EffectofM&AonStakeholders

Case:TheMergerofHewlett
PackardandCompaq
(A) Strategyand
valuation

AsaShareholderinHP,Wouldyou
VoteyourSharesinFavoroftheDeal?

WhatistheEfficiencyofHPBoard?
Boardfailedtoidentifythestrategicthreatsastheywere
emerging Nowreactingtocompetitorsthreat

Strategicdilemma:doingthedealandnotdoingthedeal
areriskyalternatives outcomeofboardsdelayedaction

HPboardhadachancetoconfrontthestrategicissuesatthe
timeitappointedFiorina

AnnualPretaxCostSavingsasaResultof
ProposedMerger

Administrative/IT costs

$625 million

Cost-of-goods-sold benefits

$600 million

Sales-management benefits

$475 million

Research-and-development efficiencies $425 million

Indirect-purchase benefits

$250 million

Marketing efficiencies

$125 million

Compaq
LeadersinPCs
Intelservers&storage
Faulttolerantcomputing

Strengths

Highperformancecomputing
Globalreach
Establisheddirectsales
capabilityinresponsetoDell

Continuedcostcutting

Opportunities

Directsales movinginright
direction
Enterpriseconsultingand
financialservices
WeakpositioninUnixmarket

WantstobemorelikeIBMbut
forcedtocompetewithDell
Majorityofsalesarenot
directandthusCPQisunable
tomatchDellscoststructure
inPCs

Commoditizationofcore
computingbusinesses
Competitionand
fragmentationofhigher
marginservicebusiness

Weaknesses

Threats

HP
Imaging

Strengths

Brandandchannelclout
owingtodominantimaging
business

PCsandInterservers:trapped
betweenDellonthelowend
andIBM/Sunonthehighend

Cyclicalproofimaging
suppliesbusinessesprovide
annuitylikehighmargin
revenuestreams

HighcostsandlowR&D
productivity

SecondonlytoSununUNIX
marketshare

Opportunities

Nodirectdistribution
Lackofbreadthandscalein
service

Directdistribution

Continuedcompetitionform
lowprice/qualitycompetitors

Costcuttingandrealignment
ofR&D

Maturationofcorporate
printingmarket

Lessmatureinternational
printermarkets

Uncertaingrowthprospects
forUnixmarketontheheels
ofdotcombustandongoing
telecomcontraction

Commercialprintingsystem

Weaknesses

Threats

ContestbyWalterHewlett
AgainsttheMerger
Credibilityof
mergersynergies
Strategicrationale
forthedeal
Impactofspecific
dealterms
Meaningof
mergerofequals

WhataretheChallengesinthisDeal?
Layoff

Expectedintegrationacross
160countriesinvolving
150,000people

Highendtonowlowend
customers

Innovationtocommodity
typebusiness

ChangeinHPway

Lowmargin,lowjobsecurity
business

Compaqhasstruggledfor
yearswithlayoffsandpoor
performance wouldsend
themoodofemployeesof
boththecompaniesfurther
south

IsitReallyaMergerofEquals?
Management/CEO

HP
CEO = Fiorina
14/20 senior executives
6 = HP
unknown
64%
shared
HP brand retained

Board composition
Compensation
Share of ownership
Layoffs
Brands
Form of transaction
Corporate name name = Hewlett-Packard
Headquarters location
HQ = Palo Alto

Compaq
COO = Capellas
6/20 senior executives
5 = CPQ
unknown
36%
shared
Compaq brand retained
Tax-deferred, all stock

SocialTermsandtheMergerofEquals
Comparativelylowacquisitionpremiumshouldbeviewedaspartof
thelargerdealstructure,billedasamergerofequals

Almostallwillvoteforthedeal

MostlikelyitwastosavefacefortheCompaqmanagementteam
andtopreserveforthemapartialplaceatthetableinmanagingthe
newfirm

