H R M i M e rg e rs & A cq u i ti n s n si o

HP-Compaq Merger
C a se A n a l s ysi

Presented by Ashish Kumar Jain | Indrani Haldar Needhi Govil| Sandeep Sharma | Vivek Vijayan

Introduction to HP

Well-respected systems vendor Smaller, but worthy competitor to IBM Competes mainly in the hardware business with desktops and servers Lacking in the services business Undisputed leader with its line of PC printers

07/18/11

The HP-Compaq Merger: Case Analysis

HP logo

Over the Ages .

HP Products

3 Major Business Segments

Imaging and Printing Systems

1st in global printer market in 2001

Computing Systems
4th in PC and server markets in 2001

Information Technology Services

8th in global services market in 2001

07/18/11

The HP-Compaq Merger: Case Analysis

Introduction to Compaq

Compaq sales leveled off with added competition from Dell Compaq was best known for its personal computer offerings After paying $5.4 billion to finance a merger with Digital Equipment, Compaq eliminated overlap by cutting thousands of jobs worldwide

07/18/11

The HP-Compaq Merger: Case Analysis

The HP way
1.Profit, To recognize that profit is the best single measure of our contribution to society and the ultimate source of our corporate strength 2.Customers.To strive for continual improvement in the quality, usefulness, and value of the products and services we offer our customers 3.Field of Interest.To concentrate our efforts, continually seeking new opportunities for growth but limiting our involvement to fields in which we have capability and can make a contribution 4.Growth.To emphasize growth as a measure of strength and a requirement for survival
07/18/11 The HP-Compaq Merger: Case Analysis

The HP way
5.Employees:To provide employment opportunities for HP people that include the opportunity to share in the company's success, which they help make possible 6.Organization: To maintain an organizational environment that fosters individual motivation, initiative and creativity, and a wide latitude of freedom in working toward established objectives and goals 7.Citizenship: To meet the obligations of good citizenship by making contributions to the community and to the institutions in our society which generate the environment in which we operate
The HP-Compaq Merger: Case Analysis

07/18/11

page 8

HP Pre-Merger

Experienced revenue growth but share price still declined Faced recession in 2001 Pay cuts and layoffs Stock price continued to fall Began to consider acquisitions

07/18/11

The HP-Compaq Merger: Case Analysis

Financial Crisis faced by HP

HP Compaq Deal Overview

In September2001 HP announces the Merger with Compaq Creates an $87 billion global technology leader, with the industry's most complete set of IT products and services for both businesses and consumers NewHPwould be the #1 global player in servers, imaging & printing, and access devices (PCs & handhelds), as well as Top 3 player in IT services, storage and management software The combination furthers each company's commitment to open, market-unifying systems and architectures and aggressive direct and channel distribution models
07/18/11 The HP-Compaq Merger: Case Analysis

HP Compaq Deal Overview

Combined company can create substantial shareowner value through significant cost structure improvements and access to new growth opportunities Transaction expected to be substantially accretive to pro forma EPS in first full year of combined operations The merger is expected to generate cost synergies of approximately $2.0 billion in fiscal 2003, the first full year of operations Fully realized synergies are expected to reach a run rate of approximately $2.5 billion by mid-fiscal 2004
07/18/11 The HP-Compaq Merger: Case Analysis page 12

HP Compaq Fact Sheet

Transaction Summary:

L e a d e rsh ip :

Structure: Stock-for-stock merger Exchange Ratio: 0.6325 of anHPshare per Compaq share Current Value: Approximately $25 billion Ownership: HPshareholders 64%; Compaq shareholders 36% Accounting:

B o a rd o f D i cto rs: 5 C o m p a q d i cto rs to re re j i H P B o a rd o n C h a i a n a n d C h i f E xe cu ti O ffi r: rm e ve ce C a rl Fi ri a y o n Pre si e n t: M i a e lC a p e l a s d ch l C h i f Fi a n ci lO ffi r: R o b e rt W a ym a n e n a ce I a g i g & Pri ti g : V yo m e sh Jo sh i m n n n A cce ss D e vi s: D u a n e Z i e r ce tzn I I fra stru ctu re : Pe te r B l ckm o re T n a S e rvi s: A n n Li rm o re ce ve

Purchase First half of 2002

Expected Closing:

Key Facts (last 4 qtrs) Revenues Total Assets Operating Earnings

HP $47.0 billion $32.4 billion $2.1 billion

Compaq $40.4 billion $23.9 billion $1.9 billion

Pro Forma Combined $87.4 billion $56.4 billion $3.9 billion

Shareholder Opposition

Hewletts Rationale Exaggerated importance of the scale of the computer business The merger will expose HP to brutal low profit PC business Dilute the value of the lucrative printing business Packards Rationale The new strategies counter the companys core values

07/18/11

The HP-Compaq Merger: Case Analysis

Value proposition for the Shareholders

07/18/11

The HP-Compaq Merger: Case Analysis

Managements Reasons For Merger

1.Improved Economics and Innovation 2.Complementary Leadership in Key Markets 3.Strengthened Business Provides Critical Mass in Key Growth Market 4.Financial Benefits

07/18/11

The HP-Compaq Merger: Case Analysis

Reasons Against the Merger

1.HPs Business Portfolio Will Be Worse 2.The Integration Risk of the Proposed Merger is Substantial 3.Negative Financial Impact on HP Stockholders 4.HPs Strategic Position Will Not Materially Improve

07/18/11

The HP-Compaq Merger: Case Analysis

Strategic dynamics of Acquisition Integration

07/18/11

The HP-Compaq Merger: Case Analysis

C h a n g i g E n vi n m e n t n ro
u l ti g th e In te g ra ti n Lo g i a n d Pe rfo rm a n ce g o a l a n o c s

Pro ce ss 2 : C re a ti g th e i te g ra ti n p l n n n o a

Pro ce ss 3 : E xe cu ti g O p e ra ti n a lI te g ra ti n n o n o

S h o rt te rm p e rfo rm a n ce

Pro ce ss 3 : E xe cu ti g S tra te g i I te g ra ti n n c n o

Lo n g te rm p e rfo rm a n ce

Ti e m

Formulating the Integration Logic and Performance goals

Merger would create potential competitive advantages from integration, greatly improving its product-market position across the computing business HP was strong in mid-range and high end UNIX servers, a weakness for Compaq; while Compaq was strong in low end industry standard(Intel) servers, a weakness for HP Compaq was clear #2 in the PC business and stronger on the commercial side, but HP was stronger on the consumer side. Together they would be #1 in market share HP will become #3 in services The merged entity would have scale advantages; gaining bargaining powers with suppliers With the stronger portfolio , HP would gain scope advantages by selling across the board portfolio
The HP-Compaq Merger: Case Analysis

07/18/11

Financial performance projections at the time of merger announcement

Estimated 2004 Operating margins projected by HP pre-Merger
HP Segment Operating Profit Margin 9.20% 3.00% 13.70%

Estimated 2004 Earnings projected by HP Pre-Merger

HP Segment 2004 Projected Operating Earnings((million$) 246800.00% 1068.00% 2678.00% 2482.00%

Enterprise PCs Services

Enterprise PCs Services Imaging and Printing

Imaging and Printing (no estimate)

07/18/11

The HP-Compaq Merger: Case Analysis

Selling the Integration logic externally and internally

Initial response to the intent to merge was mostly negative Michael Dell The dumbest deal of the decade. Opposition from Walter Hewlett, David Packard and other family members There were financial risks associated with the integration as cost of capital would increase because of greater volatility of PC business Mgmt. had to convince HPs shareholders to vote in favor of logic based on scale and scope, convince U.S. government and the European Commission of the legality of the proposed merger
The HP-Compaq Merger: Case Analysis

