HP-Compaq Merger


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  • http://www.youtube.com/watch?v=mF0rmeRq12g - old http://www.youtube.com/watch?v=fsE0g-8CDQo - new
  • Imaging and printing business was considered to be HP’s most profitable business. As you’ll see, many who opposed the merger did so because they wanted HP to focus solely on imaging and printing.
  • The dramatic drop in stock price showed large uncertainty among stockholders Wall Street’s predictions were significantly lower than the estimates considered by the HP board at the time it approved the merger
  • Supporters included Deutsche Banc analyst George Elling, as well as JB Ventures analyst John Jones, who thought the merger would give HP the sales horsepower to compete with Sun and IBM Among the critics were UBS Warburg analysts Don Young and Anthony Torna, who both agreed that HP’s future was in the imaging business, not the PC business
  • Acquired Consera Software to add data center planning and modeling capabilities; Triaton; TrueLogica – IT user-provisioning software, Novadigm –policy-based change and configuration management software
  • Tabblo – web priting Logoworks – web-based graphic design service provider SPI Dynamics – web application security assessment software and services Neoware – thin client computing and virtualization solutions MacDermid ColorSpan – wide-format digital inkjet printers Opsware – data center automation software company EYP Mission Critical Facilities – global consulting company for large-scale data centers
  • Servers, Consulting, IT management software, PC/Gaming/Monitors, Printers/Scanners/Faxes, Leasing/Financing, Technology Licensing
  • - Multiple systems on one physical piece of hardware
  • HP-Compaq Merger

    1. 1. HP-COMPAQ MERGER Chris Althoff, Megan Jones, Paul Gavin, Jennifer Noinaj, Scott Shapiro BADM449 – 11/12/2009
    2. 2. AGENDA <ul><li>Background </li></ul><ul><li>Porter's 5 Forces </li></ul><ul><li>HP’s Competitors </li></ul><ul><li>SWOT Analysis </li></ul><ul><li>Stakeholder Analysis </li></ul><ul><li>Merger Pros </li></ul><ul><li>Merger Cons </li></ul><ul><li>Result </li></ul><ul><li>HP Today </li></ul><ul><li>Recommendations </li></ul>
    3. 3. INDUSTRY BACKGROUND <ul><li>Fueled by competition and changing market </li></ul><ul><li>New product introductions and improvements </li></ul><ul><li>Firms had to keep pace to be successful </li></ul>
    4. 4. PORTER’S FIVE FORCES <ul><li>Threat of New Entrants (Barriers to Entry) : (Moderate) </li></ul><ul><li>PC market – developing computing equipment </li></ul><ul><ul><li>Economies of scale </li></ul></ul><ul><ul><li>Low capital requirements </li></ul></ul><ul><li>Product differentiation </li></ul><ul><ul><li>Rapid moving industry </li></ul></ul><ul><ul><li>Technology constantly improving </li></ul></ul><ul><li>Moderate customer switching costs </li></ul><ul><ul><li>Transferring files </li></ul></ul><ul><ul><li>Standardization of most computer components </li></ul></ul><ul><li>Access to distribution channels </li></ul><ul><ul><li>High for direct-to-customer </li></ul></ul><ul><ul><li>Internet & computer retailers </li></ul></ul><ul><li>Expected retaliation from existing firms </li></ul>
    5. 5. PORTER’S FIVE FORCES <ul><li>Bargaining Power of Buyers : (Low) </li></ul><ul><li>Switching costs are high </li></ul><ul><li>Low number of suppliers </li></ul><ul><li>Suppliers operate with high fixed costs </li></ul><ul><li>Bargaining Power of Suppliers : (High) </li></ul><ul><li>High number of customers who are fragmented </li></ul><ul><li>A few larger suppliers (Foxconn, Intel, Hitachi) </li></ul><ul><li>Difficulty re-producing specialized technology. </li></ul>
