The Merger of Hewlett-Packard and Compaq (A) - Strategy and valuation

What was the appropriate valuation range for the merger?

What is the Impact of M&A on employees of HP and Compaq?

Expected employee layoff as a result of cost savings through economies of scale
was expected to be 8500 at Compaq and 9000 at HP. Actual figures were
somewhere around 44000 combined.
Do you support Fiorinas proposal to acquire Compaq? What are the pros and
cons?
Rejecting Fiorinas proposal would be wise decision in this case. Though expected
cost saving is huge and numbers make sense. HPQ would be leader in many fronts
in industry after merger. But it would be stuck in middle between IBM and Dell. Risk
of merger of huge companies is very high. Synergy and culture of both companies
are different. Also combined entity would move more towards less profitable PC
industry.
What are the factors that Influence the decision of cash vs. shares payment
decision in a deal?
Control of combined entity, deal risk diversification, sellers portfolio strategy (liquidity, time horizon, tax concerns, legal and regulatory factors, and unique needs
and preferences, Buyers strategy - impact on its balance sheet and capital
structure, impact on financial ratios
Which company is dominant in Server business?
Compaq
IBM
Dell
HP
How well did the HP board perform its role selecting the CEO?
CEO Fiorina was brought at difficult time without any experience in HP. Though she
had experience of 20 years in AT&T & Lucent, she was not much aware about PC
industry. Boards main motive was new CEO will act in some direction which she
actually did but ignoring opposition from shareholders. So boards decision was
poor.
Can revenue enhancement synergy be achieved in this deal? Why?

No. As the deal would result in annual revenue loss of $4.1 billion which is around
4.5% of estimated revenue, revenue enhancement synergy cant be achieved in
short term.

How HP, IBM, Dell, Compaq differed?

IBM is leader in providing integrated solution and servers with higher profitability.
Dell was leader in PC industry and highly profitable with direct sales approach.
Compaq was ranked 2nd in PC industry but was not much profitable due to higher
cost.
HP was leader in printing and imaging and had noticeable presence in PC and
servers business.
Given the acquisition premium, how dependent is HP on the expected synergies
for this deal to be economically attractive to HP shareholders?
Expected synergies were expected to reduce annual cost by $ 2.5 billion. Though
$4.1 billion revenue loss was only 20% of this amount to balance equation. Hence
HP is very much dependent on expected synergies.
How should Kathryn Macalester vote her shares?
Kathryn Macalester should vote her share in opposition of deal as deal is very risky
in short term.
What is the integration risk in this deal?
Huge size of both the companies and different cultures of companies with different
positioning is huge risk in integration. Along with that no other deal of this size in PC
industry was successful.
Why this deal is called merger of equals? Is it appropriate to say so?
As HP and Compaq are both very huge companies with revenues more than $30
billion each so it would be appropriate to call as merger of equals.
What are the risks faced by acquirer in all cash deals?
In a pure cash deal (financed from the companys current account), liquidity ratios
decreases. In cash transactions, acquiring shareholders take on the entire risk that
the expected synergy value embedded in the acquisition premium will not
materialize.
Which company is dominant in Storage business?
HP
IBM
Dell

Compaq
Compare the board composition of HP and Compaq?

What factors influence the pricing in an M&A deal?

Pricing in a M&A deal depends on following factors: Share prices, no of
shareholders, market volatility, price premium offered, expected cost saving
How could it be possible that Compaq would sell for such a low premium over its
market value? Does the exchange ratio make sense?

What was the value of synergies?

Value of synergies was expected in cost savings of $5 to $9 per share or $2.5 billion
per year.
Which company is dominant in Integrated Services business?
Compaq
Dell
IBM
HP
What is the DCF value of HP?
High - $43
Low - $34
In your opinion, from Compaq perspective what is most suitable for the deal - (1)
Cash for Equity or (2) Equity for Equity? Why?
For Compaq cash for equity would be suitable as with pure cash deals, there is no
doubt on the real value of the bid. Also in cash transactions, HP shareholders take
on the entire risk that the expected synergy value embedded in the acquisition
premium will not materialize
Will the merger with Compaq bring HP closer to Dell, or to IBM?
The merger will bring HP closer to Dell as Compaq has strong direct sells PC
business. Also there wont be any change in integrated solutions provided by HP
which is strength of IBM
Why Carleton Fiorina is so motivated in this deal?

