Merger One of the Greatest Mergers in Term Paper

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Merger

One of the greatest mergers in the history of computers was recently organized between Hewlett Packard and Compaq Computers. This was a great victory organized by the chief executive of Hewlett Packard, Carleton S. Fiorina. The direct proof has come within one year of the purchase of Compaq computers at a cost of $19 billion. There was a savings of $3.5 billion and this was achieved in one year, when the promise was to save a billion dollars less and that too, by the end of two years. The company has had the classical result of mergers with a decrease of 17,000 jobs but there was a gain of market share, over 3,000 new patents and launching of 367 new products. It was also very successful in gaining new contracts and got $3 billion contract from Proctor and Gamble that is spread out over ten years. The success has given enthusiasm to the company to promote itself with an advertising of $400 million. (We Did It)

There has also been changes in the business itself and the high-tech industry was growing at about five times the rate of GDP, but this is not going to stay and the future growth is expected to be only at double the rate of growth of GDP. The changes are making the corporate customers more demanding and the suppliers will have to end up supplying more service and power for the amount of money spent by the customers. This will lead to losses of more jobs in the sector, and the prices of the shares will go down very fast. This will lead to bankruptcies and take-over. This is a change that will affect the rivals at Dell computers not being prepared for the growth that they will be getting in the future, and the business models of Sun Microsystems not being ready with an adequate business model. Further, according to her, the companies that cannot create new markets or get business from other companies will not be able to survive. There is no expectation of any more world beaters like Microsoft. (We Did It)

The exact cost of the deal was $18.5 billion and the most important result was that it broadened the range of products and services that were being offered by HP. The company was already in difficulties and it had to then take on the additional task of integrating the large number of 60,000 workers in Compaq with the existing 90,000 workers in HP in the entire range of 160 countries. Apart from the problems of joining up, HP also had to market, support and finally consolidate the different product lines that were earlier in competition. Yet the combination was useful and the joint company is now more successful in competition and the company was now more successful against Dell computer Corporation by 78% more, against IBM by 29% more and against Sun by 25% more. This is especially more important as Fiorina herself has predicted that the computer industry will see low single digit percentage growth rates during the next few years up to and including 2006. This is remarkably different from the earlier growth rates of 20% or more that were being achieved less than five years ago. (Compaq Acquisition Paying Dividends)

The architects of growth at HP feel that they can dominate this new market, even though the growth expectations are lower. The only challenge is expected from the other giant. According to her "it's us and IBM." HP has slashed billions in cost through the revamping of its data processing operations and the supply lines, and is now being projected as the Greatest Case Study Ever Told. When the merger of its systems with Compaq took place, HP built a single communication network which linked more than 250,000 PCs and handhelds, and handled more than 26 million e-mails in a day. At the same time, cuts took place in other areas - software applications used from 7,000 to 5,000 and components purchased from 250,000 to 25,000. It also helped other units to grow like Disney and the Disney President is on record saying that HP and Disney have common interests. The total sales to Disney have grown by more than 100% since 2001. Technology for Disney has been built by HP for some critical rides like Mission Space, and they have also designed the special wireless headsets that detail the theme park in five languages. There are a lot of efforts for sales and last October, HP had collected 25 business clients in Scotland to talk to them about the changes that it was planning. The clients were confident of the success of HP and six of them gave new contracts by the end of the week. (We Did It)

The major competition is now expected from IBM which has the capacity to deliver similar services, and IBM has already claimed that they have reduced $5 billion in their annual costs through the integration of technology and supply chain systems. This is promoted by them as a major basis for their claims to save costs for clients, and is called by them as being "on demand computing." It seems clear that IBM is able to deliver on that promise, and its annual revenue is about $9 billion more than the HP revenue of $72 billion. The value of the company in the stock market is however at $142 billion and this is more than double the stock market valuation of HP. Part of the reason for this is the high profits that IBM makes and the profits even in the recent quarter is more than double the profit made by HP. The profits come in spite of the fact that IBM employs double the number of people. (We Did It)

This is happening as IBM is much bigger in the higher profit services, whereas the main earnings of HP are still from items like printer's servers and PCs. These manufacturing activities do not yield much profit, as can be seen from the pretax profit margin of 0.4% on the $5 billion of PCs that HP has. The strength of IBM is in software where it has earned more than $850 million during the last quarter and that was a margin of 22%. The concentration of IBM has been on software for acquisitions and they have spent as much as $3 billion on Rational, Informix and CrossWorlds. (We Did It) On the other hand, HP is a large manufacturer and it uses contract manufacturing on a large scale. Its consumption of dynamic memory is 15% of total world consumption. In terms of numbers, it sells annually 40 million printers, 18 million PCs and 1.2 million digital cameras. It has over 100,000 retailers in 175 countries. (We Did It)

At the time of merger, Walter Hewlett had opposed the merger and voted the 24% stock of the company belonging to his family against the merger, but still the merger was passed by a narrow margin of three points. Then he also started a case against the present leaders with manipulating the vote. He lost the case and his position on the board. The new management knew they had to succeed and this deal was though about in June 2001. The complete plans were discussed and finalized before announcement. Shane Robison as the chief of Compaq technology sketched out the new challenges that the company was likely to face, and built a compelling technological proposition so the new HP could succeed. This was the basis for the adaptive enterprise approach of the new company. A new team was started to look at the two company's books so that they could decide what the new company should do. (We Did It)

There were many surprises, and in one case HP was losing $100 million every quarter on a product called NetServer which was of the industry standard, but was making money on a proprietary model. The problem of Compaq was exactly the opposite. The profits in PC for HP came from retail sales, but in Web-based business, Compaq had a better performance. Even regarding suppliers, the companies performed differently. While one had a better deal with Microsoft on Windows, the other had a better deal on Intel chips. The differences were in terms of only one or two percentage points, but these percentages were related to purchases of billions of dollars, and thus the amount of money involved was large. These discussions led to the deaths of some products due to others in the other company's sales like Compaq iPAQ given precedence over HP Jornada; Compaq Proliant retained over HP NetServer; HP PC business retained in preference to the Compaq consumer PC, whereas the Compaq corporate business was preferred over the HP corporate PC business. (We Did It)

There were also consolidations and the four different and incompatible e-mail systems in the two companies were combined into one, and this was to connect 215,000 PCs and 49,000 other items.…[continue]

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