The HP-COMPAQ Merger

“A hi-tech giant or another merger fiasco”

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

•Branding competition : Compaq was a reference and standard leader.

•Market maintenance and development of new markets (2000: 58% revenues outside U.S.
•Large Market Share.
•Product/service emphasis (strategic partnerships with Microsoft, Oracle…).
•Client base stable.
•Distributing dividends (1998).
•In 2000, emphasis on cost reduction and increase in gross margin.
•Competitor pressure
•Scope scale sales (ie, pocket computers)
3

3
 Pre-merge
Compaq: Products

n PC, (desktop and portable) – Manufacturing

and selling
n Servers – Manufacturing, selling plus
services
n Pocket Computer (handheld computer) -
Manufacturing and selling
n Storage – manufacturing, selling, services
and on-line storage

4
 Pre-merge
Compaq: BCG Matrix

Pocket Computers On-line storage

and IT services

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 E-commerce application software

n Hosted services

n Network management

n Integration services

n PC’s, printers, ink cartridges

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

• HP known as a brand name for printers and ink

• Held number 1 position in a number of areas, i.e Storage Area Network (SAN),
RAID and disk storage systems
• Stable client base
• Competitor pressure

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

Business Week Magazine

11

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
12

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 is the new stock symbol for the new HP.

The merger alone will require 15,000 job cuts.

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.

The merger will double the size of HP's maintenance-and-support business.

But it does little to help HP in other service sectors, such as consulting and
outsourcing. These businesses would make up less than 20% of the company's
service revenue. Since they are key to landing big contracts with corporations
and governments, analysts say HP may still need to do an acquisition, which is
unlikely in the wake of the Compaq 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

n Increase competition with major

competitors. i.e. IBM, Dell.
n Cut costs by $3 billion annually by 2004
n Increase earnings for shareholders
n Face the challenge of a shrinking market

14

HP wants to emulate IBM's push into consulting and other services

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.

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
14
 Post-merger
HPQ : SWOT Analysis

Economic downturn
Competitive environment
Threats

Organizational
Employee morale
Culture conflict

Confront Avoid
Opportunities

Exploit Search
Innovation Overlapping
Integration management

Customer loyalty cost savings Overlapping

market share Stable growth product lines

Strengths Weaknesses
15

SWOT stands for Strengths, Weaknesses, Opportunities and Threats. It's a

four-part approach to analyzing a company's overall strategy or the strategy of
its business units. All four aspects must be considered to implement a long-
range plan of action. In order to “swat” the competition you need to
understand SWOT. SWOT stands for Strengths, Weaknesses, Opportunities
and Threats. It's a way to analyze a company's or a department's position in the
market in relation to its competitors. The goal is to identify all the major
factors affecting competitiveness before crafting a business strategy.

15
 Post-merger
HPQ : PRODUCT LINES & COMPETITORS

PRODUCTS MARKET MAIN

COMPETITORS
SHARE (%)

PCs (-) 19% DELL ( + )

PRINTERS (+) 15% CANON, LEXMARK

LOW-END SERVERS 37% IBM (+)

HIGH-END SERVERS (-) LAG IBM (+), SUN
LOW LEVEL SERVICES 62% IBM (HIGH LEVEL)
STORAGE (+) LEAD EMC, SONY
SOFTWARE (-) LAG MS, CA, IBM 16

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.

Fiorina: We'll continue to organically grow, particularly the outsourcing and

consulting ends of the business. We'll be looking for strategic opportunities for
acquisition.

Capellas: We believe we can be brutally competitive in the individual product

segments. But we can also integrate hardware and software into solutions.

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.

Sensing a possible vulnerability as HP merges with Compaq, Dell recently

reached an agreement with Lexmark International to have printers and ink
cartridges manufactured under the Dell name.
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 Post-merger
HPQ : PRODUCTS GROWTH

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

* Data: Gartner Inc., IDC, Credit Suisse First Boston

17

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 Post-merger
HPQ: Product Life Cycle

pc’s

Printers

Storage

s erver

Service

software
Notebook

18

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.

HP develops and markets products in a broad range of printing and imaging

categories. We lead the market in inkjet printers, all- in-one devices, laser
printers, wide- format plotters, scanners, print servers and ink.

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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

Today, a third of HP's server business-- its powerful Unix machines--has

healthy profit margins and is tied with Sun Microsystems (SUNW ) for top
market share. But most analysts expect Sun and IBM (IBM ) to outpace HP in
this sector when tech spending recovers because rivals are offering newer Unix
models. At the same time, HP's $1.6 billion Intel-based server business
continues to bleed red ink.

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

Diversification Market Segmentation Market leadership

innovation

High
printer
PCs
Maintenance of
Phased withdrawal; Expansion, Productt
Position;
merger Server
Capability

Market penetration Differentiation

Storage

Divest Notebook Cash Generation

Low Imitation; Service

phased withdrawal

Unattractive Average Attractive

20

Matrix obtained from page 257 of Strategic Management Book

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 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

Data Source: Yahoo Finance

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 Post-merger
HPQ : SPACE CHART
Company Financial Strength

+
Conservative in Aggressive in printer market
storage market
Aggressive
Company
HPQ
- + Industry
Competitive Strength
Advantage - +

Defensive in PCs market New HP competitive in

server market
-

Environmental
Stability

22

•Competitive advantage: ( 3.8 / 5 )

•Market share: 5
•Product quality: 5
•Product life cycle: 3
•Customer loyalty: 4
•Know how: 5
•Vertical integration: 1
•Financial strength:( 2.8 / 5 )
•ROI: 2
•Leverage: 1
•Liquidity: 3
•Easy of exit from market: 2
•Inventory turnover: 5
•Economies of scale and experience: 4
•Environmental stability: ( 3.2 / 5 )
•Technological changes: 4
•Rate of inflation: 1
•Demand variability: 3
•Price range of competing products: 2
•Barriers to entry into market: 4
•Competitive pressure/rivalry: 5
•Industry strength:( 2.5 / 5 )
•Growth potential: 2
•Profit potential: 3
•Financial stability: 1
•Technological know-how: 4
•Capital intensity: 3
•Ease of entry into market: 2

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 Post-merger
HPQ: Organization Life Cycle

Performance
Decline
Maturity

HP
Development

Introduction

Effort & Time

23

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.

23
 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
24

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

25

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.

As indicated in this ETOP, the new HP is critically vunerable due to

Economic, Social, Technological and Competitive threats.

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 Post-merger
HPQ : Strategic Profile Design Factors

n Sustainability – The new HP must retain and grab

additional market share
n Uniqueness – Largest I.T company in the world
n Value added – Merger must demonstrate success
n Enhancement – Increased product line
n Flexibilty – Adaptation to market forces
n Stability – Retention of customer/client base

26

These design factors were obtained from slide 5-28

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 Post-merger
HPQ : Strategic Profile Design Factors con’t

• Fit – Was the merger of HP/Compaq a good strategic

move? Only time will tell!!!!
• Performance – Results of merger to be monitored over a
long period of time, i.e: 12 – 24 months and continuously
benchmarked against competitors
• Consistency – HP must demonstrate in new corporate
structure
• Stretch – CEO and Chairman Fiorina to lead merged
company aggressively

27

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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.

28

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.”

Compaq has compelling offerings for home/wireless networking and HP has

strength in digital imaging solutions. Maintaining both brands will enable HP
to leverage existing brand awareness and preferences and give customers the
opportunity to continue to buy the brand and products that best meet their
needs.

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