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 : Diversified

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"The HP-Compaq merger was a big bet that didn't pay off, that didn't even come close to attaining what Fiorina and HP's board said was in store. At bottom, they made a huge error in asserting that the merger of two losing computer operations, HP's and Compaq's, would produce a financially fit computer business." 1

- Fortune, February 07, 2005.

A Mega-Merger

On September 04, 2001, two leading players in the global computer industry - Hewlett-Packard Company (HP) and Compaq Computer Corporation (Compaq) - announced their merger. HP was to buy Compaq for US$ 24 billion in stock in the biggest ever deal in the history of the computer industry. The merged entity would have operations in more than 160 countries with over 145,000 employees, and would offer the industry's most complete set of products and services.

However, the stock markets reacted negatively to the merger announcement with shares of both companies collapsing - in just two days, HP and Compaq share prices declined by 21.5% and 15.7% respectively. Together, the pair lost US$ 13 billion in market capitalization in a couple of days. In the next two weeks, HP's stock went down by another 17%, amidst a lot of negative comments about the merger from analysts and the company's competitors. Industry analysts wondered what benefits HP, a global market leader in the high margin printers business, would reap in acquiring a personal computer (PC) manufacturer like Compaq at a time when PCs were fast emerging as low-margin commodity products.

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Though the merger helped HP in achieving economies of scale in the PC business, it faced fierce competition from Dell Computers (Dell),2 a low-cost, direct-marketer of PCs.

The merger also did not help HP to compete with IBM, which not only sold PCs3 but was also a market leader in the high-margin consulting and service businesses. In June 2005, HP's shares hovered around US$ 23 per share, below the price just before the merger was announced. This indicated that the merger had failed to create shareholder value. In contrast, the share price of US-based Lexmark, HP's major competitor and the second largest company in the printers business, rose by 60%, while Dell's share price moved up by 90% in the same period. With the PC and other hardware businesses of HP making miniscule profits, analysts opined that the company's printer business should be spun off into a stand-alone company...

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1] Loomis, Carol J., Ryan, Oliver, "Why Carly's Big Bet is Failing," Fortune, February 07, 2005.

2] Dell Computers is the world's leading computer systems company that designs and develops PCs, servers, and storage equipments. The company also offers professional services catering to the needs of leading global companies. For the fiscal year ended January 2005, Dell generated revenues of US$ 49,205 million and net income of US$ 3,043 million.

3] IBM sold its PC business to China-based Lenovo in December 2004.


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