Mergers and Acquisition – A Case Study and Analysis of HP-Compaq Merger

Short description

The following is a brief description of the two companies:

HP

It all began in the year 1938 when two Stanford University electrical engineers called William Hewlett and David Packard started their business in a garage in Palo Alto. In one year, the partnership called Hewlett-Packard was entered into, and in the year 1947 HP was incorporated. The company has been growing ever since its profits grew from five and a half million dollars in 1951 to about $ 3 billion in 1981. The rate of growth knew no bounds as HP’s net sales rose to $ 42 billion in 1997. From manufacturing audio oscillators, the company made its first computer in 1966, and it was in 1972 that it introduced the concept of personal computing of a calculator, which was further developed into a personal computer in 1980. The company is also known for laser printers, which it introduced in 1985.

Compaq

The company is better known as Compaq Computer Corporation. This was a company that started itself as a personal computer business in the year 1982. It had the charm of being called the largest manufacturers of personal computer devices worldwide. The company was formed by two senior executives at Texas Instruments. The company name had come from – “Compatibility and quality”. The company introduced its first computer in 1983 after at a cost of $ 2995. Despite being portable, the problem with the computer was that it looked like a suitcase. Nevertheless, there were major commercial benefits from the computer as it sold more than 53,000 units in its first year, with $ 111 million in revenue.

Reasons for the merger

A very simple question that arises here is that if HP progressed at such a tremendous pace, what was the reason why the company had to merge with Compaq? Carly Fiorina, who became CEO of HP in 1999, had a key role to play in the merger that took place in 2001. She was the first woman to take over as CEO of such a large company and the first outsider as well. She worked very effectively as she traveled more than 250,000 miles in her first year as CEO. Her basic goal was to modernize HP’s operating culture. She placed great emphasis on the profitable sides of the business. This shows that she was very extravagant in her approach as CEO. Despite the increase in the market value of HP’s share from $ 54.43 to $ 74.48, the company was still ineffective. This was because it failed to meet its objectives due to a failure of both business and industry. HP was forced to cut back on jobs and also avoided the privilege of having Price Water House Cooper’s take care of its overhaul. So even Fiorina’s job was threatened. This meant that improving the company’s internal strategies would not suffice for the company’s success. In the end, the company certainly had to plan something else. So it was decided that the company would take over Compaq in a stock transaction whose net worth was $ 25 billion. Originally, this merger was not planned. It started with a telephone conversation between CEO HP, Fiorina and Chairman and CEO Compaq, Capellas. The idea behind the conversation was to discuss a licensing agreement, but it continued as a discussion of competitive strategy and eventually a merger. It took two months for further investigation, and in September 2001, the boards of directors of the two companies approved the merger. Despite the decision of HP’s CEO, the merger was strong against the company. The two CEOs felt that the only way to fight growing competition in terms of prices was to have a merger. But investors and other stakeholders believed the company would never be able to have the loyalty of Compaq customers whose products are sold with an HP logo on. Apart from this, there were questions about synchronizing the members of the organization with each other. This was also due to the change in organizational culture. While these should have serious issues with the merger, CEO of HP, Fiorina justified the fact that the merger would remove a serious competitor in the over-the-counter PC market these days. She said the company’s market share would increase with the merger and that the work unit would also double. (Hoopes, 2001)

Benefits of the merger

Although it seemed advantageous to very few people at first, it was Fiorina’s strong determination that she was able to stand by her decision. Wall Street and all of its investors had gone against the company, which had turned on its ideas by saying that it has made 1 + 1 = 1.5 by its extravagant ways of expansion. Fiorina had said this way that it would not only have a larger share of the market after the merger of the company, but also the production units would double. This would mean that the business would grow tremendously in volume. Her dream of competing with the giants in the field, IBM would also come true. She was of the opinion that much of the redundancy in the two companies would decrease as the internal costs of promotion, marketing and shipping would coincide with the merger. This would cause the least damage to the collection of revenue. She used the ideas of competitive positioning to justify her plans for the merger. She said the merger is based on the ideologies of consolidation and not on diversification. She could also defend accusations against the change in HP was. She was of the opinion that HP has always encouraged change as it is about innovating and taking bold steps. She said the company demands to be consistent with creativity, improvement and change. This merger had the capacity to deliver exactly the same. (Mergers and Acquisitions, 2010)

