Merger of Hewlett-Packard and Compaq

Topics: Compaq, Carly Fiorina, Hewlett-Packard Pages: 15 (5218 words) Published: April 21, 2011
Merger of Hewlett-Packard and Compaq
Mergers, Acquisitions and Restructuring

Introduction Throughout 1999 and 2000 in the midst of an increasingly competitive business environment, Hewlett-Packard’s board of directors and executive management evaluated numerous alternatives for business growth to protected the company’s viability. Although HP’s Imaging and Printing Group (IPG) dominated its market segment, the company did not rank among the top three among competitors in personal computers, servers, storage, or services. HP recognized its need to build strong complementary business lines while maintaining its strength in imaging and printing. For this reason the board of directors evaluated some strategic alternatives aimed at improving the company’s position in enterprise computing and services. In 2000, HP was pursuing a strategy to expand its services business through both organic growth, thanks to increased investment in its services business, and potential acquisitions. In the same year, Compaq directors had grown annoyed with Compaq’s poor performance and were encouraging Compaq’s CEO, Michael Capellas, to explore a potential business combination with another computer company. Capellas subsequently presented to the board the relative SWOT analysis of potential pairings with companies such as Dell, Sun, EMC Corporation, and Hewlett-Packard among others, and according to Capellas, the strengths of a combined HP and Compaq were “intuitively obvious”. “We wanted to be the next IBM,” Capellas said. Discussions of a business combination between Hewlett-Packard and Compaq began in June 2001, during licensing conversations between the two companies concerning HP-UX software. Carly Fiorina, former HP Chairman and CEO, contacted Michael Capellas to discuss Compaq’s interest in licensing. After a period of deliberation, Capellas contacted Fiorina to discuss the potential for a broader strategic relationship based on synergies between the two companies. By June 2001, HP and Compaq had executed a confidentiality agreement, and the companies commenced mutual business due diligence investigations. On September 2 and 3, 2001, HP and Compaq executives, along with their respective financial and legal advisors met to negotiate the final terms of the merger agreement. Both boards unanimously approved and executed the merger agreement as of September 4, 2001. During the evening of September 3, 2001, HP and Compaq issued a joint press release announcing the merger agreement. Prior to merger discussions, HP and Compaq had been focused on growing their enterprise computing and Information Technology (IT) services businesses, two areas in which each company had areas of strength, but in which neither company was dominant across the board. By merging, the newly combined company would be a major force in enterprise computing and perhaps within the top three in services. Furthermore, with customers looking to maintain strong relationships with fewer technology vendors, the merger better positioned the combined company to provide their clientele with a wider spectrum of products and services. In February 2002, HP’s three primary lines of business were: Imaging and Printing, Computing (consisting of desktops, notebooks, servers and storage products) and IT Services. Although the market leader in imaging and printing, HP’s Computing and IT Services businesses noticeably lagged the competition, and the company did not have an organic growth strategy for these businesses.

On the other hand, Compaq’s three primary divisions were: Access (consisting of commercial and consumer PCs), Enterprise Computing (which included servers and storage products) and Global Services. The company was the market leader in PCs and shipped more units internationally than within the United States. Although direct distribution had helped lower its costs, Access still operated at a negative margin. By merging with HP’s PC business, management believed that positive...
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