07/18/11

The Integration plan

The top executive positions for the combined companies named prior to the announcement of the merger Integration team formed to work with the new companys executive committee to agree on
Short term and long term goals, Define how the new company would work, Develop plans for strategic and operational integration

Integration team to start multi year initiatives to develop

HPs direct distribution model(to compete with Dell) and Global solution delivery capability (to compete with The HP-Compaq Merger: Case Analysis 07/18/11 IBM)

Executing Operational Integration

07/18/11

Integration team presented a monthly report to all executive committee members and was reviewed at their meetings Short term synergy goal of $2.5 billion $ was exceeded by over $1billion Tasks related to people selection, reduction plan, pay systems were implemented on schedule Procurement savings plan was also implemented rapidly. $1.1 billion saved in first 6 months in procurement Failure to pick up key customer concerns Failing to revise original assumptions cause of internet bust because of no clear feedback loop to the preceding part of the process
The HP-Compaq Merger: Case Analysis

Fi a n ci l p e rfo rm a n ce re su l - 2 0 0 4 n a ts

Actual Operating profit margin

HP Segment 2002 OPM 2003 OPM 2004 OPM 2004 Estimated OPM

Reduced Earnings
HP Segment 2004 Projected OE(million $) 2004 Actual OE

Enterprise -2.00% 0.97% PCs Services -1.70% 0.10% 11.10% 9.17%

1.14% 9.20% 0.85% 3.00% 11.02% 13.70%

Enterprise PCs Services Imaging & Printing

2468 1068 2678 2482

173 210 1263 3847

07/18/11

The HP-Compaq Merger: Case Analysis

Executing strategic integration

Failed to adjust goals in light of changing environment Remaining operational integration tasks related to corporate culture, IT integration Competing with Dell- Top management should have driven HPs direct business model more aggressively to measure against Dells projected capabilities by 2004 Competing with IBM- Top management should have looked to acquire the necessary expertise as part of a more aggressive plan to close the gap with IBMs capabilities. It needed to develop capabilities to serve global accounts.
The HP-Compaq Merger: Case Analysis

07/18/11

Changing Environment

mulating the Integration Logic and Performance goals

Strong

Process 2: Creating the integration plan

Strong Strong Exceeded short term performance goals Process 3:Executing Operational Integration Failed to revise long term Weak performance goals Weak Failed to maintain effective strategic change capability Process 4:Executing Strategic Integration Missed long term performance goals

Strong

Time

Role of HR in HP Compaq merger

Set up clear, open & regular communication

qIntranet portal started to disseminate information quickly qFast start face-to-face new team discussion meetings

People Strategy program

qStabilize new HP foundation qMobilize high performance workplace qEnergize best place to work

Clean room discussions planning the integration

Culture included in overall integration Linking organization design with overall business strategy
The HP-Compaq Merger: Case Analysis

07/18/11

Role of HR in HP Compaq merger

Adopt & go methodology

qno dual systems, processes or policies qswift decisions regarding HR practices

Creating a global job structure

qcommon system of job codes, titles & functions

Creating a global grade structure

qcommon pay ranges across all countries

New reward system introduced that acted as a motivator Voice of the workforce survey
qevaluates level of employee engagement

07/18/11

The HP-Compaq Merger: Case Analysis

Recap of what happened in the background

07/18/11

0 7 /1 8 /

The HP-Compaq Merger: Case Analysis

page 30

What happened after 2005

07/18/11

The HP-Compaq Merger: Case Analysis

page 32

HP Timeline (2005 2006)

2005

Acquired Snapfish, online photo service company Acquired Scitex Vision, industrial wide-format digital printing

2006
Acquired VoodooPC, high-end gaming PC provider Acquired Mercury Interaction, IT management software and services company Legal investigations board members leaked confidential information to media Formal inquiry from Securities and Exchange Commission Shareholder lawsuits

