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HP & Compaq Merger

HP-HEWLETT PACKARD
The company pre-merger
In 1938, two Stanford graduates in electrical engineering, William Hewlett and David Packard, started their own business in a garage behind Packards Palo Alto home. One year later, Hewlett and Packard formalized their business into a partnership called Hewlett-Packard. HP was incorporated in 1947 and began offering stock for public trading 10 years later. Annual net revenue for the company grew from $5.5 million in 1951 to $3 billion in 1980. By 1997, annual net revenue exceeded $42 billion and HP had become the worlds second largest computer supplier. The company, which originally produced audio oscillators, introduced its first computer in 1966. In 1972, the company pioneered the era of personal computing by introducing the first scientific, hand-held calculator. Hewlett-Packard introduced its first personal computer in 1980.Five years later, HP introduced the LaserJet printer, which would become the companys most successful product ever.

HP-Product Portfolio
1. 2. 3. 4. 5. 6. 7.

Laptops/Notebooks Palmtops/PDA Printers & printing consumables Digicams Scanners Moniters Mainframes

Major Competitors:
IBM Servers, PCs, storage and IT services Dell PCs Canon Printers, fax, copiers, optical equipment Compaq Pc, Servers, Pocket computers

HP & Compaq Merger

COMPAQ
The company pre-merger:
Compaq Computer Corporation is an American personal computer company founded in 1982. Once the largest supplier of personal computing systems in the world, it had the charm of being called the largest manufacturers of personal computing devices worldwide. The company was formed by Rod Canion, Jim Harris and Bill Murto former Texas Instruments senior managers. The name "COMPAQ" was derived from "Compatibility and Quality", as at its formation Compaq produced some of the first IBM PC compatible computers. The company introduced its first computer in the year 1983 after at a price of 2995 dollars. In spite of being portable, the problem with the computer was that it seemed to be a suitcase. Nevertheless, there were huge commercial benefits from the computer as it sold more than 53,000 units in the first year with a revenue generation of 111 million dollars. Compaq existed as an independent corporation until 2002, when it was acquired for $25 billion by Hewlett-Packard. Prior to its takeover the company was headquartered in northwest unincorporated Harris County, Texas, United States.

Compaq-Product Portfolio
1. 2. 3. 4. 5. 6. Enterprise computing group Mainframes servers workstations Internet products networking products Commercial desktops Portables Small and medium business solutions

Compaq Competitors
IBM Servers, PCs, storage and IT services. Sun Microsystems Servers Dell PCs HP PCs, IT services and pocket computers Palm Pocket computers

HP & Compaq Merger

PRE-MERGER STATS FOR HP & COMPAQ


Company Compaq HP Company Compaq HP Company Compaq HP Market share in high end servers 3% 11.4% Market share in mid-range UNIX servers 4% 30.3% Market share in laptops for quarter 2 (volume share) 12.1% 6.9% Revenue $134 M $512M Revenue $488 M $3,675 M

