The world’s largest corporate Information Technology merger began in September 2001 when HP announced that they would acquire Compaq in an all stock purchase valued at $25 billion. Over an 8 month period ending in May 2002, the merger passed shareholder and regulatory approval with the end result being one company. The new HP has annual sales of approximately $90 billion which is comparable to IBM, and an operating income of almost $4 billion. The merger was led by Carly Fiorina, the chairwoman and CEO of HP. The president of the new HP was Michael Capellas who was the former chairman and CEO of the old HP and who has recently resigned and is now the CEO of World Com. Overall, many analysts were critical of the merger from the beginning since both Compaq and HP were struggling companies before the merger. The common question that has been raised by analysts is: Do two struggling companies make a better merged company? Some analysts have indicated that the merger is a gamble and that it is difficult to see any focused logic behind the merge considering that most I.T acquisitions are not successful.
Prior to the merger, Compaq has been unable to grow despite previously buying Digital, while HP was trying to grow internally, without much success. Both companies were still adjusting to acquisitions they have made in the past and both were adjusting to new leadership (Fiorina and Capellas). The merger deal also means that there are many overlaps in products, technologies, distribution channels, services, facilities and jobs. Employee morale is a threat to a successful merger as there have been numerous layoffs -15,000 employees. The claimed annual cost savings of about $2.5 billion dollars by the year 2004 amounts to only 3 % of the combined costs of both companies. Gartner Group research has indicated that the merged company has failed to do a good enough job of presenting the benefits of an acquisition of this scale to justify the deal’s risk as it is generally known that technology mergers rarely work.
In addition, both companies in the past have struggled to resolve conflicts between direct and indirect sales channels. The cultural background of both companies is quite different and integration will take a long time. The culture at HP is based on consensus; Compaq’s culture on the other hand is based on rapid decision making. From a positive perspective, most botched tech mergers involved companies that were trying to buy their way into new businesses they knew little about, this is not the case with the HP/Compaq merger. Apart from servers and PC’s, they have several areas where their products overlap e.g.: they are both are involved in making data -storage equipment and both make hand held computing devices. In addition, both companies also bring different strengths to the table.
Compaq has done a better job in regard to engineering an entire line and HP has been strong in consumer products. The justification provided by HP senior management suggests that a merger will enable them to compete with two of their biggest competitors, IBM and Dell. In conclusion, it is viewed by many analysts that there will be at least 2 more years of bitter infighting which will cause the new HP to lose direction and good personnel. This is great news for competitors such as IBM and Sun as both of them will be able to pick off the market while the new HP is distracted by the merger. The new HP may be a threat to IBM but not anytime soon. It could take several years to determine if the largest merger in I.T history will be a success or a complete flop.
THE IT INDUSTRY PROFILE
Information technology (IT) is a broad field that covers all aspects of managing and processing information. IT professionals design, develop, support, and manage computer software, hardware, and networks. From the exuberant growth of its early years to the uncertainty of recent times, the IT industry has stabilized—with job growth rates now rising steadily—and continues to change in order to meet the needs of the business world. While the wild optimism that surrounded the IT industry a few years back has been deflated, the IT industry is adapting to a changing market. New developments such as creating infrastructure for mobile technologies will continue to ensure the vitality and viability of the industry. And as the industry responds to new business needs, it will continue to evolve into a mature profession, a profession versatile enough to adapt to new demands and stable enough to support new innovations and developments.
In information technology (IT), India has built up valuable brand equity in the global markets. In IT-enabled services (ITES), India has emerged as the most preferred destination for business process outsourcing (BPO), a key driver of growth for the software industry and the services sector. The IT industry is passing through a phase of mergers and consolidations in India largely in line with global trends. Companies are focusing on organic as well as inorganic growth. Indian IT companies are prowling for potential acquisitions both in the domestic as well as foreign markets. 3 Indian software companies – TCS, Infosys, and Wipro have all crossed the billion dollar mark.
Competition in the Indian IT arena is increasing leaps and bounds with global giants like IBM, Accenture, and CSC etc. Trends over the last five years tell the story of Dell’s increasing market share, at the cost of its competitors. This degree of competition prompted a merger between HP and Compaq in 2001; IBM has refocused its priorities to lucrative corporate customers. In 2003, the PC industry grew 11 % as a whole. Despite differing focuses, all players saw an increased demand by consumers for new systems.