Challenges
Challengesof
integratingglobal
operations

International
natureof
business

Executionof
distribution
model

Development
andtransitionof
newProductMix

Challenges
Exposureto
increased
competitive
pressures

Weakeconomy
mayinhibitmerger
atcriticalstage

Currentandfuture
weakeningof
creditrating

Customer/Market
Uncertainties

Regulatory
approval/
restrictions

FixedRatioof
0.635

Challenges
Competition AsHPand
Compaqsmoothouttheir
merger,theindustry and
theircompetitors moveon
tobiggerandbetterthings

Blendingin Themerged
companyneedstobea
hybridenterprise

Convincingcustomers
Customerswantaclear
migrationpath,especial
withregardstodiscontinued
offerings

Meshingcultures HP:
deliberative,thorough
decisionmakingCompaq:
fastdecisionmakingand
marketingCompetition

WhatshouldbeCommunication
StrategiesofHP?
Demonstratethe
ValueofActing
Now
Ensuringeffective
corporate
communications

Identificationof
keystakeholder
groups

ReducetheCostof
Action

Showcasethe
RisksofWaiting

StakeholderRelatedFailureFactorsin
thisDeal
Failuretosecurethegoodwill
ofarangeofstakeholder
groupscommontoboth
companies.(shareholdersvs.
otherstakeholders,e.g.
regulatorybodies)

Tofocusonthecorporate
objectivesisdifficultifpeople
areworriedabouttheirown
position

Unavoidablebecausethereis
necessarilysomeuncertainty
aboutthefinalshapeofthe
organization

SuggestedCommunicationinaM&A
Process
Identificationof
keystakeholder
groups

Formsandchannelsavailableforcommunicating
Reactionsneedtobetrackedthroughoutthemergerprocess.

Developinga
unifiedcorporate
identity

Throughdetailedanalysisoftheinternalenvironmentsofbothcompaniesanda
consciousdecisiontobuildonthestrengthsofeach.

Ensuringeffective
corporate
communications

Monitoringtheresults
Identifyingtheemergenceofpotentiallydamagingissues
Monitoringperceptionspre,during,andpostmerger
Revealingconflictingmessagesemanatingfromthetwocompanies
Evaluatingthefinancialbenefitsanddrawbacksofthemerger

WhataretheStakeholdersReactions
ExpectedinthisDeal?

Customerdissatisfaction

Employersattritionissues

Impactontheindividualor
groupworkingincompany
&onworkculture

SeparationAnxiety
Differencesin
compensationpackages
anddesignation

Egoclashesbetweenthe
topmanagement

Companywiderumors
Employeesloosefaithin
theirorganizationandtend
tobecomedemotivated

WhataretheStakeholdersReactions
ExpectedinthisDeal?
Stresslevelexperiencedby
theCEOsoftentravels
throughthechainof
command,affecting
subordinatesaswell

ProcessofM&Ahasagreat
impactontheworkculture
duringthosedealprocess
daysasitdisturbswhole
organizationofthecompany

Fearoftransferand
retrenchment

Lossofpositioninthe
hierarchicallevel

Stepchildtreatmentfor
targetemployees

Eachcompanyhasitsownset
ofvalueswhichmayconflict
withthoseofacquired
company

Lossofidentity,Lackof
information&anxiety,Talent
islost,Familyrepercussions

ManagingReactions!
Organizationmusteffectively
developandimplement
assistanceprogramfordisplaced
employees

Communicationfromthe
executiveteamwithemployeesin
thepreacquisitionphaseneeds
tobeconsistentsothatanxiety
levelsamongthepersonnelcan
bekeptatlowlevel

Needfordevelopingand
executingeffectiveemployee
communication,particularly
conveyingtheemployeesthat
howthetransactionwillimpact
organizationalmembers

Communicationbetweenthe
membersoftransferorand
transfereeCompanyshouldbe
open,honestandstrategic

W
A
L
T
E
R
A
N
D
F
A
M
I
L
Y

C
A
R
L
Y
A
N
D
H
P

TradingHistoryofCompaqandHPStock(in$)
(surroundingSept4,2001,AnnouncementDate)

