It's all started in the year 1938 when two electrical engineering graduates from Stanford University named 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. The company has been prospering ever since its profits grew from five and half million dollars in 1951 to about 3 billion dollars in 1981. The pace of growth did not know any 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 a calculator first which was further advanced into a personal computer in the year 1980. The company is also known for its laser-printer which it introduced in the year 1985.
The company is better known as Compaq Computer Corporation. This was a company that began to be a personal computer company in the year 1982. It was the charm of being the largest manufacturer of personal computing devices worldwide. The company was formed by two senior executives at Texas Instruments. The name of the company had come from- "Compatibility and Quality". The company introduced its first computer in the year 1983 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.
Reasons for the Merger
A very simple question that arises here is that 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 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 . She worked very efficiently as she traveled over 250,000 miles in the first year as a CEO. Her primary goal 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 CEO. Despite 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 plan something different. So, it was decided that the company would acquire 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 a licensing agreement but it continued as a discussion on a competitive strategy and finally a merger. It took two months for further studies and by September 2001, the boards of the two companies approved 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 other stakeholders thought that the company would never be able to have the loyalty of the Compaq customers, if the products were sold with an HP logo on it. Other than this, there were questions about 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 be serious problems with 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. (Hoopes, 2001)
Advantages of the Merger
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 of her investors had gone to the company to bulge her ideas with the saying that she had made 1 + 1 = 1.5 by her extravagant ways of expanding. Fiorina had put it this way that after the company's merger, not only would it have a larger share on the market but also the units of production would double. This would mean that the company would grow tremendously in volume. His dream of compete 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 for 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 HP has always encouraged changes as it is about innovating and taking bold steps. She said that the company needs to be consistent with creativity, improvement and modification. This merger had the ability to provide exactly the same. (Mergers and Acquisitions, 2010)
Advantages to the Shareholders
The following are the ways in which the company can be advantageous to its shareholders:
Unique Opportunity: better with the merger. The reason for the same was that now the value creation would be fresh, leadership qualities would improve, capabilities would improve and so would the sales and also the company's strategic differentiation would be better than the existing competitors. Other than this, one can also access the capabilities of Compaq directly, thus reducing the cost structure of becoming the largest in the industry. Finally, one could also see an opportunity in reinvesting.
Stronger Company: The Profitability is bound to increase in enterprise, access and services sectors in high degrees. The company can also see a better opportunity in its research and development.
Compelling Economics: The expected accumulation in IIP gains would be 13% in the first financial year.
Compelling Economics: The expected accumulation in IIP gains would be 13% in the first financial year. The company could also conduct a better segmentation of the market to forecast its revenue generation. This would go to as much as two and a half billion dollars of annual synergy.
Ability to Execute: As there would be integration in the planning procedures of the company, the chances of value creation would also be enormous. Along with that the experience of leading a diversified employee structure would also be there. (HP to buy Compaq, 2001)
Opposition to the Merger
In fact, it was only CEO Fiorina who was in favor of going with the merger. This is a practical application of Agency problem that arises because of the change in financial strategies of the company owners and the management. Fiorina was certain to lose her job if the merger did not take effect. The reason was that HP was not able to meet the demand targets under her leadership. But the owners were against the merger due to the following beliefs of the owners:
The new portfolio would be less preferable: The position of the company as a larger supplier of PCs would certainly increase the amount of risk and involve a lot of investment as well. Another important reason in this context is that HP's prime interest in Imaging and Printing would not exist anymore as a result of diluting the interest of the stockholders.
Strategic Problems Would Stay Unsolved: The market position in high-end servers and services would still remain despite the merger. The price of the PCS would not come down to be affordable by all. The requisite change in material for imaging and printing also would not exist. This merger would have no impact on the low end servers as Dell would be there in the lead and high-end servers either where IBM and Sun would have the lead. The company would also be eluded from the advantages of outsourcing because of the surplus labor it would have. So, the quality is not guaranteed to improve.
Huge Integrated Risks: There are no examples of success with such huge mergers. Generally when the market does not support such mergers, do not do well as it is the case here. When HP could not properly manage its organization, integration would only add to the difficulties. It would be even more difficult under the conditions due to the existing competitions between HP and Compaq. Being prone to such risky conditions, the company would also have to vary its costs causing greater trouble for the owner.
