Group 2

THE HP-COMPAQ
MERGER:A BATTLE FOR
HEART AND SOUL OF
THE COMPANY

Aditi Roy BD21056

Eshita Kare BD21068
Pavan Srinath BD21082
Rishikesh Promod Nair BD21087
Shivam Pandey BD21094
Table of contents
1. Executive Summary ....................................................................................................... 2
2. Problems Identified ........................................................................................................ 2
3. Alternatives available ...................................................... Error! Bookmark not defined.
4. Analysis ......................................................................................................................... 4
5. Conclusion ..................................................................................................................... 5

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1. Executive Summary

The case tries to assess the HP-Compaq merger deal by analyzing the governance process
at HP. It describes the importance of having the various stakeholders being involved in the
decision of mergers and acquisitions.
The y2k decade began with 3 problems concerning majors like HP and Compaq - IT
downturn, strong competition (especially from Dell and IBM), and the fact that hardware was
getting commoditized. To beat this, Carly Fiorina and Micheal Capellas, the CEOs of HP and
Compaq respectively, decided a merger to be the best way out. The post merger company
would be called HP, led by the CEO and Chairman of HP, Carly Fiorina herself. The 2
leaders analyzed the financial aspects of the $25 billion deal to be very optimistic. Operating
margins would be increased, leading to a saving of $2.5 billion in 3 years, adding $4 to the
$5 HP’s share price. Projected revenue for the new HP was around $87 billion, with profits
around $3.9 billion.
Even with such rosy picture painted for the public, the news of the merger was not taken in
the same stride. HP share prices by 25% on the next day of merger announcement, while
that of Compaq fell by 16% over the next 2 days – reducing the value of the deal by $6
million. The deal was critiqued in every light since the news was out – one major concern
being the proficiency of neither of the 2 merging entities in giving solutions that the merged
entity proposed (for eg the specialised, all-purpose software which was promised as a
solution to the losses owing to commoditized hardware, but neither of HP or Compaq had
any experience in that). Besides, the amalgamation of 3 different corporate cultures of
employees was also going to be a major issue – “HP’s Silicon Valley old-timers, Compaq’s
aggressive Texas upstarts and DEC’s (Comapq’s acquired entity) Ivy League eggheads”.
Critics called it the “shotgun wedding”. Amidst all the critiques, votes by the shareholders
were registered in favour of the merger. However, a few months later, Walter Hewlett, heir of
the Hewlett family and board member at HP, filed a proxy statement with the American SEC
regarding his opposition to the merger. What followed was nothing less than chaos cloaked
in controversies. Hewlett publicly denounced Fiorina’s decision about the merger – about
how the exchange of a third of HP’s high-profit printing and imaging business with Compaq’s
low-margin PC business was profitable. He was also questioned about the concrete reasons
or action plan with respect to this disagreement by Richard Hackborn, a veteran HP board
member. To this, Hewlett later came up with a 3-step proposal. Amidst the news of
opposition to the merger, HP’s share price rose by 17% that month.
The breakup would have hurt both the entities. A breakup fee of $675 billion was agreed
upon to be paid by whoever broke off the deal, the 2 companies would get into rivalry after
knowing each other’s proprietary secrets and personal bonuses for each of the CEO’s would
take a huge toll as well.

2. Problem Identification

1. Agency Problem –
“Walter Hewlett and Fiorina were proxies in a battle for the heart and soul of HP”. The Hewlett
family and other shareholders were long-term investors and had expectations accordingly, the
CEO’s returns were tied to her short-term gains (According to the case, Fiorina’s
compensation was estimated to be around $70 million over the next 2 years owing to this
deal). While one cared about the basis on which HP was built and nurtured and sustained till

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now, the other worried about the stagnancy that will occur if it continued. While one believed
HP to beborn out of innovation, the other wondered whether they had become sleepy HP and
that this unfreezing was needed to push the company towards becoming “The New HP”.

2. Shareholder backlash –
The breakdown of shareholders at HP was as following:
Fiorina’s major target audience when thinking about mergers was the group holding the
highest chunk (57%) – the institutional investors. She sidelined the very crucial, albeit lower
% holder of share, the H&P families without realising that their wisdom as well as influence
could have proved more beneficial to her and HP than the absence of it led to chaos. And
since all the shareholders were not taken into consideration while deciding on the merger, the
obvious backlash followed. The flames were fanned further by Walter Hewlett.
Even the general perception, before Hewlett could have influenced anybody, was not positive.
Share prices fell, critics called it shotgun wedding, about how it was about 2 drunks helping
each other, etc.

3. Marrying 3 very different corporate cultures –

“HP’s Silicon Valley old-timers, Compaq’s aggressive Texas upstarts and DEC’s (Comapq’s
acquired entity) Ivy League eggheads” were asked to settle together in harmony to transform
a company. Accompanying these exceptional expectations were the vast number of layoffs –
around 15,000 people – when promises of employment were made for 145,000 people in the
discussion of merger.

