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1HP & 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 Packard’s 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 world’s 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 company’s most successful product ever.
HP-Product Portfolio
1. Laptops/Notebooks2. Palmtops/PDA3. Printers & printing consumables4. Digicams 5. Scanners6. Moniters 7. Mainframes
Major Competitors:
IBM Servers, PC’s, storage and IT services
Dell PC’s
Canon Printers, fax, copiers, optical equipment
Compaq Pc, Servers, Pocket computers
2HP & 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. Enterprise computing group2. Mainframes servers workstations 3. Internet products networking products4. Commercial desktops5. Portables6. Small and medium business solutions
Compaq Competitors
IBM Servers, PC’s, storage and IT services.
Sun Microsystems Servers
Dell PC’s
HP PC’s, IT services and pocket computers
Palm Pocket computers
3HP & Compaq Merger
PRE-MERGER STATS FOR HP & COMPAQ
Company Market share in high end servers Revenue
Compaq 3% $134 MHP 11.4% $512M
Company Market share in mid-range UNIX servers
Revenue
Compaq 4% $488 MHP 30.3% $3,675 M
RELATIVE PERFORMANCE OF HP-COMPAQ
Company Market share in laptops for quarter 2 (volume share)
Market share in PCs for quarter 2 (volume share)
Compaq 12.1% 11.6%HP 6.9% 4.5%
4HP & 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.
5HP & 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 trimmingthe payroll. And investors could benefit big time from huge cost savings. By eliminatingredundant 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 trimmingthe 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 company’s service professionals. Improves access to the market with Compaq’s direct capability and low cost structure. Work force reduction by around 15,000 employees saving around $1.5 billion per year. Improve HP’s market share.
KEY POINTS THAT ENCOURAGED THE MERGER DECISION
6HP & Compaq Merger
HP’s 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. 1990’s 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.
ADVANTAGES OF MERGER:
7HP & Compaq Merger
Market Benefits
1. Merger will create immediate end to end leadership2. 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 company’s 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 Compaq’s 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 HP’s market share across the hardware line and double the
size of HP’s service unit—both 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.
8HP & 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.
9HP & Compaq Merger
DEAL
Announcement Date September 4, 2001
Name of the merged entity Hewlett Packard
Chairman and CEO Carly Fiorina
President Michael Capellas
Ticker symbol change From HWP to HPQ
Structure: Stock-for-stock merger
Form of payment Stock
Deal Approx $ 25 billion
Exchange Ratio 0.6325 HPQ shares to each Compaq Shareholder
Ownership in merged company 64% - former HWP shareholders36% - former CPQ shareholders
Ownership of Hewlett and Packard Families
18.6% before merger8.4% after merger
Accounting Method Purchase
Merger method Reverse Triangular Merger
Merger Type Horizontal Merger
10HP & Compaq Merger
TYPE OF MERGERIt 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 Compaq’s assets through a wholly owned subsidiary
Stock
DEAL VALUATION:
Financial Highlights:
Particulars HP Compaq HPQ
Total revenues 47.0 40.4 87.4
Assets 32.4 23.9 56.4
Operating Earnings 2.1 1.9 4.0
Number of Employees 88,500 70,100 1,58,600
Market capitalization (as on 31staugust,2001)
45,109 20,995 66,104
Hewlett Packard
Compaq
Heliose Merger Corp
11HP & Compaq Merger
POST MERGER HPQ PRODUCT LINES AND COMPETITORS
Products Market share (%) Main competitors
PCs(-) 19% DELL(+)
PRINTERS(+) 15% CANON,LEXMARK
LOW-END SERVERS 37% IBM(+)
HIGH-END SERVERS(-) LAG IBM(+),SUN
LOW-LEVEL SERVICES 62% IBM(HIGH LEVEL)
STORAGE(+) LEAD EMC,SONY
SOFTWARE(-) LAG MS,CA,IBM
EPS CALCULATIONS:
Particulars HP COMPAQ
EPS before merger 0.21 0.33
EPS of HPQ after merger0.31
12HP & Compaq Merger
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.
MANAGEMENT OF THE FIRM
13HP & Compaq Merger
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.
