HP COMPAQ:

A FAILED MERGER?
Annadurai Anbarasu

CONTENTS
Background HP & Compaq Why Merger ? Reasons? Does it make sense? Positives and Negatives of Merger Merger Strategy Challenges & SWOT Analysis Achieved Benefits for Shareholders and Customers

Present status Leadership across portfolio

Conclusion

BACKGROUND HP

30s

50s

60s

70s

80s

90s

00s

1939
A new company; HP invents first product

1957
Going Public

1966
HP enters computer industry; HP Labs opens 1st HP Computer

1972

1980

1994

1959
Going global

Replacing the Our first PCs Planet slide ruleHP Partners 1984 invents the program A print pocket launched revolution: calculator 2005 1999 HP Halo introduces Collaboration Agilent Spinboth the Studio off ThinkJet and 2008 the LaserJet Commitment to cloud

2002 HPCompaq merger

BACKGROUND COMPAQ

Rod, Jim and Bill Founded COMPAQ

Entered Server Market

DEC Acquisition

HP Acquired Compaq

1982

1984

1990

1997

1998

2000

2002

Introduced Deskpro 286/386 based systems

Tandem Acquisition

No 1 in PC worldwide

WHY MERGER?
HP and Compaq suffer similar risks of Standing still
Not able to respond to the changing customer requirements with smaller product mix

Increase competition with major competitors like IBM, DELL Cut Costs by US$3 billion annually within 3 years & Increase earnings for shareholders Merger will enhance business segments as individual and complimentary each other like supply chain Face the challenge of a Shrinking market.

HP-COMPAQ MERGER - POSITIVES

Improved Economics and Innovation
Combined company creates economies of scale Direct sales channel More flexible distribution model

Complementary Leadership in Key Markets

Industry leading product line in entire server category Industry leader in enterprise storage segment and storage area networks Broader portfolio of products and services

Strengthened Business Provides Critical Mass in Key Growth Market

65,000 IT architects in 160 countries accelerates growth Better customer loyalty Leading position in mission-critical services, and multivendor support

Financial Benefits
Estimated $2.5 billion in annual cost savings by mid-2004 Would allow HP to increase investment in the imaging and printing business

HP-COMPAQ MERGER - NEGATIVES

HPs Business Portfolio Will Be Worse
Increased exposure in unprofitable PC business PC market was expected to shrink

The Integration Risk of the Proposed Merger is Substantial

No significant merger involving computer companies had ever met expectations: ex. Compaq/Digital, Tandem.. HP management had no experience with large merger

Negative Financial Impact on HP Stockholders

Dramatic drop in stock price after proposed merger was announced Wall Street predicted low estimates for future financial performance

HPs Strategic Position Will Not Materially Improve

Neither company had a profitable PC business model Neither company had successfully transitioned to a direct distribution model

MERGER TRANSACTION SUMMARY

Item Proposal

Structure Exchange Ratio

Current Value Ownership Accounting Expected Closing

Stock-for-Stock merger 0.6325 of an HP share per Compaq share

Approx. US 25 Billion Hp Shareholders 64%; Compaq shareholders 36% Purchase First half of 2002
HP 47.0 32.4 2.1 45.11 Compaq 40.4 23.9 1.9 20.99 Combined 87.4 56.4 3.9 66.10

FY02 in US$ billion Key Figures FY02 Revenue Assets Operating earnings Market Capitalization

WHAT IS STRATEGY?
HP & COMPAQ

MARKET REACTION
US $ 13 Billion lost in first 2 days (HP & COMPAQ combined) 17% loss in next 2 weeks

At the same time the competitors like: DELL went up by 80% Lexmark went up by 60%

PRE-MERGER BCG MATRIX

High
Pocket computers (PDA) Servers Laptops & Desktops

Industry Growth Rate

Low

Printers, Printer supplies

High

Pocket computers (PDA)

On-line storage and IT services

Low

Storage
Laptops & Desktops

Servers

Low

Relative Market share

High

POST-MERGER BCG MATRIX

Services

Industry Growth Rate

Software

High

Laptop/Notebooks

Servers PCs/Desktops

Storage

Low

Printers, Printer supplies

Low

Relative Market share

High

CHALLENGES
Competition : As HP and Compaq smooth out their merger, the industry and their competitors move on to bigger and better things Blending in : The merged company needs to be a hybrid enterprise

Meshing cultures : INCREASE MORALE & AVOIDING CULTURE CLASHES HP: deliberative, thorough decision-making Compaq: fast decisionmaking and marketing

CHOOSING PRODUCTS

Fix the PC business Optimize the server business Enhance the service & consulting

Convincing customers: Customers want a clear migration path, especial with regards to discontinued offerings

Cost: Cut Costs while monitoring revenues (about 3B)

Internal IT: Integrating internal IT applications

SWOT ANALYSIS POST MERGER

Competitive Environment

Economic Downturn Organizational Culture conflict

Threats

Employee Morale

Confront
Opportunities
Innovation Integration Cost Saving Customer Loyalty Market Share

Avoid Search
Overlapping Management Overlapping product lines

Exploit

Strengths

Weaknesses

ACHIEVED BENEFITS FOR CUSTOMERS

HP now offers a one-stop shopping experience for global corporate customers Broader product portfolio

The economies of scale have helped HP focus on its legacy of manufacturing innovation

Ease of doing business Enhanced supply and demand visibility

Direct selling capabilities Elimination of non-value-added steps, such as administration, and costs

ACHIEVED BENEFITS FOR SHARE HOLDERS

In mid-July 2007, Five years after the merger announcement, Shareholder returns were up 46 percent. Over the same period: The Standard & Poor's IT index had sunk 9 percent Competitors like: IBM was down 23 percent Dell was up only 2 percent

LEADERSHIP ACROSS THE PORTFOLIO

Worldwide market share data for calendar Q4 2010
MARKET SHARE POSITION

Blade Servers
x86 based Servers Unix + Linux + Windows Servers Branded Tape Drives Automated Software Quality Distributed System Management Software Inkjet printers Laser printers Workstations

53.4% 38.5% 34.2% 38.0% 39.0%

#1 #1 #1 #1 #1

13.6%
47.7% 36.2% 44.5% 20.2% 18.3% 28.5%
SHARE

#1
#1 #1 #1 #1 #1 #1
POSITION

Notebooks
Desktops Thin Clients
MARKET

IT Asset Management Software IT Services Outsourcing

18.3% 6.0% 8.6% 10.6%

#2 #2 #2 #2

Ethernet Switches

CONCLUSION
"The merger accomplished what HP and Compaq set out to do in the first place, providing the critical mass and reach needed to ensure a long-term role in an industry undergoing a fundamental transition, "This deal enabled the merged company to grow revenue and profits in an increasingly competitive marketplace. Jean S. Bozman, VPResearch, International Data Corporation. 8th Nov 2006