8/27/2001

HWP
Closing
Price
25.02

8/28/2001

24.61

1.6

13.32

0.4

15.57

16.86%

8/29/2001

23.95

2.7

13.13

1.4

15.15

15.37%

8/30/2001

23.4

2.3

12.69

3.4

14.80

16.63%

8/31/2001

23.21

0.8

12.35

2.7

14.68

18.87%

9/4/2001

18.87

18.7

11.08

10.3

11.94

7.72%

9/5/2001

18.21

3.5

10.41

6.0

11.52

10.64%

9/6/2001

17.7

2.8

10.35

0.6

11.20

8.17%

9/7/2001

18.08

2.1

10.59

2.3

11.44

7.98%

9/10/2001

17.89

1.1

10.35

2.3

11.32

9.33%

9/17/2001

16.02

10.5

8.75

15.5

10.13

15.80%

Date

HWP
CPQ
CPQ
Percentage Closing Percentage
Change
Price
Change
0.4
13.27
2.8

Implied
CPQ
Price
15.83

Implied
Premium
for CPQ
19.26%

FinancialInformationonPeers
(DataPresentedat2001YearEnd)
Company Name

SIC

Sales

Sales 3-yr
CAGR

(in $000)

(% )

Gross
Profit
Margin
(%)

EBIT
Margin
(% )

Market 1-yr Total

Value Return
(in $000)

(% )

Est. 2002
EPS
Growth*
(% )

P/E

Beta

D/E

ROA

ROE

ROI

(% )

(% )

(% )

Apple Computer Inc

3571

5,363

3.4

24.9

6.2

5,441

39.8

nm

nm

1.31

0.08

0.6

0.9

0.9

Cisco Systems Inc

3576

22,293

38.1

55

0.1

140,671

70.6

46.0

nm

1.82

2.9

3.7

3.7

Compaq Computer Corp

3571

33,554

2.5

25.3

1.4

16,592

34.6

94.0

nm

1.49

0.05

2.4

5.1

4.8

Dell Inc

3571

31,168

19.5

18.4

7.3

71,666

5.2

23.0

57.3

2.21

0.11

9.2

26.5

23.9

Fujitsu Ltd (ADR)

7373

37,646

4.6

34.2

1.5

15,183

42.2

nm

nm

1.12

1.33

8.3

44.8

17.4

Gateway Inc

3571

5,938

7.4

21.1

3.5

2,605

55.3

nm

nm

2.04

33.9

74.1

57.5

Hewlett-Packard Co

3570

45,226

1.3

28.6

4.5

32,651

63.3

52.6

1.48

0.27

1.9

4.5

3.5

Hitachi Ltd (ADR)

3570

60,104

3.0

29.3

1.5

24,550

15.4

nm

nm

1.15

0.78

4.9

21.0

9.9

IBM Corp

7371

85,866

1.7

41.9

10.8

208,371

43

2.0

25.8

1.24

0.68

8.7

32.7

19.5

NEC Corp (ADR)

3571

38,354

1.7

27.6

1.3

13,830

46.8

nm

nm

1.69

2.83

6.2

54.8

13.5

Silicon Graphics Inc

3571

1,854

15.7

41

16.7

272

62.9

nm

nm

0.98

nm

38.5

nm

186.9

Sun Microsystems Inc

3571

18,250

23.1

51.9

10.1

51,197

65.4

nm

52.4

1.82

0.14

5.4

9.3

8.1

Unisys Corp

7373

6,018

5.8

30

4.5

4,002

14.3

54.0

nm

1.2

0.35

0.9

2.4

1.7

30,126

3.2

33

0.6

45,156

35.6

35.8

47

1.5

0.55

5.6

11.2

18.6

Averages

InformationonRecentComputerRelatedTransactions
(CompletedTransactions;Acquisitionof100%Interest)
Ann Date

Target Name

Acquirer Name

1/26/1998 Digital Equipment

Compaq Computer

8/3/1998 Stratus Computer

Premium over Stock Price (%

Deal Multiples
Equity
Trans
Equity
Equity
Equity
Equity
Value/
1 day
4 wks Defensive Consideration
Value ($ Value* ($ Value/ Net Value/
Value/ Net
1 wk prior
Target
prior
prior
Tactics
mil)
mil)
Sales
EBIT
Inc
Offered
Cash Flow
$9,124

$9,063

0.69

34.67

15.45

Ascend Comm.