    6. 6. PORTER’S FIVE FORCES <ul><li>Threat of Substitutes : (Moderate) </li></ul><ul><li>Switching costs for consumers would be high </li></ul><ul><li>Frequent product introductions and continuous improvements in price </li></ul><ul><li>Rivalry : (High) </li></ul><ul><li>High Fixed costs </li></ul><ul><li>Barriers for exit are high </li></ul><ul><li>Constant changes to products and price </li></ul><ul><li>Two big players hold the top two market share spots in the computer hardware industry. </li></ul><ul><ul><li>IBM </li></ul></ul><ul><ul><li>Dell </li></ul></ul>
    7. 7. COMPETITORS - IBM <ul><li>Strong R&D and marketing </li></ul><ul><li>Gave rise to PC industry with Microsoft Windows OS </li></ul><ul><li>IBM Global Services – strong customer assistance </li></ul><ul><li>Created a conflict of interest </li></ul>
    8. 8. COMPETITORS - DELL <ul><li>Direct business model </li></ul><ul><li>Low inventory costs, introduce new technology quickly </li></ul><ul><li>Dell.com </li></ul><ul><li>Close customer relationships built loyalty </li></ul><ul><li>Ranked #1 in global PC market share in 2001 </li></ul>
    9. 9. COMPETITORS - COMPAQ <ul><li>Highly successful early on with “leading-edge technology” </li></ul><ul><li>Trend-setter price strategy in early ‘90s </li></ul><ul><li>Dealer network for sales, later Internet sales </li></ul><ul><li>Acquired Tandem Computer and Digital Equipment Corporation </li></ul><ul><li>Revenue increased but high merger expenses and heightened competition </li></ul>
    10. 10. HP HISTORY <ul><li>Founded in 1939 by William Hewlett and David Packard </li></ul><ul><li>87,000 employees, 120 countries </li></ul><ul><li>Drive to be industry leader in every category </li></ul><ul><li>Actively expanded into new markets </li></ul>
    11. 11. HP HISTORY <ul><li>Late ‘90s brought innovation, but low sales growth </li></ul><ul><li>Trouble keeping up with changing market </li></ul><ul><li>CEO retires, name Carly Fiorina as new CEO </li></ul><ul><li>Focus on customer and Internet sales </li></ul><ul><li>Revamped organizational structure </li></ul><ul><li>Front-end supported by strong back-end </li></ul>
    12. 12. HP PRODUCTS <ul><li>3 Major Business Segments </li></ul><ul><ul><li>Imaging and Printing Systems </li></ul></ul><ul><ul><ul><li>1 st in global printer market in 2001 </li></ul></ul></ul><ul><ul><li>Computing Systems </li></ul></ul><ul><ul><ul><li>4 th in PC and server markets in 2001 </li></ul></ul></ul><ul><ul><li>Information Technology Services </li></ul></ul><ul><ul><ul><li>8 th in global services market in 2001 </li></ul></ul></ul>
    13. 13. HP PRE-MERGER <ul><li>Experienced revenue growth but share price still declined </li></ul><ul><li>Faced recession in 2001 </li></ul><ul><li>Pay cuts and layoffs </li></ul><ul><li>Stock price continued to fall </li></ul><ul><li>Began to consider acquisitions </li></ul>
    14. 14. SWOT ANALYSIS <ul><li>Strengths : </li></ul><ul><li>Compaq-Server category and overall storage </li></ul><ul><li>HP-High-end storage </li></ul><ul><li>Strong brand recognition </li></ul><ul><li>Weaknesses : </li></ul><ul><li>Developing a direct distribution model </li></ul><ul><li>Consulting and outsourcing (low market share) </li></ul><ul><li>Compaq-Printers (low market share) </li></ul>
    15. 15. SWOT ANALYSIS <ul><li>Opportunities : </li></ul><ul><li>Merger could improve economics and innovation </li></ul><ul><ul><li>Economies of scale </li></ul></ul><ul><li>Strengthen leadership in storage </li></ul><ul><li>Market growth in IT services </li></ul><ul><li>Threats : </li></ul><ul><li>Dell increases pressure in the low-end server market </li></ul><ul><li>IBM, Dell and new entrants erode more market share </li></ul>
