HP Compaq Companies Merge Free Essay Example

In September 2001, two leading companies in the computing industry announced that they were going to merge. As one of the biggest deals in the computer industry, Hewlett-Packard Company was going to purchase Compaq Computer Corporation for $25 billion. There were several reasons mentioned for the merger. The main reason was that the size of the new merged business would enable the company to purchase stock in large quantities and take advantage of the discounts offered. (This was mentioned in a report in BusinessWeek.

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The newly appointed CEO, Fiorina had mentioned that the combined amount spent on supplies of the two companies was about $65 billion and the discount that could be achieved by buying in bulk would be about 3 or 4%. However, Fiorina’s cost cutting techniques did not just consist of the savings on supplies and affected the employees. She decided on postponing pay rises for three months and less than a month after some staff had already agreed to take wage cuts, management announced that they were going to make 6,000 members of staff redundant.

A memo was sent round the departments stating that staff who had agreed to take wage cuts would not be guaranteed to keep their jobs. Immediately after the merger was announced Hewlett Packard stated in press releases that they hoped that the merged company would lead the world in certain aspects of the computing industry. They hoped to lead in revenues generated from servers, access devices and imaging and printing. This includes PCs and hand-held devices. It was an optimistic opinion of HP.

A report produced by the International Data Corporation in April, 2001, stated that in the first quarter of 2001, the US PC market actually decreased by 9. 5%. Compaq showed an enormous decrease of 33% and HP showed a decrease of 18%. Dell, the main competitor, showed a smaller decrease of 10%. Also, a report written in BusinessWeek, shortly after the merger was announced revealed that the companies have made a loss of almost $500 million this year and Dell, a leading competitor, was continuing to thrive.

Two weeks after the merger was announced, HP’s competitors stated that they thought the merger would not benefit the company and would lose market share. They felt that it would provide a good opportunity for them to attain market share themselves as the merger would only confuse HP’s and Compaq’s existing customers. Results for the quarter ending in September 2001 confirmed that this was the case and Dell had gained in world-wide market share. HP-Compaq took a decrease in market share of approximately 3%.

In the servers industry, two other main competitors, IBM and Sun Microsystems had introduced several new products, while HP’s UNIX machines were becoming slightly out-dated. Servers are an especially profitable business. Dells performance compared to the computing industry was particularly good and so showed HP-Compaq up. In order to survive in this area, HP-Compaq needed to spend more money on research and development and to introduce more products. It is imperative in the computing industry to stay up to date with new technological advances, since the industry is constantly changing.

Hewlett Packard also stated that they hoped to be the global leader for IT services, storage and management software, after the merger. According to the same report in BusinessWeek, HP and Compaq did do some servicing and repairs, but IBM were the leader in this area. The basic repairs covered were not any where near as profitable as the consulting issues covered by other companies. In the storage business, it would have been very difficult for Compaq to take more profits than the storage giant EMC.

Management software was a growth area at the time of the merger, but Hewlett Packard was always behind its competitors in introducing new products and Compaq did not have much of an input into this area. It seems that Hewlett Packard were being optimistic again. Analysts had stated that since both HP and Compaq’s results in September 2001 were not great, they expected the next quarter’s results to also be lower as well. Analysts were also worried because HP and Compaq were expecting more than half of their profits to be from printers and PC’s which have a low profit margin.

They were worried that the merged company would not have enough money to invest in research and development, to keep at the fore-front of new technologies and introduce new products into the market. HP-Compaq would need to do this to gain market share. Another reason for the merger was that HP considered that Compaq had moved to a model of direct selling with no middle-men. This was similar to the structure of Dell computers; a direction which HP wished to head in order to be more successful. Fiorina considered that Compaq would be able to help HP move over to this method.

Analysts were pessimistic about this and suggested that costs would have to be cut dramatically if HP wished to have more of a market share than Dell. Compaq was already closer to that model, but was not doing very well, in terms of profits. HP was making more profits and Compaq’s results for the quarter ending September 2001, had just shown a decrease of 33%. It was unlikely that Compaq could help them in this area. Another of HP’s press releases stated that the merger was expected to yield savings of $2. 5 billion annually.

It is good that the companies were expecting to make savings, but the current PC market was in decline and so would make it difficult to make any savings at all. These savings were due to come from Product Rationalization, Efficiencies in administration, procurement, manufacturing and marketing and improved direct distribution of PC’s. The savings from product rationalization would be expected to come from using the same computer parts throughout their products, but in the low margin PC’s and printer markets, this will not necessarily make any great savings.

It would be possible to make savings in administration, procurement and marketing when the departments of the two companies merge as certain jobs which at the moment are done once for each company will only need to be done once. The direct distribution of PC’s and servers will help to yield savings as long as HP manage to move to a more “Dell like model”, although the HP’s server sector does not look too optimistic for the future.

Once the merger had been announced and the integration process had begun, employees at Compaq and HP knew a lot of inside information about the other company. It would be very difficult to now decide not to go ahead with the merger. Also, there was a $675 million dollar break-up fee which would have to be paid if the merger did not go ahead, not to mention the further loss of employee’s confidence in the company. Analysts stated that it would be likely that Fiorina and other board members may leave if the merger did not go ahead which would be difficult to deal with at this time.

Although this is not a good reason for the merger to go ahead, once the company was at this stage, it would have been difficult to change the plans. Walter Hewlett, the eldest son of one of the HP co-founders, owned a stake of 5. 2% in Hewlett Packard. Originally, he said that he would approve the merger, but when it came to the voting time, he used his stake to oppose the merger. Some analysts stated that when Fiorina found out that Walter was not going to approve the merger, she should not have gone ahead with the arrangements.

Walter did follow the correct rules and procedures with regards to corporate governance by changing his mind in this way and apparently HP was considering a court case against him. This would have created a bad company image and Fiorina did not want this just as the merger was due to go ahead. She may have had to step down as chief executive officer and this would be disadvantageous for the company. The new CEO would have to find out how the company works and work out strategies. It seems that Walter did not act very responsibly by changing his mind.

Also, shortly after Walter altered his opinion to oppose the merger, David and Lucile Packard announced that they were going to use their stake to oppose the merger (they were the largest shareholders with a 10. 4% stake). It is unknown whether they were influenced by Walter’s decision. By now HP employees were beginning to lose faith in the merger as well. Statistics showed that the number of employees that supported the merger fell from 84% to 55% after Walter’s comments, which some people said decreased the morale of the employees.