07/18/11

The HP-Compaq Merger: Case Analysis

HP TimeLine (2007)

2007
HP & Wataniya Telecom Algeria advanced billing solution to support new mobile services Established research lab in St. Petersburg, Russia (growing economy) Expansion of printing, PC & software businesses Removed itself from NASDAQ listing to reduce the cost of fees and admin duties Filed patent infringement lawsuits against Acer Filed Print cartridge and ink formulation patent infringement case against Pelikan Hardcopy Awarded 7-year contract for technology services with NASA worth $5.6 billion Entered into agreements with 30 content providers for their media libraries (4,000 movies, TV, films, etc) for production & distribution through HP Video Merchant Services
The HP-Compaq Merger: Case Analysis

07/18/11

HP TIMELINE (2008)

2008

HP & Unilever signed a 7-year outsourcing contract for the management of Unilevers technology infrastructure Sara Lee renewed its infrastructure outsourcing services contract for 7-years and from 10 countries to 35 HP & Foxconn started constructing a manufacturing facility in Russia for the production of HP PCs with an investment of $50 million Created HP & Novell alliance for identity and security management solutions HP sells Novell products, Novell manages technology HP & Acer resolved all claims between them New radio frequency identification (RFID) technology to secure and improve audit controls in the data center US Air Force contract for desktop, laptop, and services Joined with Intel & Yahoo, created a cloud computing research and education data center Acquired Electronic Data Systems Corp (EDS), global technology services, for $13.9 billion

07/18/11

The HP-Compaq Merger: Case Analysis

HP Timeline (2009 Present)

2009

HP & Sun Microsystems agreement HP to distribute and provide software support for Suns OS on HPs server 10-year contract with Avivia (insurance) to manage 2 data centers for $1 billion 12-year contract with British Columbia Ministry of Labour and Citizens Services for hosting and data center services for $586 million 11/11 Acquires 3COM, global enterprise networking solution, for $2.7 billion

07/18/11

The HP-Compaq Merger: Case Analysis

HP Today

Total Revenue: $118,364 million (2008) 13.5% growth over prior year Net Income: $8,329 million (2008) 14.7% growth over prior year CEO: Mark Hurd Started on April 1, 2005

07/18/11

The HP-Compaq Merger: Case Analysis

HP Market Share

Leading global PC market for shipments 2006 Took market leadership from Dell 18% HP, 14% Dell, 11% Acer, 7% Lenovo (2008) Leading global server market 30% market share in 2008 Leading blade servers segment 47% HP, 26% IBM (2008)

Storage market EMC, HP (2008) IT services 2nd largest player (EDS acquisition in 2008) Competitors: Accenture, IBM Branding #12 in Top 100 Best Global Brands (Interbrand, 2008) #1 in US, #10 in world for Environment, Social Impact Ratings (The Economist, 2008)

Leading global printers market 40% market share in 2008 Competitors: Xerox, Canon The HP-Compaq Merger: Case Analysis 07/18/11

PC Shipments for 3Q09 (US & INTL)

Source: IDC Worldwide, Quarterly PC Tracker 10/09

07/18/11

The HP-Compaq Merger: Case Analysis

HP Structure Now

7 business segments
Technology Solutions Group Enterprise Storage and Servers (ESS) HP Services (HPS) HP Software Personal Systems Group (PSG) Imaging and Printing Group (IPG) HP Financial Services (HPFS) Corporate Investments

07/18/11

The HP-Compaq Merger: Case Analysis

So whats the Verdict?

They did manage to save $3 billion with the merger, successfully accomplishing their main goal of reducing costs of $2.1 billion However, that came at the price of firing 44,000 employees over the last 3 years Original estimate: 15,000-17,000

Success/ Failure? Let time decide

07/18/11

The HP-Compaq Merger: Case Analysis

Thank You

07/18/11

The HP-Compaq Merger: Case Analysis

page 42