4. The varying stances of important, heavyweight shareholders –

Initially, many heavyweight shareholders decided to go against the merger including 1 of HP’s
top 5 shareholders Bank of America, also Wells Fargo, CalPERS, The New York State
Common Retirement System Fund etc. Then, as the last deciding vote, Deustche Bank voted
in favour of the deal. Such major last minute changes made the story all the more palatable,
but the deal and its proceedings very difficult.

3. Alternatives Available

The HP-Compaq scenario could majorly go in two directions- Deal or no deal. There
are certain implications to both situations:
#1 Merger goes through-

• This would effectively mean that the family and board have lost control of the
company, which does not align with the interest of the shareholder’s
representatives.
• Carly Fiorina is likely to keep control of the merged entity, and family’s
presence in the decision-making core group of the company would get
diminished further.

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 • Merger if two big companies comes with higher risk of failure, especially in tech
companies as had been the trend before the merger was proposed.
• The merger would mean that an expected 15,000 of the workforce would be
laid off to cut costs, which is mis-aligned with the vision of a responsible
corporation.
• The merger was expected to present a stronger foot to the changing computer-
industry dynamics and increasing competition by leveraging economies of
scale and supply chain synergies, making the combined entity more
competitive and relevant in the decades that followed.

#2 Merger doesn’t go through-

• In case the shareholders led by influencer and in this case, activist
shareholder Hewlett family wins the battle and the merger is avoided, it would
mean a longer-lasting relevance of the family in dictating business affairs at
HP.
• This would also mean that Carly Fiorina would be removed from the position
of CEO and a non-reformist compliant personality would be onboarded for the
same.
• HP can follow the 3-point proposal shared by Hewlett:
o Investment and expansion of printer and imaging business- digital
cameras.
o Optimizing the software and consulting business by acquisition of
smaller firms.
o Restructuring and rationalization of PC business, possibly by shutting
down some plants.

4. Analysis

# Why merger

• HP and Compaq both suffer from a similar problem of stagnancy, with the
changes and downturn in the IT industry, and the commoditization of the
hardware part of computers.
• The competition had increased immensely with players like Dell and IBM
having significant market shares, making the long-term presence of HP fragile
in the industry.
• The merger was expected to save $3 billion in costs over 3 years, increasing
the shareholder equity.
• As per the advocates of the merger, it was also expected to enhance the
business segments which complemented each other like production
capabilities and supply chain.
• Together, the merged entity was expected to be in a better position to deal with
the shrinking PC market.
# Impacts of Merger

• Positive
o The merger is expected to bring positive economies of scale in the
operations of the two companies, hence creating unexplored synergies.

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 o Once the entities combine, it would be able to hold a complementary
leadership position in key markets.
o In face of increasing competition, the merged business has the potential
to strengthen the position in key growth markets.
o The merger is expected to save $3 Bn in costs. However, $2.5 Bn were
expected to be saved by laying off people.
• Negative
o HP’s product portfolio would be worse off after the merger, as the
Compaq products are in different categories and segments.
▪ Higher exposure in unprofitable Personal Comupter business
▪ 10% growth rate expected in printing and imaging categories
▪ Expected shrinkage in PC market
o Since the firms are very large, the integration risk of the merger is
significantly high. Additionally, there is a cultural difference between the
3 firms- HP, Compaq, DEC.
▪ Significant merger among computer firms had not met
expectations during that period
▪ No experience with HP management
▪ High revenue losses predicted
o The financial impact on the HP shareholders seems to be negative
▪ The stock price has plummeted since the merger was proposed
officially
▪ Pessimistic wall street estimates
o HP’s strategic position might stay constant and not improve much even
after the merger
▪ Both companies did not have profitable business model in
computers
▪ Both companies were struggling to transition into direct
distribution model
▪ High-profit areas- position not consolidated

5. Conclusion

The breakup would have hurt both the entities. A breakup fee of $675 billion was agreed upon
to be paid by whoever broke off the deal, the 2 companies would get into rivalry after knowing
each other’s proprietary secrets and personal bonuses for each of the CEO’s would take a
huge toll as well. Not just this, if the merger would not go through, Fiorina was almost certain
to lose out on her job. If the entities went ahead with the merger, Walter felt that HP and its
core being would be jeopardized. He proposed to go the HP way of expanding and not trade
the profitable parts of HP for low-margin parts of a company of dying-business.
Consequentially, the stakes were high for both.
What led to this was the ignorance of taking into account the wisdom and considerations from
the board, let alone from people of the family who have been actively involved in the company
and its decisions. Had this deal turned out differently if they were consulted in making the
decision, can never be realistically answered. But, even after the backlash, if things would
have been properly managed like providing data-backed answers to the questions raised by
Hewlett, or trying to talk to other stakeholders in making them understand the value of this
deal which the 2 CEOs very clearly saw or at least talk to Hewlett and make him understand

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how his company was not going to be put up to be ruined, but what vision Fiorina held for HP.
Underestimating the significance of the influence even an 8% shareholder could have on the
deal was one of the biggest problems of this deal.