Market share in PCs for quarter 2 (volume share) 11.6% 4.5%

RELATIVE PERFORMANCE OF HP-COMPAQ

HP & Compaq Merger

REASONS FOR THE MERGER


A logical question that arises here is that, if HP was progressing at such a marvelous pace - what was the reason that the company had to merge with Compaq? Carly Fiorina, who became the CEO of HP in the year 1999, had a key role to play in the merger that took place in 2001. She was the first woman to have taken over as CEO of such a big company and the first outsider too. Her basic aim was to modernize the culture of operation of HP. She laid great emphasis on the profitable sides of the business. This shows that she was very extravagant in her approach as a CEO. In spite of the growth in the market value of HP's share from 54.43 to 74.48 dollars, the company was still inefficient. This was because it could not meet the targets due to a failure of both company and industry. HP was forced to cut down on jobs and also be eluded from the privilege of having Price Water House Cooper's to take care of its audit. So, even the job of Fiorina was under threat. This meant that improvement in the internal strategies of the company was not going to be sufficient for the company's success. Ultimately, the company had to certainly plan out something different. So, it was decided that the company would be acquiring Compaq in a stock transaction whose net worth was 25 billion dollars. Initially, this merger was not planned. It started with a telephonic conversation between CEO of HP, Fiorina and Chairman and CEO of Compaq, Capellas. The idea behind the conversation was to discuss on a licensing agreement but it continued as a discussion on competitive strategy and finally a merger. It took two months for further studies and by September, 2001, the boards of the two companies approved of the merger. In spite of the decision coming from the CEO of HP, the merger was strongly opposed in the company. The two CEOs believed that the only way to fight the growing competition in terms of prices was to have a merger. But the investors and the other stakeholders thought that the company would never be able to have the loyalty of the Compaq customers, if products are sold with an HP logo on it. Other than this, there were questions on the synchronization of the organization's members with each other. This was because of the change in the organization culture as well. Even though these were supposed to serious problems with respect to the merger, the CEO of HP, Fiorina justified the same with the fact that the merger would remove one serious competitor in the over-supplied PC market of those days. She said that the market share of the company is bound to increase with the merger and also the working unit would double.

HP & Compaq Merger

OBJECTIVE OF MERGERS
The objectives of merger are: Increase competition with major competitors. i.e. IBM, Dell. n Cut costs by $3 billion annually by 2004 n Increase earnings for shareholders n Face the challenge of a shrinking market

HP wants to emulate IBM's push into consulting and other servicesThe accelerated cost savings come from leveraging HP's new bulk to renegotiate contracts for supplies such as memory chips and hard drives. A big chunk of the savings--$1.5 billion annually--will come from trimming the payroll. And investors could benefit big time from huge cost savings. By eliminating redundant administrative functions, HP cost savings would reach $3 billion a year by 2004. The company would likely write off most of the more than $1 billion cost of the merger in 2002. The new HP will exploit its market power for everything from better deals with suppliers to pressuring software developers such as Oracle Corp.and SAP to push HP gear. Then, over time, it will develop the consulting and software smarts to help customers deliver whizzy new offerings. The accelerated cost savings come from leveraging HP's new bulk to renegotiate contracts for supplies such as memory chips and hard drives. A big chunk of the savings--$1.5 billion annually--will come from trimming the payroll.

EXPECTATIONS FROM MERGER OF HP AND COMPAQ


Following were the expectations from merger of HP and Compaq: The merger of HP with Compaq will create superior customer value by expanding its product range and together HP and Compaq can focus on R & D in a greater extend. The second best benefit that the merger will emerge is cost benefit by generating cost synergies reaching approximately $2.5 bn annually. Drive a significantly improved cost structure, approximate assets of $56.4 billion, annual revenues of $87.4 billion and annual operating earnings of $3.9 billion. Adds up to world-class innovation and quality through the merger of two of the leading IT companies of the world. Larger PC position resulting from the merger likely to increase risk and dilute shareholders interest. Operations in more than 160 countries and over 1, 45,000 employees. Expand the numbers of the companys service professionals. Improves access to the market with Compaqs direct capability and low cost structure. Work force reduction by around 15,000 employees saving around $1.5 billion per year. Improve HPs market share.

HP & Compaq Merger

KEY POINTS THAT ENCOURAGED THE MERGER DECISION


HPs Failure to meet target (in spite of increased share value) Merger as the way to fight the growing competition in terms of prices Merger as the solution to remove one serious competitor in the over-supplied market Increased market share for HP and doubled working unit. Merger would eliminate one player in an oversupplied PC market place. To compete with IBM and other companies Reduce Costs. 1990s IT recessionary phase. Merger expected to yield savings projected to reach $2.5bnannually by 2004. Advantage of more volume of sales. Development of direct distribution capability. Strengthen sales force .Improve customer base.