INTRODUCTION TO THE COMPANY PROFILE
In 1938, two electrical engineering graduates from Stanford University called William Hewlett and David Packard started their business in a garage in Palo Alto. In a year’s time, the partnership called Hewlett-Packard was made and by the year 1947 HP was incorporated. It began offering stocks for public trading 10 years later. The company has been prospering ever since as its profits grew from five and half million dollars in 1951 to about 3 billion dollars in 1981. The pace of growth knew no bounds as HP’s net revenue went up to 42 billion dollars in 1997. Starting with manufacturing audio oscillators, the company made its first computer in the year 1966 and it was by 1972 that it introduced the concept of personal computing by introducing the first scientific hand-held. HP introduced its first personal computer in the year 1980. The company is also known for the laser-printer which it introduced in the year 1985.
HP – Product Portfolio
* Printers and Printing Consumables
* IBM – Servers, PCs, Storage and IT services
* Dell – PCs
* Canon – Printers, Fax, Copiers and Optical Equipment
* Compaq – PCs, Servers and Pocket Computers
Compaq Computer Corporation is an American personal computer company founded in the year 1982. It had the charm of being called the largest manufacturers of personal computing devices worldwide. The company was formed by two senior managers at Texas Instruments. The name of the company had come from-“Compatibility and Quality”. 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. Company existed as an independent corporation until 2002, when it was acquired for $25 billion by Hewlett Packard.
COMPAQ – Product Portfolio
* Enterprise Computing Group
* Internet products
* Networking Products
* Commercial Products
* Small and Medium Business Solutions
* IBM – Servers, PCs, Storage and IT services
* Sun Microsystems – Servers
* Dell – PCs
* HP – PCs, IT Services and Pocket Computers
* Palm – Pocket Computers
PRE – MERGER STATS FOR HP & COMPAQ
RELATIVE PERFORMANCE OF HP AND COMPAQ
HP – COMPAQ MERGER
“If HP was progressing at such a tremendous 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 on 3rd September, 2001. She was the first woman to have taken over as CEO of such a big company and the first outsider too. She worked very efficiently as she travelled more than 250,000 miles in the first year as a CEO. 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 HP, Fiorina and Chairman and CEO 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.
GROWING PROBLEMS AT HP
* HP was not adapting to technological innovation fast enough
* Margins were going down
* IPG (HP’s Imaging and Printing Group) was the leader in its market segment but did not rank anywhere among top 3 in servers, storage or services * Printing line was facing competition from Lexmark and Epson which were selling lower-quality inexpensive printers
* Needed to build strong complementary business lines
HP’s POSITION BEFORE MERGER
* By 2001, as the industry stumbled, meeting growth targets became difficult for HP and it was forced to cut jobs and scrap plans
* As a result HP stock price dropped drastically
* Turning the company around required more than just strategy from within
OBJECTIVES OF THE MERGER
* Increase competition with major competitors i.e. IBM, Dell
* Cut costs by $3 billion annually by 2004
* Increase earnings for shareholders
* Face the challenge of a shrinking market
EXPECTATIONS FROM THE 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, and 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
* 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 would eliminate one player in an oversupplied PC market
* To compete with IBM and other companies
* Reduce costs
* 1990’s IT recessionary phase
* Merger expected to yield savings projected to reach $2.5bn annually by 2004
* Advantage of more volume of sales
* Development of direct distribution capability
* Strengthen sales force
* Improve customer base
ADVANTAGES 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.
* Merger will creates immediate end to end leadership
* Compaq was a clear No.2 in the PC business and stronger on the commercial side than HP, but HP was stronger on the consumer side. Together they would be No.1 in market share in 2001
* 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
* Improves access to the market with Compaq’s direct capability and low cost structure
* The much bigger company would have scale advantages: gaining bargaining power with suppliers.
* HP and Compaq have highly complementary R&D capabilities
* 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
* Top management has experience with complex organizational changes
* Merger would result in work force reduction by around 15,000 employees saving around $1.5 billion per year
* Merger will result in substantial increase in profit margin and liquidity
* 2.5 billion is the estimated value of annual synergies
* Provides the combined entity with better ability to reinvest Even though it seemed to be advantageous to very few people in the beginning, it was the strong determination of Fiorina that she was able to stand by her decision. Wall Street and all her investors had gone against the company lampooning her ideas with the saying that she has made 1+1=1.5 by her extravagant ways of expansion. Fiorina had put it this way that after the company’s merger, not only would it have a larger share in the market but also the units of production would double. This would mean that the company would grow tremendously in volume.
Her dream of competing with the giants in the field, IBM would also come true. She was of the view that much of the redundancy in the two companies would decrease as the internal costs on promotion, marketing and shipping would come down with the merger. This would produce the slightest harm to the collection of revenue. She used the ideas of competitive positioning to justify her plans of the merger.
She said that the merger is based on the ideologies of consolidation and not on diversification. She could also defend allegations against the change in the HP was. She was of the view that the HP has always encouraged changes as it is about innovating and taking bold steps. She said that the company requires being consistent with creativity, improvement and modification. This merger had the capability of providing exactly the same.