Hp and Compaq Merger

Webster University November 6, 2011 Hewlett- Packard Company, referred to as HP, is an American multinational information technology company. Its headquarters is based in California USA. The company was founded in 1939 built in a Palo Alto garage by Bill Hewlett and David Packard and is now one of the world’s largest information technology companies operating worldwide in almost every country. It has 87,000 employees in 120 countries. HP specializes in developing, manufacturing computing, data storage, and networking hardware. In addition it designs software and delivers services. A majority of HP’s product lines include storage devices as well as computing devices, and a wide range of imaging products and last but not least, printers. Its products are widely available to households, small to medium sized businesses, as well as through online distribution, office supply retailers, and major technology vendors. It also caters to enterprises and office supply retailers. The late 90’s brought innovation but low sales growth, as HP faced troubles in keeping up with the changing market. It was at the point where Carly Fiorina was appointed as the new CEO. The focus then became on customer and internet sales. Carly revamped organizational structure. This led to a revenue growth however, share prices still declined and HP faced recession in 2001, which led to pay cuts and layoffs. Stock prices continues to soar which led to the consideration of acquisitions. HP is committed to the development of products, information, and services that are widely accessible to everyone including those with disabilities. The commitment it provides in catering to everyone supports its diversity and â€Å"Total Customer Experience† objectives ensure that its technological benefits serve all. According to Dave Packard, â€Å"it is necessary that people work together in unison toward common objectives and avoid working at cross purposes at all levels if the ultimate in efficiency and achievements is to be obtained. † HP has a vision of diversity as being a main factor that drives success as well as personal leadership from everyone within the company. Their competitive advantage allows them to learn and to adjust through the depth of their values. It is vital for HP managers to come together regularly in order to discuss and assess the â€Å"HP Way† which ensures their top priorities through lower costs, information technology system improvements, increase in business growth, an improvement in efficiency, and customer service improvements. HP is organized in the form of two groups. The first is the Business Customer Organization, and the second group is the Consumer Business Organization (Wagonfeld, Rubenstein, and Block, 2001). Both groups are supplied through the following product divisions: Computing systems, imaging and printing systems, and embedded personal systems. In addition HP services are available which works between the consumer, the product, and the groups. Major product lines include personal computer (PC), desktop and mobile personal computers, software solutions, copiers, scanners, networking solutions, and consulting services. In addition, the company’s support group offers consulting, education, and solution financing to its users. Compaq was founded in 1982 by Rod Canion, Jim Harris, and Bill Murto and its headquarters is based in Houston, Texas. The three founders invested $1,000 each in order to begin the formation of their company and began their first product, a portable personal computer to run all the software being developed at the time for the IBM PC. Four years into operation, the company was able to pave way to the Fortune 500 more rapidly than any other company in the same domain. Compaq products were developed and placed in three different groups. The first group is the Enterprise Computing Group which designs and develops servers, internet products, and networking products. The second group is the Commercial PC Group which designs and develops commercial desktops, and small and medium business solutions. The final group is the Consumer PC Group which designs and develops consumer products such as desktops, printers, and portables. Compaq markets its products mainly to consumers from the following sectors: Business, home, government and education. In 2001, Compaq and HP engaged in a merger. The new HP will become the second largest global technology provider with around $87 billion in revenue as well as many opportunities to create competitive advantages with their existing resources. It then had the ability to provide a multiple number of solutions and will be in position of competitive advantage in comparison to the leader IBM. Prior to Compaq’s merger with HP, its ticker symbol was CPQ, however after the merger its ticker symbol is now HPQ. . The management’s reasons for the merger included the following: Improved economics and innovation, complementary eadership in key markets, strengthened business provides critical mass in key growth market, and financial benefits. First of all, combining HP and Compaq would result in creating economies of scale, direct sales channel, and a more flexible distribution channel. Second of all, the merger would facilitate the industry leading product line in the entire server category, and gain a broader portfolio of pro ducts and services. Thirdly, having around 65,000 IT architects in 160 countries accelerates growth and leads to better customer loyalty. Finally, financially, it estimated $2. 