Hewlett-Packard–Compaq: The Merger Decision Harvard Case Solution & Analysis

1) Do you support Fiorina's proposal to acquire Compaq? What are the pros and cons? Will the merger with Compaq bring HP closer to Dell or IBM?

Fiorina’s proposal is quite attractive and seems to be a successful acquisition strategy and based on the assumptions along with estimated results of business combination; the merger will be in favor of HP.

The merger will result in establishment of larger company and will bring competitive advantage to HP over its rivals such as Dell and IBM because HP and Compaq alone do not have the capacity to compete with its direct competitors. Moreover, the merger will be in favor of its shareholders.

On the other hand, the merger of HP and Compaq will enable the combined company to offer integrated services and products and the addition of Compaq’s products will increase the HP’s portfolio of products. Meanwhile, the combined workforce will increase the HP’s strength and capabilities in terms of customers account coverage; therefore, all the above advantages will increase the competitiveness of combined business.

Additionally, the merger will result in a company, which will be completely a service technology oriented company and which will be capable of selling personal computers, printers and related services. In addition, the merger will enable HP to utilize established distribution networks and setup new distribution channels in order to increase the sales revenues.

Meanwhile, the merger will result in a large company and large production will lower down the cost of production, consequently, it will bring the advantage of economies of scale. Moreover, the merger will bring the divers skills and expertise together under one umbrella in order to improve the services of server solutions and support as well as after sales services will also get improved; which will bring the advantage of customer loyalty and customer retention.

Synergies effect will bring cost savings of $2.5 billion annually, which will increase the profits and per share value of its share by $5 to $9 approximately. Additionally, the increased profits will generate more cash flows and these cash flows can be used by HP for investment in other projects will be under the need of investment. However, there will be some attached disadvantage to this merger, which can undermine the attractiveness of merger proposal.

The merger will potentially result in conflicting of shareholders interest because HP is currently involved in the printing and imaging business; which has high potential for growth and market of printing and imaging business that is also growing. On the other hand, Compaq deals in personal computer solutions that has no growth potentials and even the market is in decline stage; which makes the PC business less attractive to investors, therefore, the merger will add both products into one portfolio that will lower down the profitability and attractiveness of combined business operations and HP’s shareholders will not be interested in merger because it will lower down the value of their investment.

Moreover, the combination will result in addition of some unwanted or less beneficial business units into HP’s portfolio, which will undermine their integration into HP’s other business units, consequently, the merger will create integration issues.

Moreover, the management of both HP and Compaq do not have any past experience of executing such a large business combination; which will make the execution and completion of merger process even more difficult.

However, the combination of HP and Compaq will increase the consolidated revenues above the revenue levels of its competitors but still it will bring the consolidated revenues closer to IBM and Dell revenues. In addition, the combined business will increase the market share and its expertise in sever and personal computer markets in order to compete with IBM and Dell in their respective markets. Therefore, the proposed merger will bring it closer to IBM and Dell.

2) Why was the Board of HP so divided on this issue? What grade will you give to HP's board in the way they handled this complicated strategic issue?

The board was divided on this acquisition target because of the agency problem that existed between the shareholders and the board members. Hewlett Packard gave an opinion that merger would not be in favor of the owners because to the risk associated with the combined business. However, the full board was in favor of the acquisition deal but Hewlett was not in favor of the acquisition of Compaq because the market of personal computer solution was not growing and the profit margins were also lower in comparison to HP’s printing and imaging business. However, the combined business will capture the greater market share of personal computers but still it would acquire high share of a stable market with no growth potentials, which would lower down its profitability in comparison to growing market of printing and imaging business that is the core business of HP..................

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