Financial Impact: This is mainly because the market reactions are negative.
Financial Impact: This is mainly because the market reactions are negative. On the other hand, the position of Compaq was completely different from HP. As the company would have a greater contribution to the revenue and HP being diluted at the same time, the problems are bound to develop. This would mean that drawing money from the equity market would also be difficult for HP. In fact this might not seem to be a very profitable merger for Compaq as well as in the future.
The basic problem that the owners of the company had with this merger was that it would hamper the core values of HP. They felt that it was better to preserve wealth than to risk it with extravagant risk taking.
So far as this merger between HP and Compaq is concerned, on the side there was this strong determination of the CEO, Fiorina and the other side were the strong opposition from the company owners. This opposition continued from the market including all the investors of the company. So, this practical Agency problem was very famous considering the fact that it contained two of the most powerful hardware companies in the world. There were a number of options such as Change Management, Economic Wise Management, and Organizational Management that could be considered to analyze the issue. But this case study can be solved best by a strategy wise analysis. (HP-Compaq merger faces stiff opposition from shareholders stock prices fall again, 2001)
Strategic Analysis of Case
A CEO will always consider such a merger to be an occasion to take a competitive advantage over its rivals like IBM as in this case and also be of some interest to the shareholders as well. The following are the strategies that are related to this merger between HP and Compaq:
* Having an eye over shareholders' value: If one sees this merger from the eyes of Fiorina, it would be certain that the shareholders have a lot to gain from it. The reason for the same is the increment in the control of the market.
* Development of Markets: Two organizations are involved in mergers as they want to expand their market both on the domestic and international level. Integration with a domestic company does not need much effort but when a company merges internationally as in this case, a challenging task is on the head. A thorough situation scanning is important before putting your feet in the International arena. Here, the competitor for HP was Compaq in a large degree, so this merger certainly required a lot of thinking. Organizations merge with the international companies in order to set up their brands first and let people know about what they are capable of and also what they look in the future. This is the reason that after this merger the products of Compaq would also have the logo of HP. Once the market is well-known then HP would not have to suffer the branding created by Compaq.
* Propagated Efficiencies: Any company by acquiring another or by merging makes an attempt to add to its efficiencies by increasing the operations and also having control over it to the maximum extents. We can see that HP would now have an increased set of employees. The only factor is that they would have to be properly controlled as they are of different organizational cultures. (Benefits of Mergers, 2010)
* Allowances to use more resources: An improvised organization of monetary resources, intellectual capital and raw materials offers a competitive advantage to the companies. When such companies merge, many of the intellects come together and work towards a common mission to excel with financial gains to the company. Here, one can not deny the fact that even the top brains of Compaq would be taking part in forming the strategies of the company in the future.
* Management of Risks: If we particularly take an example of this case, HP and Compaq entering into this merger can reduce the risk level they would have diversified business opportunities. The options for making choice of the supply chain also increase. Now even though HP is a pioneer in inkjet orientation, it would not have to use the Product Based Facility layout which is more expensive. It can manage the risk of taking process based facility layout and make things cheaper.
* Listing potential: Even though Wall Street and all the investors of the company are against the merger, when IPOs are offered, a development
* Necessary political regulations: When organizations take a leap into other nations, they need to consider the different regulations in that country that administer the policies of the place. As HP is already a pioneer in all the countries that Compaq used to do its business, this would not be of much difficulty for the company.
* Better Opportunities: When companies merge with another company, later they can put up for sale as per the needs of the company. This could also be done partially. If HP feels that it would not need much of the warehouse space it could sell it at increased profits.
* Additional products, services, and facilities: Services get copyright that enhances the level of trade. Additional Warehouse services and distribution channels offer business values. Here HP can use all such values integrated with Compaq so as to increase its prospects. (Berry, 2010)
There are a number of mergers and acquisitions that fail before they actually start to function. In the critical phase of implementation itself, the companies come to know that it would not be beneficial if they continue as a merger.
Conversations are not implemented: Because of different cultures, ambitions and risk profiles; many of the deals are canceled. As for the reactions of the owners of HP, this seems to be extremely likely. So, motivation amongst the employees is an extremely important consideration in this case. This requires an extra effort from the CEO, Fiorina.