5 billion in annual cost savings by mid 2004 and the merger would also allow HP to increase investment in the imaging and printing business. Reasons against the merger were the following: HP’s business portfolio would be worse due to an increased exposure in unprofitable PC business, and the PC market was expected to shrink. Second of all, the integration risk of the proposed merger is substantial as no merger involving computer companies had ever met expectations, and analysts estimated a revenue loss that could be as high as 15-17%. Third of all, it would have a negative impact on HP stockholders as a dramatic drop in stock price was announced after the proposal of the merger and Wall Street predicted low estimates for future financial performance. A fourth reason against the merger is that HP’s strategic position will not materially improve as neither company had a profitable business model nor successfully transitioned into a direct distribution model. Furthermore, a merger would not materially improve HP’s market position in high profit areas. Despite the debate for or against the merger, there was a 51. % approval margin and supporters believed it was the best option available for both firms. SWOT analysis: The strengths of the merger are Compaq-Server category and overall storage, HP high-end storage, and strong brand recognition. HP and Compaq were to save $2. 5 billion in operating costs by 2004. After their merger, there was an increase in cash flow. The weaknesses they faced are the develo pment of a direct distribution model, consulting and outsourcing (low market share), and Compaq printers (low market share). Consumers were unsure about the reliability of new products, and HP’s market share was to increase to 18. % only. The opportunities they were faced with are the improvement the merger could have of economics and innovation namely economies of scale. It also strengthened market leadership in storage, and market growth in IT services. Finally, the threats posed were the increases of pressure by Dell in the lower-end server market, and the entrants of IBM and Dell into the market that further eroded more market share. Michael E. Porter draws upon Industrial Revolution economics in order to derive the five forces that determine the competition and the overall profitability of a market. For example, an unattractive industry would be one that combines the five forces that drives down overall profitability. The first force in Porter’s model is the threat of the entry of new competitors. Profitable markets that yield high returns and will therefore attract new firms. The result of this is many new entrants which eventually decrease profitability for all firms in the industry. The merger that occurred between Compaq and HP raises a moderate level of threat for new entrants due to economies of scale that are achieved by the already existing players, and this is what results in their competitive advantage. In addition, there is need for high capital requirement for any new player that wants to enter the market. Another factor is product differentiation which results in a constant need for the improvement in technology in order to grab consumers’ attention. A third factor is moderate consumer switching costs. An example of this is the ease for customers to change their laptops due to the standardization of most computer components. In addition, the access to distribution channels makes it easy for consumers to approach the desired products, due to the availability of direct customer service and both internet and computer retailers. The second force in Porter’s model is the bargaining power of buyers. Moderate consumer switching costs makes it easier for consumers to be able to change their laptops, due to standardization of most computer components. A low number of suppliers are providing HP and Compaq products to consumers. In addition, suppliers operate with high fixed costs, which is the main reason there are a low number of suppliers. The third force in the model is the bargaining power of suppliers, which consists of a high number of customers that are fragmented and providing products to them is not an easy task, which is why suppliers bargain highly. There are however, a few large suppliers which are trustworthy, reliable, and recognized. They provide good quality raw material such as Intel and Hitachi. A fourth force in Porter’s model is the threat of substitutes. Switching costs for consumers is high because of low price HP Compaq laptops that indicate its target towards the middle class and upper middle class segment. These people find it harder to switch from one product to another which is why they are more likely to remain loyal. In addition, frequent product introductions and constant improvements in price serve as a cause for moderate threat. A final force in the model is rivalry. High fixed costs in the cost for setup of manufacturing units increases fixed cost, which makes it more difficult for the existing players to exit the market. Also, constant changes in products and price makes competition stiffer. It is important to note that the two big players that hold the top two market share spots in the computer hardware industry are IBM and Dell. IBM has strong research and development and marketing and gave rise to PC industry with Microsoft Windows OS. IBM global services also have strong customer assistance. The latter is a direct business model with low inventory costs, and Dell’s close relationships with its consumers