    16. 16. STAKEHOLDER ANALYSIS <ul><li>Focus on the primary stakeholders: </li></ul><ul><li>Competitors </li></ul><ul><li>Public </li></ul><ul><li>Customers </li></ul><ul><li>Shareholders </li></ul>
    17. 17. STAKEHOLDER ANALYSIS <ul><li>Competitors </li></ul><ul><ul><li>IBM, Sun, Dell </li></ul></ul><ul><ul><li>Cost savings by HP </li></ul></ul><ul><li>Public and Customers </li></ul><ul><ul><li>Allows HP to reach more people </li></ul></ul><ul><ul><li>Adds Compaq’s stable of customers </li></ul></ul><ul><ul><ul><li>Tap into Compaq’s positive image </li></ul></ul></ul><ul><ul><li>Could potentially entice new investors </li></ul></ul>
    18. 18. STAKEHOLDER ANALYSIS - SHAREHOLDERS <ul><li>Compaq stock and HP stock struggling </li></ul><ul><li>HP executives believed merger’s cost savings would become a huge asset for HP </li></ul><ul><li>Dissenters to this notion form </li></ul><ul><ul><li>Walter Hewlett </li></ul></ul>
    19. 19. HP-COMPAQ MERGER DISSENT <ul><li>Walter Hewlett: Son of HP co-founder and current HP director </li></ul><ul><ul><li>Controlled the Trust and the Foundation which owned 5.9% HP stock </li></ul></ul><ul><li>Packard Foundation </li></ul><ul><ul><li>Largest HP shareholder: 10.4% HP stock </li></ul></ul><ul><li>Both conduct independent analysis of proposed merge and decide to vote against </li></ul>
    20. 20. MANAGEMENT’S REASONS FOR MERGER <ul><li>Improved Economics and Innovation </li></ul><ul><li>Complementary Leadership in Key Markets </li></ul><ul><li>Strengthened Business Provides Critical Mass in Key Growth Market </li></ul><ul><li>Financial Benefits </li></ul>
    21. 21. 1. IMPROVED ECONOMICS AND INNOVATION <ul><li>Combined company creates economies of scale </li></ul><ul><li>Direct sales channel </li></ul><ul><li>More flexible distribution model </li></ul>
    22. 22. 2. COMPLEMENTARY LEADERSHIP IN KEY MARKETS <ul><li>Industry leading product line in entire server category </li></ul><ul><li>Industry leader in enterprise storage segment and storage area networks </li></ul><ul><li>Broader portfolio of products and services </li></ul>
    23. 23. 3. STRENGTHENED BUSINESS PROVIDES CRITICAL MASS IN IT SERVICES <ul><li>65,000 IT architects in 160 countries </li></ul><ul><ul><li>Accelerates growth </li></ul></ul><ul><li>Better customer loyalty </li></ul><ul><li>Leading position in managed services, mission-critical services, and multivendor support </li></ul>
    24. 24. 4. FINANCIAL BENEFITS <ul><li>Estimated $2.5 billion in annual cost savings by mid-2004 </li></ul><ul><li>Would allow HP to increase investment in the imaging and printing business </li></ul>
    25. 25. REASONS AGAINST THE MERGER <ul><li>HP’s Business Portfolio Will Be Worse </li></ul><ul><li>The Integration Risk of the Proposed Merger is Substantial </li></ul><ul><li>Negative Financial Impact on HP Stockholders </li></ul><ul><li>HP’s Strategic Position Will Not Materially Improve </li></ul>
    26. 26. 1. HP’S BUSINESS PORTFOLIO WILL BE WORSE <ul><li>Increased exposure in unprofitable PC business </li></ul><ul><li>Imaging and printing segment was expected to grow over 10% per year </li></ul><ul><li>PC market was expected to shrink </li></ul>
    27. 27. 2. THE INTEGRATION RISK OF THE PROPOSED MERGER IS SUBSTANTIAL <ul><li>No significant merger involving computer companies had ever met expectations </li></ul><ul><li>HP management had no experience with a merger this large </li></ul><ul><li>Analysts estimated revenue losses could be as high as 15-17% </li></ul>
    28. 28. 3. NEGATIVE FINANCIAL IMPACT ON HP STOCKHOLDERS <ul><li>Dramatic drop in stock price after proposed merger was announced </li></ul><ul><li>Wall Street predicted low estimates for future financial performance </li></ul>