STRENGTHS OF COMPAQ WHICH LED TO THE MERGER


Compaq No 2 in the PC business and stronger on the commercial side than HP. HP was stronger on the consumer side. Together they would be No 1 in market share in 2001. Compaq was strong in low-end industry standard (Intel) servers. Compaq: best known for its PCs, also had enterprise businesses that it had built up through earlier acquisitions of its own. The above are some of the driving forces that resulted into the merger of HP and Compaq into HPQ. If the total case is being analyzed, it can be seen that the motives that made these companies to agree for merger is for same product line and shareholder value addition. Apart from these reasons value creation and improved cost structure are also motives behind this merger. Important facts in Compaq history that led the company to merger decision: Compaq had successfully created a direct model in PCs; Continuously weakening performance made Compaq directors impatient; Dell became strong competitor through cost efficiency; Compaq missed the online bus and its made-to-order system through its retail outlets failed to take off due to bad inventory management; To bring Compaq to the online market, Capellas (CEO) bought Digital Equipment (AltaVista); Acquisition was in cohesive resulting in 15000 layoffs and loss in 1998; New management lacked the cutting edge to maintain stability; Bad investments; Got caught in a cycle of cost cutting and layoffs; Firm was too small and poorly run to maintain its wide array of products and services.

HP & Compaq Merger

ADVANTAGES OF MERGER:
Market Benefits 1. Merger will create immediate end to end leadership 2. Compaq was a clear in the PC business and stronger on the commercial side than HP, but HP was stronger on the consumer side. Together they would be in market share in 2001 3. The merger would also greatly expand the numbers of the companys service professionals. As a result, HP would have the largest market share in all hardware market segments and become the number three in market share in services; 4. Improves access to the market with Compaqs direct capability and low cost structure; 5. The much bigger company would have scale advantages: gaining bargaining power with suppliers; and scope advantage: gaining share of wallet in major accounts. Operational benefits of Merger 1. HP and Compaq have highly complementary R&D capabilities 2. HP was strong in mid and high-end UNIX servers, a weakness for Compaq; while Compaq was strong in low-end industry standard (Intel) servers, a weakness for HP 3. Top management has experience with complex organizational changes 4. Merger would result in work force reduction by around 15,000 employees saving around $1.5 billion per year Financial Benefits 1. Mergers will result in substantial increase in profit margin and liquidity. 2. 2.5 billion is the estimated value of annual synergies. 3. Provide the combined entity with better ability to reinvest.

POTENTIAL IMPACT OF MERGER:


Merger would create a full-service technology firm capable of doing everything from selling PCs and printers to setting up complex networks; Merger would eliminate redundant product groups and costs in marketing, advertising, and shipping, while at the same time preserving much of the two companies revenues; The merger would eliminate one player in an oversupplied PC marketplace; It would also improve HPs market share across the hardware line and double the size of HPs service unitboth essential steps in being able to compete with industry-giant IBM; Fiorina argued the merger would create a full-service technology firm capable of doing everything from selling PCs and printers to setting up complex networks.

HP & Compaq Merger

VIEWS AGAINST MERGER


It would increase HP's exposure to the PC market, which he felt was neither growing nor profitable; HP was paying too much for Compaq; It would dilute shareholders' interests in the more valuable portions of HP's business: printers and imaging services; It could cause customers to delay purchases of HP products or buy from competitors due to uncertainty; There could be considerable disruption among employees during integration which could lead to loss of talent and market share; Possible benefits to HP since the announcement have declined due to negative outlooks for Compaq; Dumbest deal of the decade Michael Dell One bad PC business merged with another bad PC business does not make a good PC company

In addition to these points, Mr. Hewlett specifically pointed out the fact that he does not believe that this merger will aid HP in creating shareholder value nor does he felt this was worth the risk. Also the son of HP co-founder Dave Packard said he would vote the 1.3% stake he controlled against the Compaq deal the day after childhood friend Walter Hewlett announced his opposition. His big problem with the deal: It would require 15,000 layoffs.