Benefits for shareholders

The following are ways in which the company can benefit its shareholders:

Unique opportunity: The company’s position is bound to improve with the merger. The reason for the same was that now value creation would be fresh, leadership qualities would improve, capabilities would improve and so would sales and corporate strategic differentiation better than existing competitors. Apart from this, Compaq’s capabilities can also be accessed directly, thus reducing the cost structure by becoming the largest in the industry. Finally, one could also see an opportunity for reinvestment.

Stronger company: Profitability will increasingly increase in the business, access and service sectors. The company can also see a better opportunity for its research and development. The company’s financial position in terms of its EBIT and net cash is also on a step-by-step basis.

Compelling finances: The expected accumulation in IIP gains would be 13% in the first fiscal year. The company could also conduct a better segmentation of the market to predict its revenue generation. This would go up to 2 and a half billion dollars of annual synergy.

Ability to Execute: Since there would be integration into the company’s planning procedures, the chances of value creation would also be high. In addition, the experience of leading a diversified employee structure would also be there. (HP buys Compaq, 2001)

Resistance to the merger

In fact, only Fiorina CEO was there to join the merger. This is a practical application of the agency problem that arises from changes in the business owners and management’s financial strategies. Fiorina was sure to lose her job if the merger did not take effect. The reason was that HP was unable to meet the demand targets under her leadership. But the owners were opposed to the merger because of the following beliefs from the owners:

The new portfolio would be less preferable: the company’s position as a major PC supplier would certainly increase risk and also involve a lot of investment. Another important reason in this context is that HP’s main interest in imaging and printing would no longer exist as a result that dilutes shareholders’ interest. In fact, business owners also feel there would be a lower margin and ROI (return on investment).

Strategic issues remain unresolved: The market position of advanced servers and services will still remain despite the merger. The price of PCS would not be affordable at all. The necessary change in imaging and printing material would also not exist. This merger would have no impact on the low-end servers, as Dell would be there in the lead and high-end servers, either where IBM and Sun would have the lead. The company would also avoid the benefits of outsourcing because of the excess work it would have. So the quality is not guaranteed to improve. Finally, the merger would not be similar to IBM under any conditions that Fiorina believed.

Huge integrated risks: There have been no examples of success with such huge mergers. Generally, when the market does not support such mergers, do not do well, as is the case here. When HP could not manage its organization properly, integration would only add to the difficulties. It would be even more difficult in the circumstances because of the existing competitions between HP and Compaq. As the company is exposed to such risky conditions, the company also has to vary its costs, which causes greater problems for the owner. The biggest factor of all is that integrating the existing culture into the two companies would be a very difficult job.

Financial effects: This is mostly due to the negative market reactions. On the other hand, Compaq’s position was completely different from HP. Since the company would have a greater contribution to revenue and HP being diluted at the same time, the problems are just evolving. This would mean that it would also be difficult for HP to withdraw money from the stock market. In fact, this may not appear to be a very profitable merger for Compaq in the future.

The basic problem the business owners had with this merger was that it would hamper HP’s core values. They thought it better to preserve wealth rather than risk it with extravagant risk-taking. This high risk profile for Fiorina was a bit unacceptable for business owners in light of its prospects.

