HP-Compaq - A Failed Merger?
|
Case Code: BSTR202 Case Length: 21 Pages Period: 1999-2005 Pub Date: 2006 Teaching Note: Available |
Price: Rs.400 Organization: HP, Compaq Industry: Information Technology , Related Services Countries: US Themes: Mergers, Acquisitions, Strategic Alliances |
Abstract Case Intro 1 Case Intro 2 Excerpts
Excerpts
The Rationale for the Merger
In the late 1990s, the PC industry slipped into its worst-ever recessionary phase, resulting in losses of US$ 1.2 billion and 31,000 layoffs by September 2001. According to analysts, with the computer industry commoditizing and consolidating very fast, mergers had become inevitable.
The HP-Compaq merger thus did not come as a major surprise to industry observers. The details of the merger were revealed in an HP press release issued soon after the merger was announced. The new company was to retain the HP name and would have revenues of US$ 87.4 billion - almost equivalent to the industry leader IBM (US$ 88.396 billion in 2000).
Under the terms of the deal, Compaq shareholders would receive 0.6325 share of the new company for each share of Compaq. HP shareholders would own approximately 64% and Compaq shareholders 36% of the merged company. Fiorina was to remain Chairman and CEO of the new company while Capellas was to become the President...
The Merger Integration
The new HP developed a white paper giving complete details of its post-merger product strategy. The HP and Compaq brand names were retained for desktop PCs and notebooks for both consumers and commercial segments. The merged entity supported Compaq's brand name for its servers while it continued with HP for workstations. The electronic shopping sites of both the companies were also integrated.
To make the merger work, the new HP initially focused on two areas - avoiding culture clashes internally and reducing any problems to the customers. The company devoted a significant amount of time in planning to minimize any instance of culture clashes that usually happened in such mega-mergers. The task of ensuring this was given to Susan Bowick, HP's Senior VP of HR. She put all employees through a training workshop named as 'Fast Start,' designed to explain the merged entity's new organizational structure and allow employees overcome concerns about their new co-workers. HP also made efforts to strengthen its image as a single unified company...
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...
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..."
Exhibits
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)
Buy this case study (Please select any one of the payment options)
| Price: Rs.400 |
Price: Rs.400 | PayPal (9 USD) |