Role of Carly Fiorina (CEO OF HP) In Merger


Carly Fiorina played an important role by:

Initiative taken for the merger.


More expectations from the merger. Relied on institutional shareholders voting favor of deal. In spite of oppositions went ahead with the merger. Chances to step down as CEO, if merger fails were high.

HP & Compaq Merger

DEAL

Announcement Date Name of the merged entity Chairman and CEO President Ticker symbol change Structure: Form of payment Deal Exchange Ratio

September 4, 2001 Hewlett Packard Carly Fiorina Michael Capellas From HWP to HPQ Stock-for-stock merger Stock Approx $ 25 billion 0.6325 HPQ shares to each Compaq Shareholder 64% - former HWP shareholders 36% - former CPQ shareholders 18.6% before merger 8.4% after merger Purchase Reverse Triangular Merger Horizontal Merger

Ownership in merged company

Ownership of Hewlett and Packard Families Accounting Method Merger method Merger Type

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TYPE OF MERGER
It was Reverse triangular merger. When the subsidiary of the acquiring corporation merges with the target firm. In this case, the subsidiary's equity merges with the target firm's stock. As a result of the merger, the target would become a wholly-owned subsidiary of the acquirer and shareholders of the target would get shares of the acquirer. A subsidiary Heloise Merger Corporation was created solely to facilitate the merger Result : A tax free reorganization in which HP would control all of Compaqs assets through a wholly owned subsidiary

Stock

DEAL VALUATION:
Financial Highlights:

Particulars Total revenues Assets Operating Earnings Number of Employees Market capitalization (as on 31staugust,2001)

HP 47.0 32.4 2.1 88,500 45,109

Compaq 40.4 23.9 1.9 70,100 20,995

HPQ 87.4 56.4 4.0 1,58,600 66,104

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POST MERGER HPQ PRODUCT LINES AND COMPETITORS


Products PCs(-) PRINTERS(+) LOW-END SERVERS HIGH-END SERVERS(-) LOW-LEVEL SERVICES STORAGE(+) SOFTWARE(-) Market share (%) 19% 15% 37% LAG 62% LEAD LAG Main competitors DELL(+) CANON,LEXMARK IBM(+) IBM(+),SUN IBM(HIGH LEVEL) EMC,SONY MS,CA,IBM

EPS CALCULATIONS:
Particulars EPS before merger EPS of HPQ after merger 0.31 HP 0.21 COMPAQ 0.33

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NEW LEADERSHIP

RETENTION OF ENTITY
The merged companies are working with the name of HP Compaq.The merged entity will be headquartered in Palo Alto and retain a significant presence in Houston, which will be a key strategic center of engineering excellence and product development. The new HP will be structured around four operating units that build on the companies' similar go-to-market and product development structures to provide clear customer and competitive focus. Leadership and estimated revenues (calculated by combining the two companies' trailing four reported fiscal quarters) are as follows: A $20 billion Imaging and Printing franchise to be led by Vyomesh Joshi, currently president, Imaging and Printing Systems, of HP. A $29 billion Access Devices business to be led by Duane Zitzner, currently president, Computing Systems, of HP. A $23 billion IT Infrastructure business, encompassing servers, storage and software, to be led by Peter Blackmore, currently executive vice president, Sales and Services, of Compaq. A $15 billion Services business with approximately 65,000 employees in consulting, support and outsourcing to be led by Ann Livermore, currently president, HP Services.

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MANAGEMENT OF THE FIRM


The HP Company bought Compaq stock and a proxy contest was held. Proxy fight took place within Hewlett-Packard, when the management of that company sought to take over Compaq. On February 11, 2002, HP issued a statement to its shareholders, including proxy information and asking for a vote in favor of the merger. HP stated its reasons for wanting to see the merger completed: HP will be an industry leader in UNIX, Windows and Linux servers; HP will immediately become the industry leader in storage-area networks; HP will lead the market in super-fast and fault-tolerant computing systems (used in the Department of Defense and the world's largest stock exchanges); the new HP will go after a significant share of the PC market; HP will keep the profitability of its printing business, but will diversify from its strengths into other areas (like digital publishing and digital imaging); the new HP will double the size of its sales force to 15,000 and increase its R& L budget to over $4 billion a year; HP expects to increase its profitability to $1.5 billion per quarter, net of capital expenditures. HP explained the merger to its shareholders as a chance "to embrace the future, rather than attempting in vain to preserve the status quo".

