HP- COMPAQ_AMAR

8/6/2019 HP- COMPAQ_AMAR

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HP- COMPAQ

A failed Merger ?


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About the Merger

One of the largest Corporate IT mergers in the World

HP offered to acquire Compaq in an all stock deal

worth $25 Billion Merger was lead by the then CEO and Chairwoman-

Carly Fiorina

Analysts were critical about the merger

Will two struggling companies make a Successful

Company said the analyst They said merger was a gamble and they did not find

any focused logic

Merger lead to many overlaps in products, distributionchannels and jobs


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Contd . . .

Both companies were trying to adjust to theacquisitions they had made previously andalso new leadership

Employee morale was a question and 15000lay offs resulted due to merger.

Merger aimed at competing with IBM and Dell

Markets reacted negatively to the news.

Together both lost $13 Billion in marketcapitalization

After merger the company would haverevenues of $87 Billion comparable to market

leader IBM


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Pre Merger Scenario


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Operates in almost all the countries

Ranked 13th in Fortune 500 list

HP specializes in developing andmanufacturing computing, data storage, andnetworking hardware

Major product lines include enterprise servers,

related storage devices, as well as a diverserange of printers and other imaging products.


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Compaq

Once the largest supplier of personalcomputing systems in the world

Compaqs primary business divisions Commercial and consumerPCs

Enterprise computing: servers and storage products

Market leader inPCs, with more internationalsales than US

Market leader in fault tolerant computing andindustry standard servers


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Pre Merger StatisticsCOMPANY MARKET SHARE IN

HIGH END SERVERS

REVENUE

Compaq 3% $134 mn

HP 11.4% $512mn

COMPANY MARKET SHARE IN MID-

RANGE UNIX SERVERS

REVENUE

Compaq 4% $488 mn

HP 30.3% $3,675 mn


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MERGER INTEGRATION

A $24 billion mistake is not the HP Way.

HP and Compaq brand names were retained. Focused on reducing culture clashes. The

following questions needed to be answered in thisregard -

Can a mega-company absorb another mega-

company and still run things the way it used to?Should it even try??

Employees were put through a training workshopcalled Fast Start .


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HP made efforts to strengthen its image as a single

unified company. Merged entity relied heavily on IT.

The new HP also used conference calls and gatheringsover the internet to link employees in different locations.


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Does the merger makebusiness sense?

HP COMPAQ MERGER- A HIGH TECH GIANTOR ANOTHER MERGER FIASCO

This deal was termed as a STRATEGICBLUNDER

Most of HPs products were low margin productsand therefore they did not have the cash to investin R&D and compete with their rivals.

HP lost many of its customers. This can beattributed to the fact that changes were madewithout consulting customers.


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High Revenue Growth but Less

Operating Profit

Even though extremely high revenues, hardly 1% profits

173 142

-308-2000

0

2000

4000

6000

8000

10000

12000

1400016000

2004 2003 2002

Enterprise Storage &Services

NetRevenues

Earningsfrom Profits

210 22

-236

-5000

0

5000

10000

15000

20000

25000

30000

2004 2003 2002

Personal Systems

NetRevenues

EarningsfromOperations


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HP had missed the operating profit targetas forecasted.

These shortfalls translated into billions ofdollars of unmet target.

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

Enterprise Systems PCs

Operating Profit Margin Target vs. Actual

Profit

Forecast for 2003

Actual - 2003

Actual - 2004


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37% ofHPs assets were sold to Compaqsshareholders, (including imaging & printer business)

HPs stake in printers (the only profitable business theyhad) fell to 63%

Decline net profit

0.00

2.00

4.00

6.00

8.00

10.00

12.00

2000 2004

Net Profits (in %)Return on Assets


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Value derived from the merger was so low that HP could

have been forced to Write Off major part of %14.5B thatit wrote on its balance sheet as intangible asset .

As the computer business of Compaq was earning low

profits, the economic values of the goodwill was u

ndersuspicion.

In the end, whole merger was a fiasco.

The same be

nefits could have bee

n

achieved by HP through an alliance,

without entering the low margin

computer business.