$970

$835

1.2

9.97

11/11/1998 Sulcus Hospitality

Eltrax Systems

$71

$71

1.22

5/11/1999 Meridian Data

Quantum Corp

$94

$93

5/24/1999 Texas Micro

RadiSys Corp

$120

6/22/1999 Diamond Multimedia

S3 Inc

na

na

na

None

Cash, Stock

5.08

10.9 19.1

53.3

33.4

None

Stock

nm

26.16

nm 159.6

149.6

260.5

None

Stock

5.08

nm

nm

nm 168.9

189.6

213.8

None

Stock

$120

1.44

37.63

24.68

34.38 68.7

66.6

75.5 Lockup

Stock

$183

$183

0.32

nm

nm

nm 13.9

21.6

4.5

None

Stock

7/12/1999 Sequent Computer Sys. IBM Corp

$809

$811

1.02

nm

166.5

nm

3.3

6.7

52.4

None

Cash

7/27/1999 Mylex

IBM Corp

$261

$258

1.77

nm

nm

nm

20

17.8

108.7

None

Cash

8/9/1999 Data General

EMC Corp

$1,410

$1,409

0.97

186.2

13.68

74.8 72.8

63.5

31.1 Lockup

Stock

9/20/1999 Nichols Research

Computer Sciences

$401

$396

0.87

18.51

13.93

7/26/2000 Telxon Corp

Symbol Technologies

$571

$571

1.57

nm

2/21/2001 Blue Wave Systems

Motorola Inc

$120

$119

3.24

$890

$660

$6,336

4/2/2001 General Semiconductor Vishay Intertechnology

32.99

30.18

6.9

24.6

None

Stock

nm

2.21 27.9

40

32.1

None

Stock

33.19

25.42

30.63 2.2

4.2

12.4 Lockup

Stock

1.37

8.74

6.21

20.25

43

40.6

40.9

None

Stock

$4,812

0.55

20.88

11.18

48.17 19.6

27.8

44.5

None

Stock, Liabs

7/16/2001 SCI Systems

Sanmina Corp

9/4/2001 Compaq Computer

Hewlett-Packard

$25,263

$25,175

0.62

13.51

7.66

nm

18.9

10.2

2.0

None

Stock

12/7/2001 IKOS Systems

Mentor Graphics

$115

$116

1.91

nm

nm

nm

36.7

46.7

111.5

None

Cash

Averages

$2,921

$2,793

1.49

40.36

28.72

31.61 43.3

49.3

67.9

Averages w/o DG/EMC

$3,022

$2,886

1.52

22.14

30.23

26.21 41.2

48.2

70.6

InformationonRecentJumboDeals
(TransactionValue>$25Billion)
Deal Multiples
Target
Name

Ann Date

Acquirer Name

Trans
Value

Equity
Value*

(%)

Equity Value
Equity Value / Equity Value
4 wks Defensive
Equity Value / EBIT
1 day prior 1 wk prior
/ Net Sales
Target Cash Flow
/ Net Inc
prior Tactics

($mil)

($mil)