The information statement told shareholders that its board of directors spent two and a half years reviewing options and deciding upon the best direction for HP's future. /17Opponents of the Compaq takeover lost the fight. The management, under Carly Fiorina, remained in place, and the merger went ahead. HP declares proxy win on Wednesday March 20, 2002.

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COMPAQ
Statement of earnings 1996-2000

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Balance Sheet 1999-2000

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HEWLETT-PACKARD COMPANY
Statement of Earnings 2000-2001

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Balance Sheet 2000-2001

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Statements of Earnings 2002, 2003 &2004

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Balance Sheet 2002

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Balance Sheet 2003-2004

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Statement of earnings 2005

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Balance Sheet 2005

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Statement of earnings 2006

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Balance Sheet 2006

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Statement of earnings 2007-2011 All values USD millions.


Sales/Revenue Cost of Goods Sold (COGS) incl. D&A COGS excluding D&A Depreciation & Amortization Expense Depreciation Amortization of Intangibles Gross Income SG&A Expense Research & Development Other SG&A Other Operating Expense Unusual Expense EBIT after Unusual Expense Non Operating Income/Expense Non-Operating Interest Income Equity in Affiliates (Pretax) Gross Interest expense Interest capitalized Pretax Income Income Tax Income Tax - Current Domestic Income Tax - Current Foreign

2007
$104.29B 79.67B 76.97B 2.71B 1.92B 783M 24.62B 15.84B 3.61B 12.23B 0 60M (60M) 391M 598M 0 531M 0 9.18B 1.91B 245M 1.28B

2008
$118.36 90.89B 87.53B 3.36B 2.39B 967M 27.48B 16.65B 3.54B 13.1B 0 356M (356M) 66M 401M 0 467M 0 10.47B 2.14B 449M 858M

2009
$114.5B 89.1B 84.32B 4.77B 3.2B 1.57B 25.46B 14.43B 2.82B 11.61B 0 889M (889M) (243M) 119M 0 597M 0 9.42B 1.76B 220M 1.16B

2010
$125.6B 97.65B 92.83B 4.82B 3.34B 1.48B 28.03B 15.54B 2.96B 12.59B 0 1.73B (1.73B) 525M 111M 0 417M 0 10.97B 2.21B 671M 1.35B

2011
$127.85B 99.17B 94.19B 4.98B 3.38B 1.61B 28.68 16.72B 3.25B 13.47B 0 2.75B (2.75B) 151M 167M 0 551M 0 8.98B 1.91B 531M 1.18B

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Income Tax - Deferred Domestic Income Tax - Deferred Foreign Income Tax Credits Equity in Affiliates Other After Tax Income (Expense) Consolidated Net Income Minority Interest Expense Net Income Extra ordinaries & Discontinued Operations Extra Items & Gain/Loss Sale Of Assets Cumulative Effect Accounting Chg Discontinued Operations Net Income After Extra ordinaries Preferred Dividends Net Income Available to Common EPS (Basic) Basic Shares Outstanding EPS (Diluted) Diluted Shares Outstanding EBITDA

512M (125M)

922M (85M)

735M (356M)