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Reasons for failure

Clash betweenHPs internal technology unit presided over byformer Compaq executives & companys servicesorganization, presided over by HP employees

Other differences betweenHP & Compaq like language Analysts felt that the synergies HP foresaw would not materialize

Post merger, HP witnessed a higher revenue fall along with loss ofmarket share inPCs & servers segments

HPs focus on increasing revenues through sales ofPCs &hardware was not good when competitors were focusing onsoftware & services to improve profitability

Merger affected customers ofHP

Internal technology management structure did not respond well tomerger integration efforts being implemented


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Fall of 23% in EPS in May-July 2004 because ofHPsenterprise business performed badly

Europe : HP mismanaged dealings with distributors &resellers in enterprise business division

US : HPs project managers could not deploy new order-processing system online within the planned time whichhampered shipments of enterprise computers

HP was unsuccessful in selling Itanium Storage, bought from Compaq also failed to make a financial

impact

Services division acquired by HP from Compaq was profitablebut too small as compared to competitors(IBM, Accenture &EDS)


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Post Merger

Fiorina resigned in Feb 2005- shares went up by 6.9% onNYSE 2004 :

--savings reached US$3 billion. Majority of this cost savings wasdue to job cuts in 2003--Costs of US$ 800 million were reduced through synergies inprocurement, supply chain & shutting down manufacturing facilities--HP

reduced worldwide admin

istrative offices space by 19%--HP reported highest market share position in servers in past 3 yrs For the quarterOct 2004 to Jan 2005 :

--HP server revenues increased by 19%--HPPC unit revenues increased by 11%--PC units operating profit increased by 71%

--HPs Printing &Imaging unit increased by 3%--HP reported 3 consecutive quarters of market share gainsagainst Dell in US


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Challenges Ahead

To make company more results-oriented & develop an ability inthe company to move faster to meet new challenges

HP must get its marketing & new product development right tograb business from enterprise customers

The MAIN challenge is to extend its brand. High quality andinnovationneed to apply to servers, services, storage systems&PCs

HPneeds to boost up its service capabilities to compete with

IBM Apart from retaining its market share, HP has to develop new

businesses forHP which would bring revenues & profits

HPneeds to build the market for media centerPCs


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Another initiative in consumer electronics business, HPselling Apples iPods labeled iPod by HP

HP spun off its high margin printer business or split into2 companies, one focusing on individual consumers &other on enterprise customers

HP had to be transformed from product centric to

customer focused company


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QUESTION 2

Fiorina seemed to be the wrong person for managingthe merger. Did Fiorina fail as a leader?

Yes , Fiorina failed as a leader for the following reasons:

She compromised

HPs shareholders stock to mergewith Compaq and in exchange got little value.

The merger integration strategy was well drafted, however its implementation was very poor.

For ex, it was not communicated to Compaq employeesin sufficient detail.

Lastly, everyone lost faith in her that she could deliver


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What were her post merger contributions?

She retain

edHP

s commitmen

t towards inn

ovation

sthrough breakthroughs

She was very efficient in achieving cost reductionthrough

Job cuts

Synergies in procurement, supply chain etcReducing Admin office space

What kind of leadership is required to handle mergers ?Explain.

The o

ne that keeps the stakeholders i

nterests above alli.e. the shareholders, customers and employees

The one that ensures successful implementation of theintegration strategy

To be able to forecast challenges and resolve them

before they turn into a problem


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QUESTION 3

In order to revive HPs business, analysts felt that Hurdhad to transform HP from a product-centric to acustomer-focused company. What are the distinguishingfeatures of a customer focused organization ? Discuss

Build passion and commitment

From owner and staff

Customer is the centre

Doing whatever it takes

Lead, great examples

Build processes around your customernot the business

"Can we do something to make it even easier for thecustomer to do business with us?"


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Build a relationship

Always be communicating

For ex,

Issue newsletters regarding latest products, futureplans etc.

Build a culture of Wanting to know

What they want from you?

Likes, dislikes, changes

Action

plan

, seek their respon

ses

Let the customer be your focus and you will

become their focus.

HP- COMPAQ_AMAR

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