Legal Contracts: Anti-competitive deals are often limited by the rules that preside over the competition rules in a country. This leads to out of order operation of one company and they try to separate from each other. A lot of unnecessary marketing failures get attached to these conditions. If this happens in this case, then all that money that went into publicizing the venture would go to be a waste. Moreover, even more would be required to re-promote as a single entity. Even the packaging where the entire inventory from Compaq had the logo of HP would have to be re-done, thus hampering the finance even further. (Broc Romanek, 2002)
Compatibility problems: Every company runs on different platforms and ideas. Compatibility problems often occur because of synchronization issues. In IT companies such as HP and Compaq, many problems can take place because both companies have worked on different strategies in the past. Now, it might not seem necessary for the HP administration to make changes as per those from Compaq.
Fiscal catastrophes: Both the companies after signing an agreement hope to have some return on the money they have put in to make this merger happen and also want profitability and turnover.
Human Resource Differences: Problems as a result of cultural dissimilarities, hospitality, and social exclusion.
Human Resource Differences: Problems as a result of cultural dissimilarities, hospitality
Lack of Determination: When organizations involve, they have plans in their minds, they have a set vision; but due to a variety of problems mentioned above, the development of the combined company to accomplish its mission is delayed. Merged companies set the goal and when the goal is not accomplished due to some faults of any of the two; then both of them develop a certain degree of hatred for each other. Also clashes can occur due to bias reactions. (William, 2008)
Risk management failure: Companies that are involved in mergers and acquisitions, become over confident that they are going to make a profit out of this decision. This can be seen as with Fiorina. In fact she can fight the whole world for that. When their self-confidence turns out to over-confidence then they fail. Adequate risk management methods should be adopted which would take care of the effects if the decision takes a downturn.
Hp and Compaq now have common channels as far as their own buying is concerned. So, the benefits to this concern is that even for those materials that were initially of high cost for HP would now be available at a cheaper price. The end users are also likely to increase. Now, the company can re-frame its competitive strategy where the greatest concern can be given to all-time rivals IBM. The advantages of this merger in the field of marketing can be seen in the case of shared branding, sales and service. Even the distribution process is likely to be enhanced with Compaq playing its part. Now, the company can look forward to cross selling, subsidization and also a reduced cost.
The foremost advantage in this area is that in the location of raw material. Even the processing style would be the same as making the products and services synchronized with the ideas and also making a decent operational strategy. As the philosophical and mechanical control would also be in common, the operational strategy would now be to become the top most in the market. In this respect, the two companies would now have co-production, design and location of staff. So, the operational strategy of HP would now be to use the process based facility layout and function with the mentioned shared values.
The technical strategy of the company can also be designed in common now. There is a disadvantage from the perspective of the differentiation that HP had in the field of inkjet printers but the advantages are also plentiful. With a common product and process technology, the technology strategy of the merged company would promote highly economical functioning. This can be done through a common research and development team.
The buying strategy of the company would also follow a common mechanism. Here, the raw materials, machinery, and power would be common and therefore decreasing the cost once again. This can be done through a centralized mechanism with a lead purchaser keeping common policies in mind. Now Hp would have to think with a similar attitude for both inkjet printers as well as personal computers. This is because the parameters for manufacturing would also run on equal grounds.
This is the most important part of the strategies that would be made after the merger. The companies would have common shareholders for providing the required infrastructure. The capital source, management style, and legislation would also be in common. So, the infrastructure strategies would have to take these things into account. This can be done by having a common accounting system. HP does have an option to have a separate accounting system for the products that it manufactures but that would only arouse an internal competition. So, the infrastructural benefits can be achieved through a common accounting, legal and human resource system. This would ensure that the investment relations of the company would improve. None of the Compaq investors would hesitate in making an investment if HP follows a common strategy.
HP would now have to ensure another fact that with this merger they would be able to prove competitors to the present target and those of competitors such as IBM as well. Even the operations and the output market needs to be above what exists at present. The company needs to ensure that the corporate strategy that it uses is efficient enough to help such a future. The degree of diversification needs to be managed thoroughly as well. This is because; the products from the two companies have performed exceptionally well in the past. So, the most optimum degree of diversification is required under the context so that the company is able to meet the demands of the customers. This has been challenged by the owners of HP but needs to be carried by the CEO Fiorina. (Bhattacharya, 2010)
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