In 2001, Hewlett-Packard (now HP) shocked the business world when its former CEO, Carly Fiorina, announced that rival computer-maker Compaq had agreed to be acquired by HP. The announcement came at the end of a year in which slumping demand and strong competition from Dell had buffeted both companies. The merged company would have annual revenues of about $87.4 billion, putting it in the same league as IBM, and would be able to provide customers with a full range of computer products and services. With the exception of printers, in which HP is the market leader, there was significant product overlap between HP and Compaq.
To justify the acquisition, Fiorina claimed that it would yield a number of benefits. First, there would be significant cost savings. Some $2.5 billion per year would be taken out of annual expenses by eliminating redundant administrative functions and laying off 15,000 employees. In addition, combining the PC businesses of HP and Compaq would enable HP to capture significant scale economies and compete more efficiently with Dell. The same would be true in the computer server and storage businesses, areas in which Dell was gaining share. Critics, however, were quick to point out that DelTs competitive advantage was based on its cost-leadership business model that was based on the efficient management of its supply chain—an area in which both HP and Compaq lagged behind Dell. Although achieving economies of scale is desirable, would the merger allow HP to reduce its cost structure, such as by increasing its supply-chain efficiency? If HP could not change its PC business model to match Dell s low costs, then the merger would not provide any real benefit.
In addition to the cost advantages of the merger, Fiorina argued that the acquisition would give HP a critical mass in the computer service and consultancy business, in which it significantly lagged behind leader IBM. By being able to offer customers a total... [continues]
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