer-copier-
fax gizmos. These categories brought in 32% of HP's $5 billion in printer sales
in its most recent quarter. Since photos require more ink than plain documents,
the photo printers drive sales of highly profitable ink cartridges.
And while PC sales help the top line, profits from the printer-supplies unit
held up the bottom line.
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Post-merger
HPQ : BCG Matrix
Service
Industry growth rate
Software
High
Notebook
Storage
Servers
PCs Image
Low
printer
Low High
Relative market share ( Cash generation ) 19
While higher-end Unix systems now bring in most of the industry's profits,
over time, less expensive machines based on Intel Corp.'s (INTC ) new
Itanium chip and either Windows or the Linux software will take over many
jobs. While the Unix market is expected to grow around 6%, Fiorina says the
market for Windows and Linux models will grow 20% a year as these systems
prove their mettle at tougher computing jobs. Indeed, market researcher
International Data Corp. estimates that worldwide revenue from sales of
Windows and Linux servers will outpace Unix machines by 2005.
The company says the printer business will grow by 10% in 2003 and 2004.
By contrast, personal computer sales will fall this year and grow less than 2%
next year.
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Post-merger
HPQ : Directional Policy Matrix
High
printer
PCs
Maintenance of
Phased withdrawal; Expansion, Productt
Position;
merger Server
Capability
20
20
Post-merger
HPQ : Financial Ratio Profile
Profitability
Low Industry standard High
Liquidity
Very tight Industry standard Too much slack
Leverage
High Debts Industry standard No Debt
Activity
Too slow Industry standard Too fast
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HPQ
Industry Average
Profitability:
Gross Margin: 26.36 29.87
Gross Margin – 5 yr. Avg. 28.82 31.33
EBITD – 5 yr.Avg. 10.73 13.12
Operating Margin
– 5 Yr. Avg. 7.73 9.14
Pre-Tax Margin
– 5 yr. Avg. 8.07 10.13
Net Profit Margin
– 5Yr. Avg. 5.98 7.04
Effective Tax Rate
– 5 yr. Avg. 23.42 29.49
Liquidity:
Quick Ratio: 0.91 1.01
Current Ratio: 1.46
1.33
Leverage:
LT Debt to Equity: 0.18 0.45
Total Debt to Equity: 0.23 0.63
Activity:
Receivable Turnover: 7.39 7.07
Inventory Turnover: 7.36 32.84
Asset Turnover: 1.32
1.43
21
Post-merger
HPQ : SPACE CHART
Company Financial Strength
+
Conservative in Aggressive in printer market
storage market
Aggressive
Company
HPQ
- + Industry
Competitive Strength
Advantage - +
Environmental
Stability
22
22
Post-merger
HPQ: Organization Life Cycle
Performance
Decline
Maturity
HP
Development
Introduction
Even though both HP and Compaq were mature companies before the merge,
it can be considered that the merged company is under re-
development/restructuring, as a result the company has lost some ground as a
Mature company.
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Post-merger
HP: CHALLENGES
n CHOOSING PRODUCTS
n Fix the PC business
n Optimize the server business
n Enhance the service & consulting
n CUT COSTS WHILE MONITORING
REVENUES
n Cut $3b
n Keep revenues from shrinking more than
5%
n INCREASE MORALE & AVOIDING
CULTURE CLASHES
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Workers from HP and Compaq have spent more than 1 million hours planning
their merger. Here's how they're doing.
Their merger faces huge challenges. One top problem may be morale.
The new HP will feature Compaq's corporate PCs, low-end servers, and its
iPAQ handhelds, along with HP printers and UNIX servers. Consumer PCs
from both sides will also remain, though HP's business PCs and Jornada
handhelds will not.
Most of the $2.5 billion in reduced costs will come from eliminating
overlapping corporate functions, from legal and marketing to human resources
and sales management.
The team's biggest task: finding financial synergies. It has been dispatched to
hit two targets: $2.5 billion in cost savings by 2004 and keeping revenues from
shrinking more than 5%, as rivals swoop in to grab customers.
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Post-merger
HPQ : ETOP Profile
Factors Impact Importance Threat
Economic 8 9 72
Political 6 4 24
Social 8 8 96
Tech. 10 9 90
Competitive 9 9 81
Geographic 2 2 4
Total 367
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Enviromental Threat and Opportunity profile (ETOP) for the new HP/Compaq
identifies a very high score of 367. This scoring is based on of the 3
individuals drafting this case study. The Threat value is based on the product
of Impact X Importance. The high score is due primarily to the merger of both
companies. There are political issues arising due to the agressiveness of the
merger. The Social threat is rated high due to an employee morale issue within
the company due to the number of layoffs that have occurred. The Competitive
nature of the hi-tech industry and technological changes also strongly impact
the new HP.
25
Post-merger
HPQ : Strategic Profile Design Factors
26
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Post-merger
HPQ : Strategic Profile Design Factors con’t
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Post-merger
Conclusion - HP Strategy
n Balance between the innovation/being first
to the market and pure, raw, low cost.
n Maintaining both company brands and
strength.
n Adjust and optimize product line.
n Enhance high-end Service.
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Capellas: “There is very clearly a balance between innovation and being first
to market on one hand, and pure, raw, low cost on the other hand. If you don't
spend any money in R&D you will by definition have a couple of points on the
bottom line, but you'll also never lead in any new product categories, so you
won't get the margins there.”--
Fiorina: “People are declaring the PC business dead because it has had a
couple of rough quarters. That's incredibly shortsighted. It's clear that this is a
critical part of the ability for consumers to do interesting things in their homes.
But the reason for buying isn't going to be to get the hottest box at the lowest
price. You've got things like digital imaging, digital music. It's something that
does something for a consumer. This is what the industry is missing. It's
innovation. That's what Dell can't do.”
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