The Hewlett-Packard and Compaq Merger Analysis
The Proposed Merger with Compaq
HP entered into an agreement with Compaq Computer Corporation in September 2001. In this definitive agreement, HP is going to purchase all of Compaq’s common shares outstanding, and pay a total price of 0.6325 shares of its common stock for each share of Compaq’s common stock. To evaluate this transaction for the benefits of HP’s shareholders, we use the excess earnings model to forecast HP’s stock price if it standalone, CPQ’s stock price as a separate company and the stock price after the merger. Then we make a comparison between HP’s stock price when it operates alone and the stock price after the merger to make the decision of merger. HP as Standalone
HP had 3 principal business segments – Imaging and Printing Systems (IPG), Computing Systems and IT Services. The market of IPG, HP’s core business, was very competitive with respect to pricing and the introduction of new products. Since IPG market has become mature, the gross margin decreased from $13,824 in year 2000 to $11,752 million in 2001. On the other side, the revenue of IT Services grew 6% in the fiscal year of 2001. The growth revenue from IT services is due to the increased investment in it since HP settled on a strategy of developing its IT services business by mid-2000. We assume that, on the one hand, the IPG’s revenue is going to decline in the future because of the competitive market and the declining pricing and that the IT services business is not able to get high percentage of growth in revenue except another company will help HP to improve its IT services business. On the other hand, sales outside U.S made up more than half of HP’s revenues and HP’s historical growth record is stable in a long term. Concerning that the global economic environment would be improved in the future and the advantage of global selling, we then make assumptions that the revenue growth rate would be 5.5% and the ROE would be 15% in...
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