helped build loyalty, and it ranked number one in the global PC market in 2001. In July 1999, Carly Fiorina was appointed as the CEO of HP, and the board believed she was the saviour of HP. Her goal was to reinvent the company according to the HP way. Her motto was: â€Å"Preserve the best and reinvent the rest. † At the time Carly took over, it was a collection of independent businesses, each selling a different kind of product. Her role was to execute an â€Å"e-services† strategy that would unify them into one profitable whole. After merging with Compaq, the main strategies that are focused on are the following: Sustainability where the new HP must both retain and grab additional market share, Uniqueness by being the largest IT company world-wide, value added by which the merger must demonstrate success, an increased product line through enhancement, adaptation to market forces through flexibility, and the retention of customer base through stability. Fiorina promised balanced revenue and earnings growth, targeting 12%-15% growth in 2000. The problem was that Carly Fiorina held too many offices as she was CEO, COO, and Chairman of the board. This led to an abuse of power, poor decision-making, and miscommunication. Both Compaq and HP were in an unwinnable price war with Dell. The merger of HP and Compaq clearly benefited both companies. From Porter’s five forces model of HP-Compaq, it is evident that there are moderate entry barriers, moderate threat of substitutes, high competition, moderate bargaining of power of buyers, and high bargaining power of suppliers. HP focuses on making technology more simple for its users from individual customers to large businesses. Its top priorities are to lower costs, improve its technology systems, increase business growth, and improve both efficiency and customer service. Despite the fact that both HP and Compaq were mature companies before the merger, the merger is still considered to be under restructuring, which resulted in the company losing some of its ground as a mature company. Blending the culture of both companies resulted in more innovative ideas and is now more supportive in providing more effective customer service. Through the successful merger of HP and Compaq, their costs were reduced by $3 billion annually. From the information provided above, it is important to note that the introduction of improved and more innovative products should be of focus as competition in existing players is high in order to gain market share and competitive position in the market. The company is focusing on its strategies in order to ensure achieving all business priorities by adjusting and optimizing the product line and enhancing high end services. When analyzing a merger between two companies like Compaq and HP, it is worth noting that if we were to do a segment analysis of this merger, a different conclusion would be drawn than an increase of profits in the merged firms. In a segment analysis, the combined firms would adversely lose money while trying to gain advantage over its product line in the business sector for example. A large business segment would only see a small increase in profits in this case. Depending on the elasticity in the market and the relevant position of the firms involved, the effects of a merger would vary significantly across different segments. For example, if Dell and Compaq were to have merged in 1998, it would have resulted in a negative consumer surplus. This in turn allows us to assume that the use of segment analysis can be valuable in assessing what impacts a merger could result in in various markets that have different consumer segments. The evolution of the market also plays an important factor. In the case of the HP-Compaq merger, if the same merge had occurred at a different period like 4 years earlier there would have been a smaller consumer welfare as opposed to the results yielded in its 2001 merger. Baker and Breshnan (1985) proposed a strategy of demand and supply to evaluate the effects of mergers. Products and consumers are observed by market participants according to Baker et. al, which in turn will be correlated with equilibrium prices which will lead the price coefficient to be â€Å"biased towards zero†. Furthermore, providing the consumers with a chance to not purchase any of the products available in regards to personal computers plays an important role as it allows the uniform price increase to change the quantities purchased. In addition, by using the demand parameters that are estimated, price-cost margins and marginal costs can be calculated without the use of actual cost information. According to Nevo (2000), in the HP-Compaq merger, â€Å"marginal costs and the number of products are held constant in their pre-merger level†. Furthermore, post-merger equilibrium elasticities are calculated based on the demand parameters in the pre-merger phase. From this, we can make the assumption that both consumer preferences and the value of the good did not change after the firms merged. However, one cannot ignore the fact that changes in the strategy after the merger took place accounted for price sensitivity and particularly changes outside the industry that could impact demand for the product places doubt on whether such an assumption is valid. A way one can look at the estimates of different segments is by looking at the aggregate demand elasticities over time. This is portrayed in a report by Foncel and Invaldi (2000). It is important to note that the total elasticity for