The size of this deal gives Win or lose scenario. As market is having sluggish growth
this deal if successful would put HP in leadership position which was objective of
appointment of Fiorina.
How do the terms of merger allocate power in the board and management of the
new firm?

Which company is dominant in PC business?

Compaq
IBM
HP
Dell
What are the Strategic Challenges Faced by HP after merger?
Integration challenges

Why the board did ignores the severe negative market reaction to the
announcement of the deal?
Generally in merger acquirer loses some of its value in stock market as a result of
premium paid for the acquisition. Board wanted a change in strategy and deal made
financial strength so board ignored market reaction.
What are the risks faced by acquired in all cash deals?
In cash deals acquired may get paid less for contribution in business. It wont have
any right in shareholdings or board for decision making for future course of
company.
What will be the impact on HP and Compaq if the deal fails in voting?
If deal fails in voting then share prices of HP would improve and fall for Compaq
shares. Also there would cost impact of promotion and cost of deal.
What is the Earnings multiples value of HP?
EPS growth 4%
P/E 52.6
ROA 1.9%
ROE 4.5%
ROI 3.5%

What is HP way?
HP way symbolizes innovation, integrity, flexibility, teamwork and individual
contribution.
Why Compaq for HP?
Complementary set of products and services, cost saving due to synergies
What is the DCF value of combined entity?

What is the relative stock price performance between HP, Compaq, Dell, and IBM?
IBM > Dell > HP > Compaq
Why Walter Hewlett opposed the Deal?
1.
2.
3.
4.

Resulting business portfolio is worse

Acquisition will not solve HP strategic problems
Finical impact on shareholders is unattractive
High integration risk

Which company is dominant in Printing and Imaging business?

HP
Compaq
Dell
IBM
Why was the board so divided on this issue? What grade would you give HPs
board in the way they handled this complicated strategic issue?
Board was divided because one group failed to understand the side of other group
and long-short term view. The way they handled the strategic issue was very poor.
What is the Earnings multiples value of Compaq?
EPS growth -94%
ROA -2.4%
ROE -5.1%
ROI -4.8%
What are the various types of synergy identified in an M&A deal?
Admin synergies
Cost of goods sold synergies

Sales
Marketing
R&D efficiency
Is there any Co-Insurance Effect in this Deal?
Yes. Firms are facing financial synergies of $2.5 billion
How the stock price reacted so on the announcement of the Deal?
Stock prices of HP collapsed by 18% and stock prices of Compaq improved
When can the synergy be reasonably expected to start affecting cashflows?

Which company is dominant in Service business?

Compaq
IBM
HP
Dell
What is your assessment of the role played by third partiesconsultants,
investment bankers, analysts, and institutional investorsin this deal?
Role played by third parties is very wide. Every group saw advantage in promoting
their agenda and benefits not carefully analyzing deal with overall perspective.
What is the financial impact of this deal on HP Stockholders?
Collapse of HP stock resulted in capital loss for shareholders. Also their voting rights
got diluted.
Why did Walter Hewlett vote for the deal in the board room, and vote against it as
an investor?
As if he opposed deal in Board room there would have been renegotiation and which
would have costed more to acquire Compaq by HP. So he voted yes in board room
and opposed as an investor.
What are the various types of synergy identified in HP Compaq deal?
Admin synergies
Cost of goods sold synergies
Sales
Marketing
R&D efficiency

Where is the strategic fit between these two firms?

Together they produced a complementary set of products and services better able
to serve at lower cost along with financial benefits
Assess the appropriateness of the exchange ratio proposed in this deal. In terms
of the relative contributions of the two firms, is the exchange ratio fair to HP
shareholders?
Exchange ratio is 0.6325. This ratio is not fair to HP shareholders as this dilutes their
voting rights
In your opinion, from HP perspective what is most suitable for the this deal - (1)
Cash for Equity or (2) Equity for Equity? Why?
Equity for Equity. As in stock transactions, the synergy risk is shared in proportion to
the percentage of the combined company the acquiring and selling shareholders
each will own.
Slim approval margin & severity of the markets reaction Was the deal good?
No. As most shareholders opposed deal due to involved risk.
As a shareholder in HP, would you vote your shares in favor of the deal?
As a shareholder I wouldnt vote in favor of the deal considering the risk involved.