HEWLETT PACKARD AND COMPAQ

Hewlett Packard and Compaq Gabriel A Dionne Tutor ACC 401

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Hewlett Packard and Compaq Introduction Compaq is a company that deals with the innovation, development and selling of computers and its parts. It provides any service that is associated with computers such as programs and computer antivirus. It was founded in 1982 and became the first company that legally reverse-engineer IBM Personal Computer. Over the years it became one of the brand leaders in the computer industry. It became the largest suppliers of personal computers and became recognized all over the world for its quality products overtaking other computer brands in the market such as Dell. However, after the dot-com bubble burst the company fell under financial problems (Copeland, Koller, & Murrin, 2000). The changes that have occurred in the world and the entry of other manufacturers and service providers made competition be very stiff. In 2002, Hewlett Packard acquired the company for 25 billion U.S dollars. Out of that amount, 14.45 billion was for the companys goodwill. The shares were traded off against each other. Each Compaq share was exchanged to an equivalent of 0.6325 of HPs shares. Customers were now able to enjoy the benefits of these two companies coming together. HP brought with it the finances and other expertise to boost Compaq. Hewlett Packard maintained the Compaq name to sell to lower-end users of the computer systems. The company could continue to thrive and develop its programs with the backing of its mother company. After the acquisition deal was complete the profits of Hewlett Packard are reported to have risen tremendously. This is because both companies now had the opportunity to not only challenge each other but also work together. They came up with products that were liked by both the high end and lower-end markets.

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In terms of accounting both businesses also had to merge their books together. Their accountants needed to provide each other with a comprehensive explanation of how the books had been kept since the company started. The accountants of Compaq had to take the Hewlett Packard accountants through the methods they have used over the years. Just as IFRS states, the business that is being acquired has to reveal to the new owners any factors that affect the business. They need to reveal if the business has any debtors or creditors. This information is very relevant to Hewlett Packard. They are in a better position to know what they are getting from buying Compaq (Copeland, Koller, & Murrin, 2000). Their accountants are able to advise the management if there are any other hidden problems that pertain to the business financially. Therefore, Hewlett Packard is in a better position to know whether the investment would be profitable to them or if in the long-run it will just be a loss to the company. On the date of acquisition, financial statements will have to be prepared. Preparing the financial statements will not be easy. This is both companies will have to consolidate all the assets, liabilities, expenses and earnings. Though, Compaq will have revealed all this information HP still has to verify it comprehensively. Another challenge that will be faced would be, if the companies closed their financial years at different times it would be a problem to get all the information in time. Adjusting intra-group activities will also be a problem. Accountants will also face the challenge of estimating the balance that should be carried forward from the consolidated earnings. This is because both companies have to work for sometime before a true and fair value can be revealed. These problems are common at the start of the acquisition period. After HP and its new acquisition Compaq work together for a while they will be able to understand each others operations. That way all the issues and challenges that they had

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previously will no longer be there. This is evident in how both countries today are working seamlessly with each other. Any company that is sold has to also include the amount of goodwill and intangible assets that the company has. All companies have brand recognition with their customers. Therefore, if a buyer is interested in the company they also have to pay for the time and money spent to build the brand. Compaq is not any different. It has built its name since 1982. Hewlett Packard had to compensate the owners for the work they had put in (Copeland, Koller, & Murrin, 2000). They have to pay a value that is commensurate with the kind of goodwill that the company has made for itself. Intangible assets have the same effect. They are important to all companies and have an essential value to Compaq and Hewlett Packard. The goodwill that was paid for Compaq amounted to 14.45 billion dollars. This was a very good amount of money as it represented the amount of money that Hewlett Packard felt it represented the companys name that the company they were acquiring cost. Over the years that Compaq had been in operations, it has managed to have a good customer base. It has built itself and made a good name that is recognized in the computer industry. The amount that was paid was enough to cover and compensate the previous owners on the work they had put in to make the company what it is. The amount also covered intangible assets that the company owned. Unfortunately, there was no clear distinction to show how many the intangible assets were and how much goodwill cost. There are many special issues that are involved during an acquisition. Both companies have to ensure that their books and operations are in order. They need to reveal the ownership terms, insolvency, liquidation and reorganization (Kling & Simon, 2002). It is important that