176M 21M

(411M) 611M

0 0 0

0 0 0

0 0 0

0 0 0

0 0 0

7.26B 0 7.26B 0 0 0 0 7.26B 0 7.26B 2.76 2.63B 2.68 2.72B 11.48B

8.33B 0 8.33B 0 0 0 0 8.33B 0 8.33B 3.35 2.48B 3.25 2.57B 14.19B

7.66B 0 7.66B 0 0 0 0 7.66B 0 7.66B 3.21 2.39B 3.14 2.44B 15.8B

8.76B 0 8.76B 0 0 0 0 8.76B 0 8.76B 3.78 2.32B 3.69 2.37B 17.31B 0

7.07B 0 7.07B 0

0 0 7.07B 0 7.07B 3.38 2.09B 3.32 2.13B 16.94B

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Balance sheet 2007-2011

2007
Assets Total Assets 47402M

2008
51728M

2009
52539M

2010
54184M

2011
51021M

Total Non-Current Assets

41297M

61603M

62260M

70319M

78496M

Total Assets

88699M

113331M

11479M

124503M

129517M

Liabilities Total Current Liabilities 39260M 52939M 43003M 49403M 50442M

Total Non-Current Liabilities Total Liabilities

10913M

21450M

31279M

34651M

40450M

50173M

74389M

74282M

84054M

90892M

Total Equity

38526M

38942M

40517M

40449M

38625M

Total Liabilities & Share Holders Equity

88699M

113331M

11479M

124503M

129517M

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COMPAQ-CAPITAL STRUCTURE
The authorized capital stock of Compaq consisted of: 3,000,000,000 shares of Compaq Common Stock, par value $0.01 per share 10,000,000 shares of preferred stock, par value $0.01 per share At the close of business on June 30, 2001 1,753,000,000 shares of Compaq Common Stock were issued and outstanding 59,000,000 shares of Compaq Common Stock were issued and held by Compaq in its treasury Stock Options : As of the close of business on August 14,2001 ESOP :279,538,000 shares of Compaq Common Stock are subject to issuance pursuant to outstanding options to purchase Compaq Common Stock

HP-CAPITAL STRUCTURE
Before Merger
1. Stockholders equity: Preferred stock: 300 Million authorized; none issued Common stock: 9,600 Million and 4,800 Million shares authorized at October 31, 2001 and 2000, respectively; 1,939 Million and 1,947 Million shares issued and outstanding at October 31, 2001 and 2000, respectively

2. Dividends The stockholders of HP common stock are entitled to receive dividends when and as declared by HPs Board of Directors. Dividends are paid quarterly. Dividends were $0.32 per share in each of fiscal 2001, 2000 and 1999.

After Merger
1. Stockholders equity Preferred stock: 300 Million authorized; none issued Common stock: 9,600 shares authorized; 2,911 and 3,043 shares issued and outstanding, respectively

2. Dividends The stockholders of HP common stock are entitled to receive dividends when and as declared by HPs Board of Directors. Dividends are paid quarterly. Dividends were $0.32 per common share in each of fiscal 2004, 2003 and 2002.

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ANALYSIS OF MERGER

Earnings from operations

7000 6000 5000 4000 3000 2000 1000

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

0 -1000 -2000

Earnings from operations


STOCK PRICE OF HP over 10 years

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HP-PC BUSINESS
Myth:
HP, even after combining with Compaq, cannot fight Dells direct-sales model with their retail (indirect) plus direct model

Fact:
HPs PC business has steadily improved and is bringing competition to Dell that Dell has not seen for the past 5 or 10 years Dell's PC shipments worldwide share fell to 15.2 % from 18.2 % last year, a particularly sharp decline given that the overall market grew 10.9 percent Hewlett-Packard holds 19.1 percent of the world PC market Even in the US, HP and Dell have 24.2 and 26.8 % of the PC market in 2007

PROFITS V/S DELL COMPUTERS

Share Price HP & Dell:

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CONCLUSION
The integration of HP and Compaq had been far more successful than anybody would have predicted. The success of the merger would not be measured simply by HP and Compaqs ability to effectively integrate their two organizations or even to cut operating costs by several billion dollars. Rather the success would depend upon the integrated companys ability to grow profitably. This, in turn, could only happen if the two companies could pursue a more powerful corporate strategy by being better together.

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