    29. 29. 4. HP’S STRATEGIC POSITION WILL NOT MATERIALLY IMPROVE <ul><li>Neither company had a profitable PC business model </li></ul><ul><li>Neither company had successfully transitioned to a direct distribution model </li></ul><ul><li>Merger would not materially improve HP’s market position in high-profit areas </li></ul>
    30. 30. SO, WHAT HAPPENED? <ul><li>51.4% shareholder approval margin </li></ul><ul><ul><li>Showed a high level of uncertainty </li></ul></ul><ul><li>Supporters felt it was the best option available for the two firms </li></ul><ul><li>Critics against the merger voiced opinions about the future strategy and the riskiness of large mergers </li></ul>
    31. 31. HP TIMELINE (2004 – 2006) <ul><li>2004 </li></ul><ul><li>Digital entertainment products – Plasma & LCD TVs, HP Digital Entertainment Center (management of music, movies, photos) </li></ul><ul><li>Acquired Riverstone Networks, Ethernet routers, for $28 million </li></ul><ul><li>Acquired Synstar, independent provider of IT services, for $293.3 million </li></ul><ul><li>2005 </li></ul><ul><li>Acquired Snapfish, online photo service company </li></ul><ul><li>Acquired Scitex Vision, industrial wide-format digital printing </li></ul><ul><li>2006 </li></ul><ul><li>Acquired VoodooPC, high-end gaming PC provider </li></ul><ul><li>Acquired Mercury Interaction, IT management software and services company </li></ul><ul><li>Legal investigations –board members leaked confidential information to media </li></ul><ul><li>Formal inquiry from Securities and Exchange Commission </li></ul><ul><li>Shareholder lawsuits </li></ul>
    32. 32. HP TIMELINE (2007) <ul><li>2007 </li></ul><ul><li>HP & Wataniya Telecom Algeria – advanced billing solution to support new mobile services </li></ul><ul><li>Established research lab in St. Petersburg, Russia (growing economy) </li></ul><ul><li>Expansion of printing, PC & software businesses </li></ul><ul><li>Removed itself from NASDAQ listing to reduce the cost of fees and admin duties </li></ul><ul><li>Filed patent infringement lawsuits against Acer </li></ul><ul><li>Filed Print cartridge and ink formulation patent infringement case against Pelikan Hardcopy </li></ul><ul><li>Awarded 7-year contract for technology services with NASA worth $5.6 billion </li></ul><ul><li>Entered into agreements with 30 content providers for their media libraries (4,000 movies, TV, films, etc) for production & distribution through HP Video Merchant Services </li></ul>
    33. 33. HP TIMELINE (2008) <ul><li>2008 </li></ul><ul><li>HP & Unilever signed a 7-year outsourcing contract for the management of Unilever’s technology infrastructure </li></ul><ul><li>Sara Lee renewed its infrastructure outsourcing services contract for 7-years and from 10 countries to 35 </li></ul><ul><li>HP & Foxconn started constructing a manufacturing facility in Russia for the production of HP PCs with an investment of $50 million </li></ul><ul><li>Created HP & Novell alliance for identity and security management solutions – HP sells Novell products, Novell manages technology </li></ul><ul><li>HP & Acer resolved all claims between them </li></ul><ul><li>New radio frequency identification (RFID) technology to secure and improve audit controls in the data center </li></ul><ul><li>US Air Force contract for desktop, laptop, and services </li></ul><ul><li>Joined with Intel & Yahoo, created a cloud computing research and education data center </li></ul><ul><li>Acquired Electronic Data Systems Corp (EDS), global technology services, for $13.9 billion </li></ul>
