The Merger of Hewlett-Packard and Compaq: Strategy and Value

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The Merger of HP and Compaq: Strategy.
When a major merger is announced, like the one between HP and Compaq, investors try to understand where the stock value is going to come from and whether the companies have a plan to achieve that value. Deals are often brought to market with one big synergy number and a statement that the deal will be accretive to earnings. Many acquisitions and some large strategic investments are often justified with the argument that they will create synergy. In this paper, it is considered the pros and cons of synergy. Also there is an examination of how can be value the synergy of HP and Compaq and how sensitive this value is to different assumptions. Finally a conclusion with an empirical examination of how much synergy was actually created in this corporate merge, and how much was gained or lost. The term synergy is used mostly in the context of mergers and acquisitions. For example, if Company A has an excellent product but lousy distribution whereas Company B has a great distribution system but poor products, the companies could create synergy with a merger. In our case, Hewlett-Packard Company, a global provider of computers and imaging solutions, was focused on making computers and imaging technology. Compaq Computer Corporation was a leading provider of enterprise technology and solutions. Compaq designed developed and manufactured hardware, software, solutions and services, computers and communication equipments. The basic idea was: value and performance of the two companies combined would be greater than the sum of the separate individual parts, complementing in both cases the weaknesses of the other company. As a result, the objective of creating a stronger firm was reached; this company is now capable of beating the competition in the technology area. Back in 2001, when the CEO of HP argued for the acquisition of Compaq, she offered a number of reasons that will make sense for the deal. She noted that the combined company would be able to meet the demands of customers for “solutions capability on a truly global basis.” She also claimed that the firm would be able to lead with its products “from top to bottom, from low end to high end.” As her crowning argument, she claimed that the merger made sense because it would create “synergies that are compelling.” Synergy, the increase in value that is generated by combining two entities to create a new and more valuable entity, is the magic ingredient that allows acquirers to pay millions of dollars in premiums. It is true that investors have historically taken a pessimistic view of synergy, both in terms of its existence and its value and the track record on the delivery of synergy suggests that they have good reasons for skepticism. The new HPQ created from this definitive merger agreement was an $87 billion global technology leader. This company would offer the industry's most complete set of IT products and services for both types of customers: businesses and individuals. The combined company will have number one worldwide revenue positions in PCs, hand-helds, imaging and printing, as well as leading revenue positions in IT services, storage and management software. The merger was expected to generate cost synergies reaching approximately $2.5 billion annually and drive a significantly improved cost structure. Based on both companies' past data reported, the new HP would have approximate pro forma assets of $56.4 billion, annual revenues of $87.4 billion and annual operating earnings of $3.9 billion. It would also have operations in more than 160 countries and over 145,000 employees. See table 1. Key Facts

(last 4 qtrs):HPCompaqPro Forma Combined

Revenues $47.0 billion $40.4 billion $87.4 billion
Assets $32.4 billion $23.9 billion $56.4 billion
Earnings $2.1 billion $1.9 billion $3.9 billion
Table 1Source (

In 2002, Hewlett-Packard Company (NYSE:HWP)...
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