HP- COMPAQ

A failed Merger ?

About the Merger

One of the largest Corporate IT mergers in the World HP offered to acquire Compaq in an all stock deal worth $25 Billion Merger was lead by the then CEO and ChairwomanCarly Fiorina Analysts were critical about the merger Will two struggling companies make a Successful Company said the analyst They said merger was a gamble and they did not find any focused logic Merger lead to many overlaps in products, distribution channels and jobs

Contd . . .
Both companies were trying to adjust to the acquisitions they had made previously and also new leadership Employee morale was a question and 15000 lay offs resulted due to merger. Merger aimed at competing with IBM and Dell Markets reacted negatively to the news. Together both lost $13 Billion in market capitalization After merger the company would have revenues of $87 Billion comparable to market leader IBM

Pre Merger Scenario

 Operates in almost all the countries Ranked 13th in Fortune 500 list HP specializes in developing and manufacturing computing, data storage, and networking hardware Major product lines include enterprise servers, related storage devices, as well as a diverse range of printers and other imaging products.

Compaq
Once the largest supplier of personal computing systems in the world Compaqs primary business divisions
Commercial and consumer PCs Enterprise computing: servers and storage products

Market leader in PCs, with more international sales than US Market leader in fault tolerant computing and industry standard servers

Pre Merger Statistics

COMPANY MARKET SHARE IN HIGH END SERVERS REVENUE Compaq 3% $134 mn

HP

11.4%

$512mn

COMPANY

MARKET SHARE IN MIDRANGE UNIX SERVERS

REVENUE

Compaq

4%

$488 mn

HP

30.3%

$3,675 mn

MERGER INTEGRATION
A $24 billion mistake is not the HP Way.
HP and Compaq brand names were retained. Focused on reducing culture clashes. The following questions needed to be answered in this regard Can a mega-company absorb another megacompany and still run things the way it used to? Should it even try?? Employees were put through a training workshop called Fast Start .

 HP made efforts to strengthen its image as a single unified company. Merged entity relied heavily on IT. The new HP also used conference calls and gatherings over the internet to link employees in different locations.

Does the merger make business sense?

HP COMPAQ MERGER- A HIGH TECH GIANT OR ANOTHER MERGER FIASCO This deal was termed as a STRATEGIC BLUNDER Most of HPs products were low margin products and therefore they did not have the cash to invest in R&D and compete with their rivals. HP lost many of its customers. This can be attributed to the fact that changes were made without consulting customers.

 Internal technology management structure of HP was different from that of Compaq. HP did not meet the promised benefits to the shareholders.

High Revenue Growth but Less Operating Profit

Even though extremely high revenues, hardly 1% profits
Enterprise Storage & Services
16000 14000 12000 10000 8000 6000 4000 2000 0 173 142 0 -5000

Personal Systems
30000 25000 20000 Net Revenues Earnings from Operations 210 22

Net 15000 Revenues Earnings 10000 from Profits 5000 -236 2004 2003 2002

-308 -2000 2004 2003 2002

 HP had missed the operating profit target as forecasted. These shortfalls translated into billions of dollars of unmet target.
Operating Profit Margin Target vs. Actual Profit
10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Enterprise Systems PCs Forecast for 2003 Actual - 2003 Actual - 2004

 37% of HPs assets were sold to Compaqs shareholders, (including imaging & printer business) HPs stake in printers (the only profitable business they had) fell to 63% Decline net profit
12.00 10.00 8.00 6.00 4.00 2.00 0.00 2000 2004 Net Profits (in %) Return on Assets

 Value derived from the merger was so low that HP could have been forced to Write Off major part of %14.5B that it wrote on its balance sheet as intangible asset . As the computer business of Compaq was earning low profits, the economic values of the goodwill was under suspicion. In the end, whole merger was a fiasco. The same benefits could have been achieved by HP through an alliance, without entering the low margin computer business.

Reasons for failure

Clash between HPs internal technology unit presided over by former Compaq executives & companys services organization, presided over by HP employees Other differences between HP & Compaq like language Analysts felt that the synergies HP foresaw would not materialize Post merger, HP witnessed a higher revenue fall along with loss of market share in PCs & servers segments HPs focus on increasing revenues through sales of PCs & hardware was not good when competitors were focusing on software & services to improve profitability Merger affected customers of HP Internal technology management structure did not respond well to merger integration efforts being implemented

 Fall of 23% in EPS in May-July 2004 because of HPs enterprise business performed badly Europe : HP mismanaged dealings with distributors & resellers in enterprise business division US : HPs project managers could not deploy new orderprocessing system online within the planned time which hampered shipments of enterprise computers HP was unsuccessful in selling Itanium Storage, bought from Compaq also failed to make a financial impact Services division acquired by HP from Compaq was profitable but too small as compared to competitors(IBM, Accenture & EDS)

Post Merger
Fiorina resigned in Feb 2005- shares went up by 6.9% on NYSE 2004 : --savings reached US$3 billion. Majority of this cost savings was due to job cuts in 2003 --Costs of US$ 800 million were reduced through synergies in procurement, supply chain & shutting down manufacturing facilities --HP reduced worldwide administrative offices space by 19% --HP reported highest market share position in servers in past 3 yrs For the quarter Oct 2004 to Jan 2005 : --HP server revenues increased by 19% --HP PC unit revenues increased by 11% --PC units operating profit increased by 71% --HPs Printing &Imaging unit increased by 3% --HP reported 3 consecutive quarters of market share gains against Dell in US

Challenges Ahead
To make company more results-oriented & develop an ability in the company to move faster to meet new challenges HP must get its marketing & new product development right to grab business from enterprise customers The MAIN challenge is to extend its brand. High quality and innovation need to apply to servers, services, storage systems &PCs HP needs to boost up its service capabilities to compete with IBM Apart from retaining its market share, HP has to develop new businesses for HP which would bring revenues & profits HP needs to build the market for media center PCs

 Another initiative in consumer electronics business, HP selling Apples iPods labeled iPod by HP HP spun off its high margin printer business or split into 2 companies, one focusing on individual consumers & other on enterprise customers HP had to be transformed from product centric to customer focused company

QUESTION 2
Fiorina seemed to be the wrong person for managing the merger. Did Fiorina fail as a leader? Yes , Fiorina failed as a leader for the following reasons: She compromised HPs shareholders stock to merge with Compaq and in exchange got little value. The merger integration strategy was well drafted , however its implementation was very poor. For ex, it was not communicated to Compaq employees in sufficient detail. Lastly, everyone lost faith in her that she could deliver

What were her post merger contributions? She retained HPs commitment towards innovations through breakthroughs She was very efficient in achieving cost reduction through Job cuts Synergies in procurement, supply chain etc Reducing Admin office space What kind of leadership is required to handle mergers ? Explain. The one that keeps the stakeholders interests above all i.e. the shareholders, customers and employees The one that ensures successful implementation of the integration strategy To be able to forecast challenges and resolve them before they turn into a problem

QUESTION 3
In order to revive HPs business, analysts felt that Hurd had to transform HP from a product-centric to a customer-focused company. What are the distinguishing features of a customer focused organization ? Discuss Build passion and commitment From owner and staff Customer is the centre Doing whatever it takes Lead, great examples Build processes around your customer not the business "Can we do something to make it even easier for the customer to do business with us?"

 Build a relationship Always be communicating For ex, Issue newsletters regarding latest products, future plans etc. Build a culture of Wanting to know What they want from you? Likes, dislikes, changes Action plan, seek their responses

Let the customer be your focus and you will become their focus.