    34. 34. HP TIMELINE (2009 – PRESENT) <ul><li>2009 </li></ul><ul><li>HP & Sun Microsystems agreement – HP to distribute and provide software support for Sun’s OS on HP’s server </li></ul><ul><li>10-year contract with Avivia (insurance) to manage 2 data centers for $1 billion </li></ul><ul><li>12-year contract with British Columbia Ministry of Labour and Citizens’ Services for hosting and data center services for $586 million </li></ul><ul><li>11/11 – Acquires 3COM, global enterprise networking solution, for $2.7 billion </li></ul>
    35. 35. HP TODAY <ul><li>Total Revenue: $118,364 million (2008) </li></ul><ul><ul><li>13.5% growth over prior year </li></ul></ul><ul><li>Net Income: $8,329 million (2008) </li></ul><ul><ul><li>14.7% growth over prior year </li></ul></ul><ul><li>CEO : Mark Hurd </li></ul><ul><ul><li>Started on April 1, 2005 </li></ul></ul>
    36. 36. HP MARKET SHARE <ul><li>Leading global PC market for shipments </li></ul><ul><ul><li>2006 – Took market leadership from Dell </li></ul></ul><ul><ul><li>18% HP, 14% Dell, 11% Acer, 7% Lenovo (2008) </li></ul></ul><ul><li>Leading global server market </li></ul><ul><ul><li>30% market share in 2008 </li></ul></ul><ul><li>Leading blade servers segment </li></ul><ul><ul><li>47% HP, 26% IBM (2008) </li></ul></ul><ul><li>Leading global printers market </li></ul><ul><ul><li>40% market share in 2008 </li></ul></ul><ul><ul><li>Competitors: Xerox, Canon </li></ul></ul><ul><li>Storage market </li></ul><ul><ul><li>EMC, HP (2008) </li></ul></ul><ul><li>IT services </li></ul><ul><ul><li>2 nd largest player (EDS acquisition in 2008) </li></ul></ul><ul><ul><li>Competitors: Accenture, IBM </li></ul></ul><ul><li>Branding </li></ul><ul><ul><li>#12 in Top 100 Best Global Brands (Interbrand, 2008) </li></ul></ul><ul><ul><li>#1 in US, #10 in world for Environment, Social Impact Ratings (The Economist, 2008) </li></ul></ul>
    37. 37. HP STRUCTURE NOW <ul><li>7 business segments </li></ul><ul><ul><li>Technology Solutions Group </li></ul></ul><ul><ul><ul><li>Enterprise Storage and Servers (ESS) </li></ul></ul></ul><ul><ul><ul><li>HP Services (HPS) </li></ul></ul></ul><ul><ul><ul><li>HP Software </li></ul></ul></ul><ul><ul><li>Personal Systems Group (PSG) </li></ul></ul><ul><ul><li>Imaging and Printing Group (IPG) </li></ul></ul><ul><ul><li>HP Financial Services (HPFS) </li></ul></ul><ul><ul><li>Corporate Investments </li></ul></ul>
    38. 38. PC SHIPMENTS FOR 3Q09 (US & INT’L) <ul><li>Source: IDC Worldwide, Quarterly PC Tracker 10/09 </li></ul>
    39. 39. GROWING INDUSTRY TRENDS <ul><li>Enterprise mobility </li></ul><ul><ul><li>Services offered over the Internet </li></ul></ul><ul><ul><li>Cloud computing market: 40% growth rate </li></ul></ul><ul><ul><li>23% share of the software market by 2010 </li></ul></ul><ul><ul><li>>$40 billion by 2012 </li></ul></ul><ul><li>Web & video collaboration </li></ul><ul><ul><li>63% of companies by 2010 </li></ul></ul><ul><li>Business intelligence, Web 2.0, data mining </li></ul><ul><li>Security, risk, compliance </li></ul><ul><li>Energy-efficient data centers </li></ul><ul><ul><li>Virtualization: 50-60% of all servers </li></ul></ul><ul><ul><li>Eliminates energy costs, maintenance, cooling expenses, and data center costs by as much as 90% </li></ul></ul>
    40. 40. RECOMMENDATIONS <ul><li>Consumer trends </li></ul><ul><ul><li>Media & entertainment growth </li></ul></ul><ul><li>Enterprise trends </li></ul><ul><ul><li>Manufacturing “green” servers, acquiring analytics companies, SaaS options </li></ul></ul><ul><li>Diversify portfolio </li></ul><ul><ul><li>Tap into videoconferencing – potential agreements with Tandberg systems </li></ul></ul>
    41. 41. QUESTIONS?