So in terms of this merger between HP and Compaq, there was this strong determination from the CEO, Fiorina, and on the other hand, the strong opposition from business owners. This resistance continued from the market, including all of the company’s investors. So this practical agency problem was very famous considering the fact that it contained two of the most powerful hardware companies in the world. There were a number of settings such as Change Management, Economic Wise Management and Organizational Management that could be considered to analyze the problem. But this case study can best be solved by a strategically wise analysis. (HP-Compaq merger faces stiff opposition from shareholders’ stock prices falling again, 2001)

Strategic analysis of the case

Positive aspects

A CEO will always consider such a merger an opportunity to take advantage of a competitive advantage over its rivals like IBM as in this case and also be of some interest to the shareholders. The following are the strategies related to this HP-Compaq merger:

* Looking at Shareholder Value: Looking at this merger from Fiorina’s eyes, it would be safe for shareholders to have a lot to gain from it. The reason for the same is the increase in market control. So even if the conditions were not suitable from the financial perspective, this truth would certainly bring a lot of profits for the company in the future.

* Market Development: Two organizations are becoming involved in mergers as they want to expand their market both nationally and internationally. Integrating with a domestic company does not require much effort, but when a company merges internationally as in this case, a challenging task is upside down. A thorough scanning situation is significant before setting foot in the international arena. Here, HP’s competitor was largely Compaq, so this merger certainly required a lot of thought. Organizations are merging with the international companies to first establish their brands and tell people what they are capable of and also what they see in the future. This is why Compaq’s products after this merger would also have the logo for HP. Once the market is well known, HP does not have to like the branding created by Compaq. They would also be able to draw all Compaq customers.

* Formed efficiency: Any business by acquiring another or by merging makes an effort to increase its efficiency by increasing its operations and also having control over it to the maximum extent. We can see that HP would now have an increased set of employees. The only factor is that they should be properly controlled as they are of different organizational cultures. (Benefits of Mergers, 2010)

* Quotas to use more resources: An improvised organization of monetary resources, intellectual capital and commodities offers a competitive advantage for businesses. As such companies merge, many of the intellectuals gather and work toward a common mission to excel in financial profits for the company. Here you can not deny the fact that even the best brains in Compaq would participate in shaping the company’s strategies in the future.

* Risk Management: If we take an example of this case in particular, HP and Compaq included in this merger could lower the level of risk they would have in diversifying business opportunities. The choice of supply chain choice also increases. Although HP is a pioneer in inkjet orientation, it does not have to use the more expensive product-based facility layout. It can handle the risk of taking process-based facility layout and making things cheaper. Manufacturing and processing can now be done in different nations according to cost efficiency as the main problem.

* Listing Potential: Although Wall Street and all investors in the company are opposed to the merger, when IPOs are offered, a development will certainly be there due to the booming earnings and revenue value that HP would make with this merger.

* Necessary Political Rules: When organizations make a leap to other nations, they have to consider the different rules of the country that administers the policies of the place. Since HP is already a pioneer in all the countries that Compaq used to do its business, this would not be very difficult for the company. The company only needs to work out some minor rules with the political parties in some countries where Compaq flourished more than HP.

* Better opportunities: When companies merge with another company, they can later be sold according to the needs of the company. This could also happen in part. If HP thinks it doesn’t need much storage, it can sell the same with increased profits. It depends on whether the company will now be considered a stock brand or an order business brand.

* Extra products, services and facilities: Services get copyright, which increases trade. Additional storage services and distribution channels offer business values. Here HP can use all such values ​​integrated with Compaq to increase prospects. (Berry, 2010)

Negative aspects

There are a number of mergers and acquisitions that fail before they actually start functioning. In the critical phase of implementation itself, companies are learning that it would not be beneficial if they continue as a merger. This may occur in this merger between HP and Compaq for the following reasons.

Conversations are not implemented: Because of contrary to cultures, aspirations and risk profiles; many of the offers have been canceled. As for the reactions of HP owners, it seems highly likely. So motivation among employees is an extremely important consideration in this case. This requires extra effort from the CEO, Fiorina. This can also help her maintain her position in the business.