10/1/1997 MCI Communications

WorldCom

$41,907

$37,407

2.45

4/6/1998

Citicorp

Premium over Stock Price

33.46

13.17

68.26

102.99

100.99 94.29

Consideration
O ffered

None

Stock, Liabs
Stock

T ravelers Group

$72,558

$72,185

2.03

12.4

10.91

19.72

7.9

10.4

19

None

4/13/1998 BankAmerica

NationsBank

$61,633

$61,415

2.54

11.38

9.8

18.81

0.3

2.8

None

Stock

4/13/1998 First Chicago NBD

BANC ONE

$29,616

$29,421

2.86

12.96

np

19.26

26.5

38

34.1

Lockup

Stock

5/7/1998

Daimler-Benz AG

$40,466

$40,467

0.65

7.26

4.89

14.31

48.8

54.3

45.7

None

Newly Issued Ord Sh

SBC Communications

$62,593

$62,554

3.84

16.5

9.83

27.78

np

np

np

None

Stock

6/24/1998 T ele-Communications

AT &T

$53,592

$60,192

7.9

196.07

30.55

Nm

np

np

np

None

Stock, Other

7/28/1998 GT E

Bell Atlantic

$53,415

$53,451

2.19

10.95

6.11

23.52

2.7

2.7

4.9

Lockup

Stock

8/11/1998 Amoco

British Petroleum Co

$48,174

$47,902

1.4

14.57

8.16

22.84

np

np

np

Lockup

Newly Issued Ord Sh

12/1/1998 Mobil

Exxon Corp

Chrysler

5/11/1998 Ameritech

1/18/1999 AirT ouch Communications Vodafone Group

4/1/1999

ARCO

$78,946

$78,907

1.25

4.82

np

27.31

26.3

34.7

32.2

Lockup

Stock

$60,287

$60,212

12.9

65.45

34.77

89.74

40.6

50.2

71.5

None

Cash, Ord Sh

BP Amoco

$27,224

$27,224

2.52

nm

107.61

nm

27.2

29.9

54.4

None

Newly Issued Ord Sh

4/22/1999 MediaOne Group

AT &T Corp

$49,279

$44,768

15.53

nm

47.48

31.31

12.1

13

22.8

None

Cash, Stock, Liabs

6/14/1999 US WEST

Qwest Commun Intl

$56,307

$46,298

3.69

15.3

8.74

31.47

32.5

50.1

49.8

None

Stock, Liabs

9/7/1999

CBS

Viacom Inc

$39,434

$39,434

5.78

62.5

31.88

579.92

0.1

8.5

None

Stock T ype B

11/4/1999 Warner-Lambert

Pfizer Inc

$89,168

$99,710

7.71

38.61

33.86

57.53

25.3

29.7

40.8

None

Stock

12/20/1999 Pharmacia & Upjohn

Monsanto

$26,486

$26,521

3.7

31.02

np

37.3

1.1

5.5 13.5

Lockup

Stock

1/10/2000 T ime Warner

America Online

$164,746 $164,800

6.03

27.31

15.18

84.08

70.9

55.8

70.2

None

Stock

5/2/2000

Unilever PLC

$20,895

2.41

15.44

12.95

28.51

42.3

35.7

53.3

None

Cash

Bestfoods

$25,065

7/10/2000 SDL Inc

JDS Uniphase

$41,144

$35,172

188.09

1056.21

781.6

1395.71

77.2

68.6 106.3

None

Stock

7/24/2000 VoiceStream Wireless

Deutsche T elekom AG

$29,404

$29,104

12.14

nm

nm

nm

25.4

20.3 20.2

None

Cash, Ord Sh, Liabs

Stock

Citigroup

$30,957

$30,938

2.36

4.85

4.78

20.57

50.8

52.8

45.6

None

9/13/2000 JP Morgan & Co

9/6/2000

Chase Manhattan

$33,555

$33,716

1.72

10.48

7.45

15.9

14.7

21.5

32.4

Lockup

Stock

10/16/2000 T exaco

Chevron

$42,872

$35,993

0.78

10.25

6.92

15.55

17.7

22.6

17.5

None

Stock

Hewlett-Packard

$25,263

$25,175

0.62

13.51

7.66

nm

18.9

10.2

2.0

None

Stock

Averages T otal Sample

$51,364

$50,555

11.72

75.97

56.87

125.21

27.88

29.71 34.57

Averages without JDS/SDL

$51,790

$51,195

4.38

25.63

17.19

51.4

22.34

24.37 27.26

9/4/2001

Associates First Capital

Compaq Computer

CompaqTriangulationDiagram
Net Sales Mult

DCF

Implied Equity Value at 2/4/02

Valuation Method

High

Low

Difference

Net Sales Multiple (0.5 to 1.5)

$50.30

$16.80

$33.50

DCF (Stand-alone)

$20.80

$15.90

$4.90

Cash Flow Multiple (6 to 26)

