Hp / Compaq Merger

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Hewlett-Packard|
HP – Compaq merger|
M&A, Finance and Investments, MSc.|
29th November, 2012|
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Authors:
Marjan van Lieshout348050
Bram Piederiet322688
Jamie Romeo319954
Patrice Temming351185
Authors:
Marjan van Lieshout348050
Bram Piederiet322688
Jamie Romeo319954
Patrice Temming351185

1. Executive summary
In the spring of 2002, Hewlett-Packard Co (‘HP’ from here on) obtained all of the outstanding common shares of Compaq Computer Corp (‘CC’ from here on). The two parties, both involved in the High Technology industry, merged their companies through an exchanges of shares which was valued at 25.263 billion USD. HP bid .6325 of its common shares for each of the shares of CC. On the announcement day, the closing price of HP common stock was $23.21. Hence, the share price paid by the acquirer was $14.68 per common share of CC. This domestic merger was friendly in nature and supposed to realize a cost benefit of 2.5 billion per annum. Ownership of the combined company was said to be 64% of HP shareholders and 36% of Compaq shareholders. The merger was expected to be closed in the first half of 2002. Both the stock price of the acquirer and the target fell the day after the announcement, by -18.7% and -10.7%, respectively. Almost a full decade and a CEO later, the deal turned out to be one of the greatest ever done in the technology industry.

2. Motives and Drivers of the deal
The potential motives and drivers behind this deal can be easily divided based upon the concerned stakeholders. This merger is characterized by a sharp contrast between the CEO of HP, Fiorina, on one side, and the shareholders of HP and Compaq on the other. Because Fiorina was basically the only proponent of the merger, she met with a lot of scepticism by the stakeholders, especially shareholders, of both the acquirer and target. Before elaborating on the possible motives of Fiorina for performing this merger, we can’t ignore some personal aspects Fiorina which may have been relevant in the decisions being made. Fiorina was the first woman and outsider to take place as CEO in such a big company as HP. Her aspirations were ambitious to say the least and answered with a lot of doubt from both wall street and other stakeholders. She made it no secret that her goals were to modernize the operational culture at HP and ultimately be able to compete with the major competitor: IBM. In her own words, the key was consolidation and not diversification. * According to Fiorina, units of production would double after the merger, and hence experience an enormous growth. The firm would transform into an all-round technology product provider. This explanation can easily be related to theory set out by Stulz (199). He called this empire building and stated that when personal benefits are related to company size (and financial success), directors can have a rather simple incentive to grow their firm to reap those benefits. This can be a personal reason for Fiorina, who also had a point to prove in a ‘men’s world’. * Compaq was one of the largest competitors of HP, and by merging would be eliminated from the price war that was going on between the technology firms. * Redundancy in departments can be cut in order to decrease costs as part of the synergy. The departments were promotion, marketing, and shipping. HP and Compaq will likely have some same sources for their (raw) materials and products. Marketing benefits have to do with shared branding, and common services. According to the definition deployed by Fan and Lang (2000) , this merger is a complementary one, in which the general thought is that complementary and overlapping distribution channels exists. They also conclude that complementary merger increase firm value over time. This expectation can definitely be considered as one of the most important considerations. The effect is said to be even more strongly for firms with diversification...
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