Legal Considerations: Anti-competitive bidding is often limited by the rules that present the competition rules in a country. This leads to a company operating out of business and trying to differentiate each other. Many unnecessary marketing errors are linked to these conditions. If this happens in this case, all the money that went into publishing the venture would be a waste. In addition, even more is required to advertise as a unit. Even the packaging where the entire Compaq warehouse had the HP logo would have to be redone, further hampering funding. (Broc Romanek, 2002)

Compatibility Issues: Each company runs on different platforms and ideas. Compatibility issues often occur due to sync issues. In IT companies such as HP and Compaq, many problems can arise because both companies have worked with different strategies in the past. Now it seems that it is not necessary for HP management to make changes by Changes from Compaq. Thus, such problems have become the main concern these days.

Financial Disasters: Both companies, after signing an agreement, hope to have some return on the money they put in to make this merger happen, and also want profitability and revenue. If for some reason they are unable to reach this position, they develop a sense of disgust towards each other and also begin to charge each other for the failure.

Human Resource Differences: Problems as a result of cultural differences, hospitality and hostility issues and also other behavioral issues may separate the origins of the merger.

Lack of Determination: When organizations get involved, they have plans in their mind, they have a vision, but due to a variety of issues mentioned above, the development of the overall company to carry out its mission is delayed. Merged companies set the target and when the target is not reached due to some failure of either of the two; then both of them develop a degree of hatred towards each other. Also, clashes can occur due to bias reactions. (William, 2008)

Risk Management Failure: Companies involved in mergers and acquisitions become convinced that they will make a profit on this decision. This can be seen as with Fiorina. In fact, she can fight the whole world for it. When their self-confidence becomes superstitious, they fail. Appropriate risk management methods should be used which would address the effects of a downturn. These risk policies should regulate the tax, production, marketing, manufacturing and inventory and HR risks associated with the merger.

Strategic sharing

marketing

Hp and Compaq will now have common channels for their purchases. So the benefit of this concern is that even for the materials that were initially high cost for HP would now be available at a cheaper price. End users are likely to rise as well. Now the company can embrace its competitive strategy, where the biggest concern can be given to IBM’s rival of all time. The benefits of this merger in marketing can be seen in the case of shared branding, sales and service. Even the distribution process is likely to improve as Compaq plays its part. Now the company can look forward to cross sales, subsidization and also reduced costs.

operations

The main advantage in this area is the location of raw material. Even the type of treatment would be the same, making products and services in sync with the ideas and also by making a decent operational strategy. Since philosophical and mechanical control would also be common, the operational strategy would now be to become the market leader. In this regard, the two companies would now have co-production, design and placement of staff. So HP’s operational strategy would now be to use the process-based facility layout and function with the shared values ​​mentioned.

Technology

The company’s technical strategy can also be designed in common now. There is a downside to HP’s differentiation in inkjet printers, but the benefits are also plentiful. With a common product and process technology, the merged company’s technology strategy would foster a lot of economic function. This can be done through a joint research and development and design team.

Acquisition

The company’s buying strategy will also follow a common mechanism. Here, raw materials, machinery and power would be common, reducing costs again. This can be done through a centralized mechanism with a main buyer keeping common policies in mind. Now, Hp should think with a similar attitude for both inkjet printers as well as personal computers. This is because the parameters for manufacturing will also run on equal ground.

infrastructure

This is the most important part of the strategies that would be implemented after the merger. The companies would have common shareholders to provide the necessary infrastructure. The capital source, management style and legislation would also be common. So the infrastructure strategies have to take these things into consideration. This can be done by having a common accounting system. HP has the option of having a separate accounting system for the products it manufactures, but that would only arouse internal competition. So the infrastructural benefits can be achieved through a common accounting system, legal and human resource. This would ensure that the company’s investment conditions improve. None of Compaq investors will hesitate to make an investment if HP follows a common strategy.

HP will now have to secure another fact that with this merger they would also be able to prove competitors against the current target and competitors like IBM as well. Even the operations and the output market must be above what is currently available. The company must ensure that the business strategy it uses is effective enough to help such a future. The degree of diversification must also be thoroughly managed. This is caused by; the products of the two companies have worked exceptionally well in the past. So the most optimal degree of diversification is required in the context, so that the company is able to meet customer requirements. This has been challenged by HP owners, but must be carried by CEO Fiorina. (Bhattacharya, 2010)