HP-Compaq - A Failed Merger?

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Case Details:

Case Code : BSTR202
Case Length : 20 Pages
Pages Period : 1999-2005
Organization : HP, Compaq
Pub Date : 2006
Teaching Note : Available
Countries : US
Industry : IT - Hardware

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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Does the Merger Make Business Sense

Soon after the HP-Compaq merger deal was approved by the HP's board and its shareholders in March 2002, industry analysts termed the deal as a strategic blunder. Critics ridiculed Fiorina by saying that one bad PC business merged with another bad PC business does not make a good PC company.

Many analysts felt that the synergies HP foresaw would not materialize easily. They said that the merged company would have to cut costs drastically in order to beat Dell in PCs, while constantly investing money in research and development and consulting to compete with IBM and Sun Microsystems.

In the high-end server markets, IBM and Sun Microsystems were constantly introducing new products. Since more than half of the new HP's sales came from low-margin PCs, analysts expressed concerns that it would not have enough cash to invest in R&D in order to compete in the high-end market...

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Does the Merger Make Economic Sense

A few HP divisions that were big revenue earners were not able to contribute correspondingly to profits. An analysis of the company's business segment revenues in the fiscal 2004 revealed that the Enterprise Storage & Servers and the Personal Systems divisions, the erstwhile Compaq strongholds, brought in revenues of US$ 39.774 billion, comprising approximately 50% of HP's total revenues (Refer Table II for HP's business segment information for the fiscal 2002 to 2004).

However, the operating profits from both these divisions combined were US$ 383 million, less than 1% of the divisions' revenues. Moreover, the total contribution of these two divisions in the overall operating profits of HP of US$ 5.473 billion was just 7%. Another major business of the erstwhile Compaq, HP services which generated revenues of US$ 13.778 billion, witnessed a fall in operating profits from US$ 1.362 billion in fiscal 2003 to US$ 1.263 billion in fiscal 2004. HP's own imaging and printing was the only business division that posted respectable operating profits of US$ 3.847 billion...

The Challenges Ahead

Due to her inability to revive the performance of hardware businesses, HP's board asked Fiorina to step down as the company's Chairman and CEO on February 09, 2005. The day Fiorina resigned; the shares of HP increased by 6.9 percent on the New York Stock Exchange. Commenting on this, Robert Cihra, an analyst with Fulcrum Global Partners said, "The stock is up a bit on the fact that nobody liked Carly's leadership all that much. The Street had lost all faith in her and the market's hope is that anyone will be better..."


Exhibit I: HP's Stock Price Chart (June 2000 - May 2005)
Exhibit II: Compaq's Stock Price Chart (2001)
Exhibit III: HP - Corporate Organization (Old)
Exhibit III: HP - Corporate Organization (New)
Exhibit IV: HP's Consolidated Statements of Operations (1998-2001)
Exhibit V: HP's Product Segment Information (1999-2000)
Exhibit VI: Compaq's Consolidated Statements of Operations (1998-2000)
Exhibit VII: The New HP's Consolidated Statements of Operations (2002-04)

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