COMPAQ
14HP & Compaq Merger
Statement of earnings 1996-2000
Balance Sheet 1999-2000
15HP & Compaq Merger
HEWLETT-PACKARD COMPANY
16HP & Compaq Merger
Statement of Earnings 2000-2001
Balance Sheet 2000-2001
17HP & Compaq Merger
18HP & Compaq Merger
Statements of Earnings 2002, 2003 &2004
19HP & Compaq Merger
Balance Sheet 2002
Balance Sheet 2003-2004
20HP & Compaq Merger
Statement of earnings 2005
21HP & Compaq Merger
Balance Sheet 2005
22HP & Compaq Merger
23HP & Compaq Merger
Statement of earnings 2006
Balance Sheet 2006
24HP & Compaq Merger
Statement of earnings 2007-2011
25HP & Compaq Merger
All values USD millions. 2007 2008 2009 2010 2011
26HP & Compaq Merger
Sales/Revenue $104.29B $118.36 $114.5B $125.6B $127.85B
Cost of Goods Sold (COGS) incl. D&A
79.67B 90.89B 89.1B 97.65B 99.17B
COGS excluding D&A 76.97B 87.53B 84.32B 92.83B 94.19B
Depreciation & Amortization Expense
2.71B 3.36B 4.77B 4.82B 4.98B
Depreciation 1.92B 2.39B 3.2B 3.34B 3.38B
Amortization of Intangibles 783M 967M 1.57B 1.48B 1.61B
Gross Income 24.62B 27.48B 25.46B 28.03B 28.68
SG&A Expense 15.84B 16.65B 14.43B 15.54B 16.72B
Research & Development 3.61B 3.54B 2.82B 2.96B 3.25B
Other SG&A 12.23B 13.1B 11.61B 12.59B 13.47B
Other Operating Expense 0 0 0 0 0
Unusual Expense 60M 356M 889M 1.73B 2.75B
EBIT after Unusual Expense (60M) (356M) (889M) (1.73B) (2.75B)
Non Operating Income/Expense
391M 66M (243M) 525M 151M
Non-Operating Interest Income
598M 401M 119M 111M 167M
Equity in Affiliates (Pretax) 0 0 0 0 0
Gross Interest expense 531M 467M 597M 417M 551M
Interest capitalized 0 0 0 0 0
Pretax Income 9.18B 10.47B 9.42B 10.97B 8.98B
Income Tax 1.91B 2.14B 1.76B 2.21B 1.91B
Income Tax - Current Domestic
245M 449M 220M 671M 531M
Income Tax - Current Foreign 1.28B 858M 1.16B 1.35B 1.18B
Income Tax - Deferred Domestic
512M 922M 735M 176M (411M)
Income Tax - Deferred Foreign
(125M) (85M) (356M) 21M 611M
27HP & Compaq Merger
Income Tax Credits 0 0 0 0 0
Equity in Affiliates 0 0 0 0 0
Other After Tax Income (Expense)
0 0 0 0 0
Consolidated Net Income 7.26B 8.33B 7.66B 8.76B 7.07B
Minority Interest Expense 0 0 0 0 0
Net Income 7.26B 8.33B 7.66B 8.76B 7.07B
Extra ordinaries & Discontinued Operations
0 0 0 0 0
Extra Items & Gain/Loss Sale Of Assets
0 0 0 0 0
Cumulative Effect - Accounting Chg
0 0 0 0 0
Discontinued Operations 0 0 0 0 0
Net Income After Extra ordinaries
7.26B 8.33B 7.66B 8.76B 7.07B
Preferred Dividends 0 0 0 0 0
Net Income Available to Common
7.26B 8.33B 7.66B 8.76B 7.07B
EPS (Basic) 2.76 3.35 3.21 3.78 3.38
Basic Shares Outstanding 2.63B 2.48B 2.39B 2.32B 2.09B
EPS (Diluted) 2.68 3.25 3.14 3.69 3.32
Diluted Shares Outstanding 2.72B 2.57B 2.44B 2.37B 2.13B
EBITDA 11.48B 14.19B 15.8B 17.31B 16.94B
Balance sheet 2007-2011
28HP & Compaq Merger
2007 2008 2009 2010 2011AssetsTotal Assets 47402M 51728M 52539M 54184M 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-CurrentLiabilities
10913M 21450M 31279M 34651M 40450M
Total Liabilities 50173M 74389M 74282M 84054M 90892M
Total Equity 38526M 38942M 40517M 40449M 38625M
Total Liabilities & Share Holders Equity
88699M 113331M 11479M 124503M 129517M
COMPAQ-CAPITAL STRUCTURE
The authorized capital stock of Compaq consisted of:
29HP & Compaq Merger
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 HP’s 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 byHP’s Board of Directors. Dividends are paid quarterly. Dividends were $0.32 per common share in each of fiscal 2004, 2003 and 2002.
ANALYSIS OF MERGER
30HP & Compaq Merger
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
-2000
-1000
0
1000
2000
3000
4000
5000
6000
7000Earnings from operations
Earnings from operations
STOCK PRICE OF HP over 10 years
31HP & Compaq Merger
HP-PC BUSINESS
Myth:
HP, even after combining with Compaq, cannot fight Dell’s direct-sales model with their retail (indirect) plus direct model
Fact:
HP’s 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:
32HP & Compaq Merger
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 andCompaq’s 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 company’s 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.