$31.80

$7.30

$24.50

Latest Mkt. Price ($12.00 to $12.40/share)

$21.10

$20.40

$0.70

LTM Mkt. Price ($12 to $20/share)

$34.10

$20.40

$13.60

HewlettPackardTriangulationDiagram
Net Sales Mult

EBIT Mult

DCF

ValuationMethod
NetSalesMultiple(0.5to1.5)
DCF(Standalone)
EBITMultiple(9xto40x)
CashFlowMultiple(6to26)
LatestMkt.Price($22.00to$23/share)
LTMMkt.Price($22to$31/share)

High
$67.50
$42.50
$46.70
$46.20
$44.60
$60.20

Low
Difference
$22.50
$45.00
$34.10
$8.40
$10.50
$36.20
$10.70
$35.50
$42.70
$1.90
$42.70
$17.50

MonthlyStockPrices
Price

Beta

Price

Beta

Ratio of
CPQ to
HWP
Price

Price

Beta

Price

Beta

Ratio of
CPQ to
HWP
Price

Sep-98

31.63

na

26.47

na

1.19

Oct-98

31.63

na

30.13

na

1.05

Sep-00

27.58

1.04

48.50

1.21

0.57

Oct-00

30.41

1.05

46.50

1.24

0.65

Nov-98

32.50

1.07

31.28

1.34

1.04

Nov-00

21.50

1.25

31.63

1.44

0.68

Dec-98

42.00

1.15

34.16

1.35

1.23

Dec-00

15.05

1.28

31.56

1.44

0.48

Jan-99

47.63

1.15

39.19

1.36

1.22

1-Jan

23.71

1.37

36.85

1.46

0.64

Feb-99

35.38

1.36

33.22

1.47

1.06

1-Feb

20.20

1.40

28.85

1.53

0.70

Mar-99

31.69

1.35

33.91

1.45

0.93

1-Mar

18.20

1.40

31.27

1.43

0.58

Apr-99

22.31

1.29

39.44

1.47

0.57

1-Apr

17.50

1.33

28.43

1.34

0.62

May-99

23.69

1.25

47.16

1.35

0.50

1-May

15.99

1.33

29.32

1.34

0.55

Jun-99

23.69

1.15

50.25

1.34

0.47

1-Jun

15.32

1.34

28.60

1.33

0.54

Jul-99

24.06

1.13

52.34

1.30

0.46

1-Jul

14.94

1.40

24.66

1.33

0.61

Aug-99

23.16

1.12

52.69

1.28

0.44

1-Aug

12.35

1.45

23.21

1.32

0.53

Sep-99

22.88

1.06

45.38

1.33

0.50

1-Sep

8.31

1.55

16.05

1.41

0.52

Oct-99

19.13

0.95

37.09

1.21

0.52

1-Oct

8.75

1.54

16.83

1.43

0.52

Nov-99

24.44

0.95

47.44

1.23

0.52

1-Nov

10.15

1.55

21.99

1.47

0.46

Dec-99

27.06

0.97

56.88

1.28

0.48

1-Dec

9.76

1.55

20.54

1.46

0.48

Jan-00

27.25

0.94

54.13

1.28

0.50

2-Jan

12.35

1.48

22.11

1.46

0.56

Feb-00

25.13

0.98

67.25

1.16

0.37

High

47.63

1.55

67.50

1.53

1.23

Mar-00

27.00

0.96

66.44

1.06

0.41

Average

23.60

1.20

39.92

1.32

0.62

Apr-00

29.19

0.91

67.50

1.04

0.43

Low

8.31

0.90

16.05

1.04

0.37

May-00

26.25

0.95

60.09

1.08

0.44

Volatility

18.30%

Jun-00

25.56

0.94

62.44

1.08

0.41

Jul-00

28.06

0.90

54.59

1.11

0.51

Aug-00

34.06

0.94

60.38

1.13

0.56

CPQ

HWP

CPQ

Proposed Exchange Ratio

HWP

15.40%
0.6325

DCFValuationofMergerSynergies
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ApplicationofLeadershiptotheM&A
Process