the whole market is increasing over time. This is turn means that consumers are being less sensitive as the market is approaching its maturity, this would lead to the expectation that the demand for personal computers would be more elastic. Income effect plays a big role here as soaring prices means that purchasing a PC would become a smaller share of the budget over time. In addition, further developments in software widened the use of computers and have now become a necessity in our daily lives. The total elasticity of the home segment is the one that faces the largest rise. The reason for this is that this segment became less elastic over time due to two reasons. The first reason was due to high income elasticity and the second was due to higher usage of several developments in other domains such as the internet. Qualitative analysis of coordinated effects in the HP-Compaq merger is essential in understanding the formation of the merger that took place between both companies. In order to coordinate firms that are looking into merging should be able to come to an agreement which is not always easy as products in both firms are complex and differentiated. Compaq and HP should monitor one another’s behaviour closely to detect factors such as undercutting, and keeping rivals out by â€Å"collectively coordinating behaviour between them†, Stigler (1964). The distribution of brands and market shares varies both in time and across markets. Most firms are multi product firms which is why it is essential to bear in mind that there is a substantial number of products. Another important factor here is that firms may face elastic demands which arise from the consumers’ substitution of products in quality segments. In addition, market transparency ensures that all coordinating oligopolists are aware of the changes in the evolving markets. In the HP-Compaq merger, there are several market features that pave way for coordination in the server industry and others that prevent it from occurring. Also, competitors like Dell and IBM did not try to stand in the way of the merger. According to Freidman (1971), the merger between HP and Compaq affects the incentive to cooperate, yet it actively decreases the firms’ incentives to cooperate in a strategic manner. Freidman also goes on to portray that his model does not take into account either the entry or exit of a product, nor uncertainty. The reduction of costs, and enrichment of revenues, growth of the industry, and need of product diversification are several reasons why mergers and acquisitions have become proliferate over the last decade or so. When analyzing the financial results of the HP-Compaq merger, it is important to look at the profitability and efficiency ratios of the companies in the pre-merger and post-merger stages. In order to maximize profit and minimize products, HP and Compaq understand and adjust to the constantly shifting and changing markets, which technologies need acceleration, value creation for its consumers, and global development which serves as a shield against competitors like Dell and IBM. It is essential for a firm to understand its position in the industry especially in a market that is saturated with competition like the computer industry where competitors such as Dell, IBM, Toshiba, Sony, Vaio, are present. An organization must be able to identify the factors that have an effect on the firm such as its suppliers, consumers, and competitors. Those factors enable the industry to know how to maintain itself in such a marketplace in order to be in a â€Å"win-win† situation. One of the benefits that resulted from the HP-Compaq merger is the following. Both firms were in a no win situation price war with Dell. The merger resulted in Compaq and HP to stop competing with one another. In February 2001, Dell, the biggest competitor of HP-Compaq launched a campaign to become the largest competitor in the PC industry. In an attempt to grab the market share, Dell announced and intentional undercut in its prices by 10%. Although some mergers produce marginal results or lead to the sinking of companies, HP and Compaq’s merger created a new corporate culture. This helped the company focus its product development efforts. The company improved its position in a number of core markets. By completing the merger when they did, HP was able to position itself by taking the extra leap ahead of trends that were working against the two companies when they existed as independent entities. In addition, its commitment to cultural change helped the merger go through a smoother transition, although HP took certain measures like reducing its workforce size, the change of 2 CEO’s, and the reorganization of the management’s structure. â€Å"The HP-Compaq merger established what it had set out to. Its main aim was to provide the essential mass and ensure a long term-role in an industry that was undergoing a fundamental transition,† according to Jean S. Bozman, research vice president in IDC’s world-wide Server Group. Furthermore, he added that â€Å"this deal enabled the merged company to grow revenue and profits in an increasingly competitive marketplace. † References: Anon (2002): Investor relations- taking a fair share of the responsibility, Strategic Direction. Bradford: Vol. 18, Iss. 8, pgs. 13-16. Ahles, Andrea (2002): Hewlett-Packard Executives Say Its Company Is on Track to Produce Lasting Benefits, Knight Ridder Tribune Business News. Washington: Aug 28, pg. 1. 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