HP Compaq Assignment.pdf

8/18/2019 HP Compaq Assignment.pdf

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The Merger of Hewlett-Packard and Compaq (A): Strategy and Valuation

1. Why would HP acquire Compaq? Is the industry attractive? What are the trends affecting the

industry structure?

Why would HP acquire Compaq ?

After Sept’11, there was a slowdown and companies were undergoing a stagnant situation and

hence HP executives did not wanted to be action less and looked forward for the merger.

HP is also feared that it has reached a standstill moment and it must take some action in order to

move ahead in business.

Investors and shareholders also have been creating pressure to look out for this merger.

Compaq has certain product lines where HP is not there and can leverage on the different expertise

of both companies.

Is industry attractive ?

Industry has slowed down and there is economic slowdown in the market. However, companies are

developing on their current expertise and are innovating. IBM has recently done very well in IT

service, end to end services. Hence, all players are looking up for new avenues to create new

products and services in the market. Dell has created the innovate value chain to benefit the

customers and change the industry dynamics. There is pressure on companies to be innovative to

sustain market and economic changes.

Walter gives a perspective to be innovative in current industry situation and create synergies there

and do reach cost excellence in PC businesses.

Trends affecting the industry structure

Economic Slow Down may affect new market investments and consumer expenditures. The inflation

and share prices would also be hit due to Sept’11.

There were 3 main platforms and growth was still expected. UNIX by 11% in PC businesses. So,

positivity is still there.

Investors and shareholders have been creating pressure for merger as that would increase the shareprice.


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2. What would a SWOT analysis of both reveal?

Strengths

1.

Strong brand recognition2. Different business excellence hence high synergy.

3. HP excellence in UNIX and high end servers.

Compaq had its unique strength of good distribution management and excellence in cost saving

techniques whereas HP had unique advantage of being innovative, high on quality and integrity.

Both the companies had good brand recognition. Both had different business excellence, HP was

good in manufacturing computers, high end servers, imaging and printing, UNIX. Compaq had

advantage in enterprise technology and solutions. Hence, both had high chance of beating

competition together.

Weakness

1. Same product lines

Very distinct focus not only in business but for employees also. HP had high vision and dreams to

make revenues and lead the IT services, however Compaq did not had a vision to be innovation and

main focus was on fierce competition by cost saving. Many product lines are overlapping and hence

conflict.

Opportunity

1. Economies of scale

2.

High bargaining power with vendors and suppliers.It seemed like Compaq accretion could cost dilution of HP image and value and work culture. Though

there were economies of scale but the thought and direction of work was given low preference.

Both the companies wished to foray in IT services field. This could well get them high bargaining

power in market with vendors and suppliers.

Threats

1. Fight for same customer

2. Not substantial effect on share price

Many product lines are overlapping and hence conflict, so in field both the companies will befighting with each other for one customer. The culture differences can be a big cause for further

slowdown and as is HP share prices have fallen and the merger will not be able to give it a raise, the

news itself was not perceived positively by public.


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3. Was the merger strategy sound?

1. On theory, it was a sound merger. Profits by business excellence. Many business like cost

saving on PC business, UNIX edge could be of good strategic decision. Both the companieswould emerge as a giant power to compete against IBM service model or DELL distribution

network. Storage – Compaq’s leading position and HP’s leadership in high end integration is

hopeful to bring in more profits. There were many strategic synergies.

2. Cost saving - It is mandate for any organization in IT industry to carry out innovations and R

& D, with the 2 companies coming together, the cost efficiencies will also be achieved. As

addressed by CEO of HP, the solution will be of global level.

3. Numbers were positive - The merger certainly had all the needed synergy and sounded

good. Also, the adequate steps were taken for the valuation of merger.

4. Growth – Along with the two companies, vendors will also come together, 100 plus vendors

will lead to consolidation.

On the critical side,

1. The cultural differences can be a major gap area, which is under estimated now. Compaq no

fault tolerance culture and where HP has a American style of working where they learn by

creating and doing mistakes on the way.

2. Human Resource orientation is crucial – The nesting and go live stage is very essential and

they must ensure to hold on to the employees. The employees lay off, where both the

companies have common function and hence those employees will create unrest in the

environment.3. However, Walter disapproved of the merger, because the share price were not increasing

and that was where the initial thought had originated.

4. There are also conflict in Walter numbers – 5.2% EBIT & 7.2% ROC were calculated.

Alternate to the earlier calculations, where 8.1% EBIT & 10.7% ROC was reported. Over

optimist picture was reported. Annual growth of over 20% was reported.

5. Weak economy may not be a good stage to plunge investment for the company and

employees. The market uncertainties would be high and hence decision making power

needs to be more than sure in such rough times.

6. Development and mapping of product lines – Many product lines are overlapping and hence

managing of the same is very important. The direction from management should be veryclear else it may lead to cannibalisation within the merged company.


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4. What is the value of projected synergies?

Recurring, annual, pretax cost saving as projected by management = 2.5 billion by mid 2004

Annual Pretax cost saving

Administrative/IT-Cost $625 Million

Cost of goods sold benefit $600 Million

Sale-Management Benefits $475 Million

R&D efficiencies $425 Million

Indirect Purchase Benefits $250 Million

Marketing efficiencies $125 Million

Total 2.5 Billion

•

As projected by management, these cost saving to have value of $5 to $9 per share. eventaking in to account revenue losses of 4.1 billion in 2004.

• Expected an overall increase in operating margin of 8% to 10%


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Projected Operating

Margin FY20013 Operating Margin

FY 2001

Enterprise systems 9.2 -3.2

Personal systems 3.0 -4.2

Services 13.7 4.5

• PV = No. of shares * Share price

Therefore,

PV of HP = 1936 * 18.87 = 36532

PV of Compaq = 1689 * 11.08 = 18714.12

As given in the case, lets take discount rate as 0.15

TV = 2500/0.15 = 16666.66

PV of HP and Compaq = PV(HP) + PV(Compaq) + PV (Synergy)

= 36532 + 18714.12 + 16666.66

= 71912.71

Since Compaq has 36% share, the value of the Compaq in merger is = 0.36 * 71912.71

=25888.57

Therefore, value of synergy = EV(Compaq) – PV(Compaq)

= 25888.57 - 18714.12

= 7174.45 Million


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5. What is the appropriate value for Compaq ?

Valuation range of merger of Compaq can be calculated as difference between its current value and

expected value ie value with synergy.

Hence,

PV (Compaq) = 1689 * 11.08 = 18714.12

Expected Value (Compaq) = PV (Compaq) + Synergy

= 18714.12 + 7174.45

= 25888.57

Therefore,

Valuation Range of Compaq = (18714.12, 25888.57)

HP Compaq Assignment.pdf

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