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The Merger of HP-Compaq Case

Question 1: Was the merger sound strategically?

HP was already a famous global company in 1990s. Although innovation was still critical to long-term success, HP’s industry was maturing and with that came the additional pressure of slimming margins, the importance of distribution efficiencies, and a more critical need for developing long-term relationships with customer. Although HP was the market leader in imaging and printing, its computing and IT-services businesses noticeably lagged the competition, and the company did not have an organic growth strategy for these businesses. In 2000, Compaq had grown impatient with Compaq’s poor performance, it tried to explore a potential business combination with another computer company. The company was the market leader in PCs with a negative operated margin. HP and Compaq had different strengths in their lines of business, which together produced a complementary set of products and services, better able to serve customers at lower cost. The companies attributed both strategic and financial benefits to the merger.

Question 2: What is the value of the projected synergies?

By merging with HP’s PC business, Compaq can reduce cost and change to get positive operating margins by economies of scale. Compaq was the market leader in fault-tolerant computing and industry-standard servers, but was not strong in the UNIX market, where HP-UX was a top supplier and strong in high-end servers. The combination of new company would be a dominant leader in servers and be well positioned to exploit the fast-growing trend of “storage area networks” in the storage market. By combination, the new company can reduce costs, offer a comprehensive array of products for enterprise customers, and more effectively allocate R&D for growth in its enterprise-computing business. The merger would deliver significant financial benefits to shareholders. Through major cost saving and improved profitability of...
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