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companies ensure that these factors are in order so that they do not cause any problems later on. In terms of ownership, both companies should reveal who owns the company. Compaq had to reveal to HP the ownership structure of the company. They needed to reveal how shares were distributed and the companys payment structure when it came to dividends. This will give the new owners and idea of how the company was being operated. HP revealed its ownership so that Compaq can know who would be the new owners after the sale went through. How insolvent a business is information that should be revealed when a business is being acquired? It helps the buyers know how much debt the company they are about to acquire has. It helps the buyers know if they can be able to handle the debt or not. Liquidation matters are also very important. The liquidity of a company is important as it helps the buyers know how easy it is to wind up the company in the event that the purchase is not profitable to them. They would want to know how liquid the company is. A more liquid company is easy to wind up than a company that is not too liquid (Kling & Simon, 2002). A liquid company is most preferred by investors. The buyer would also like to know the liquidation process. The most important aspect that a buying company needs to know about is the terms that a company has as regards to reorganization after an acquisition. After a company has been acquired by another company, there are other issues that need to be resolved. There are employees that were previously there all holding different positions. After an acquisition the new owners need to know what they will do with them. There are employees whose contracts protect them and assure them of their jobs after an acquisition (Copeland, Koller, & Murrin, 2000). There are other employees that do not have this clause that protects them. A buying company needs to have all this information to enable them to make an informed choice.

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When Hewlett Packard showed interest in acquiring Compaq, all these information had to be revealed. Compaq is required by law to show all the information as pertains to ownership, insolvency, liquidation and restructuring of the company after the acquisition. The information helped Hewlett Packard see how viable the idea of acquiring Compaq was. Just as the books of accounts are important, this information is also vital to HP. It helped them see the potential of Compaq (Kling & Simon, 2002). It also allowed them to see if the acquisition will be viable in the long run for them. These issues are also used to valuate property. It helps to see if the amount of money being asked for is worth it. It is used as a bargaining chip also for the sellers. It helped show that the value of the company so very high and that the asking price by Compaq is fair. Therefore, the information is valuable to both buyers and sellers (Copeland, Koller, & Murrin, 2000). There are key areas of difference for the acquisition reporting if IFRS was used instead of US GAAP. The areas that will be affected are intangibles, inventory cost and write downs. In IFRS intangibles are treated as principle based while in US GAAP they are recognized at fair value. In inventory cost the records are also different. IFRS uses the last in first out (LIFO) principle when accounting for inventory cost. While US GAAP can use two methods, it can be either LIFO or first in first out (FIFO). The other difference is in the way inventory is written down from one year to another. In IFRS inventory is written down and depending on whether the criteria is met in future periods the entry can be reversed. In US GAAP on the other hand, once an entry is written down, it cannot be reversed. The entry is permanent and reversal is not allowed under any circumstances. These are some of the differences that the two methods of accounting have in terms of asset acquisition (PricewaterhouseCoopers, 2008).

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The differences are bound to have an effect on the profitability of the combined entities. The entries that are made will have a different impact on the journal entries. This means that it might either inflate or reduce some figures. Therefore, in the long run there are bound to be differences in the amount of profit reported at the end of the financial year. For instance, when writing down inventories when an entry is reversed in IFRS it will mean that there will be a difference in the profit. Accountants that use US GAAP will report a different value from those that use IFRS. The inventory method used also affects how much profit the combined entities will make (PricewaterhouseCoopers, 2008). This is because after valuation there will be different prices of the goods. Hewlett Packards acquisition of Compaq was a very good decision. It has made the company reinvent itself and a new market.

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8 References

Copeland, T. E., Koller, T., & Murrin, J. (2000). Valuation: Measuring and managing the value of companies. New York: Wiley. Kling, L. R., & Simon, E. N. (2002). Negotiated acquisitions of companies, subsidiaries, and divisions. New York, N.Y: Law Journal Seminars-Press. PricewaterhouseCoopers LLP. (2008). IFRS and US GAAP: Similarities and differences. S.l.: PricewaterhouseCoopers LLP.