The Merger of HP and Compaq

Abstract

The paper discusses the nature of a merger and one of the biggest mergers in the last ten years i.e. the merger of HP and Compaq.  It further discusses the discussions of analysts and some stakeholders’ position of the merger and how it eventually turned out.

Stanford educated William Hewlett and David Packard started their company with $538 as capital in the garage of one of its founders, David Packard.  Their initial product was a resistance-capacity audio oscillator, a machine used for testing sound equipment.

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It was in 1939 when they formalized their partnership and tossed a coin to determine the order of their company name, Hewlett-Packard [HP]. It was incorporated in 1947. Ten years after its incorporation, HP shares were offered to the public.  The partners agreed that Hewlett will take charge of technological development while Packard will handle the management aspect of the organizational structure.

After World War II, the electronics sector was rapidly growing particularly in defense and industrial areas.  HP took full advantage of this situation. In the last world war, the company was utilized to assist the former professor of William Hewlett and David Packard at Stanford, Professor Frederick Terman. HP was asked to produce microwave signal generators for the professor’s research on antiradar projects. By 1950, HP had 70 products and was earning $2 million.

In 1951, HP introduced a device, HP524A, which substantially reduced the time required to measure radio frequencies from ten minutes to about two seconds. The device was widely used by radio stations using FM band. During that time, the FM band was newly established then and the device functioned to maintain accurate broadcast frequencies. By 1958, HP revenues reached $30 million. It was also during this time that HP had its first acquisition. It acquired a company engaged in the manufacture of graphic recorders, F.L. Moseley Company.

The first computer developed by HP in 1966 was for its own company product control. Another of the early significant products of HP was its first desktop scientific calculator which came out of its production lines in 1968. In 1972, HP introduced to the market a handheld scientific calculator and a microcomputer.  However, in 1973, Texas Instruments offered a lower priced scientific calculator.

HP entered the personal computer business in 1980 and one of its best-selling product, the HP LaserJet printer, was introduced only in 1984. By 1989, HP was having a revenue of $829 million. However, the early 90’s was not good to HP’s business. Although its HP's 95LX palmtop personal computer was a best seller, it has to restructure in order to cope with the demands of the industry and effectively retain its position.

The resurgence of its business was also brought by its aggressive expansion on the personal computer (PC) business in the mid-90’s. In 1992, HP’s share in the PC market was only one percent but in mid-1997, it jumped to number three following Compaq and IBM and outgunning Dell Computer.

In 1998, HP reviewed its operations and they decided to create a separate company to handle its non-computing segment. The business generated by this segment of their operation represented 16 percent of its total income at $7.6 billion. The new company carried with it the following products: test and measurement products and service, medical electronic products and service, electronic components, and chemical analysis and service.  The following year, HP had a new President and CEO in the person of Carleton (Carly) S. Fiorina. Carly Fiorina had 20 years of experience at AT;T and Lucent Technologies.

On the other hand, it was in the summer of 1981, when three senior managers of Texas Instruments (TI) decided to form a company that will produce a personal computer (PC) that is at par with the ones produced by IBM.  They were Joseph R. Canion, James M. Harris, and William H. Murto.  They only had $1000 each so they went to Ben Rosen, President of Sevin – Rosen Partners, a venture capital firm.. Ben Rosen who invested $2.5 million. In 1982, the company was incorporated and called Compaq Computer Corporation.  The company is a public company listed in the New York Stock Exchange.

Compaq practiced the consensus type of management wherein inputs from different divisions were considered before a new product is launched. In 1983, Compaq was one of the first companies who introduced to the market the first briefcase computer or laptop. In that year, the company substantially grew.  Its capability expanded from 200 machines at the start of the year and having 9,000 by yearend.

In 1986, Compaq made it to Fortune 500. It was a record as they achieved such recognition in less than four years of existence. The phenomenal growth of Compaq is attributed to its good relationship with its dealers.  Its dealers do not have to compete with the company because it does not have a direct sales and this provides a sense of security to the dealers. Also, “Salespaq”, an agreement with their dealers wherein the latter’s cost of advertising, sales training, or incentives are paid by Compaq, provided an additional motivation to its authorized dealers.

In the late 80’s Compaq has shown that though it is relatively a new player, it is a leader in introducing new technology. In 1987, Compaq in collaboration with Intel produced the DESKPRO 386 which was three times faster than IBM’s fastest computer.  By the time IBM introduced its version using the same chip of Intel, Compaq was already developing its portable version.

By late 1989, Compaq introduced the SYSTEMPRO and DESKPRO 486 which utilized a hardware known as EISA (Extended Industry Standard Architecture). The hardware was designed to considerably increase its speed thereby enabling it to perform multitasking and networking operations. Sales reached $3.6 billion in 1990 with 3,872 authorized dealers all over the world.

However, 1991 was a tragic year for Compaq. Economic recession, price competition and problems in distribution brought about a slump for the first time in its history.  Eventually, Chief Executive Officer (CEO) and one of the founders, Joseph R. "Rod" Canion, resigned after a $70 million third quarter loss was reported. The last remaining founder, James C. Harris, who was then the vice-president of engineering also left the company in that year

Nevertheless, through its management restructuring, new products and aggressive pricing, Compaq again regained its position as one of the leaders in the industry. By 1996, its revenue was 1996 was $20.01 billion with a net income of $1.32 billion. In 1997, Compaq has a reported annual sales of $ 24.58 billion and a workforce of 32, 565. Prior to its merger with HP, Compaq is into desktop computers, portable computers, workstations, PC servers, entry servers, midrange servers and computer services. Compaq acquired Tandem Computers Incorporated, Microcom, Inc. and Digital Equipment Corporation.  In 1998, Compaq was recognized by Forbes as the 1997 Company of the Year.

Also in the same year, Compaq had a change of leadership and Michael D. Capellas became its new President and CEO. It was also in this year that Compaq made a shift in its operations and focused on becoming an IT and internet leader. Through its acquisition of Digital Equipment Corporation, Compaq also acquired Alta Vista, known at the time to be the leader as an Internet search and navigation guide.

The first news of a company merger between HP and Compaq was announced on September 3, 2001. According to Carly Fiorina, the merger was in accord to her mandate to “recreate and reinvent HP”.  The merger is the brainchild of Carly Fiorina and analysts would point out that she has essentially two hurdles to tackle i.e., whether the merger will push through due to opposition and if it will, is the merged company going to perform as expected.  Observers added that a failure in any of the two will surely lead to her ouster in HP.

Carly Fiorina graduated from Stanford University with a degree in medieval history and philosophy. She also earned a master’s degree in business administration from the University of Maryland at College Park and a Master of Science degree from the Massachusetts Institute of Technology. She was 47 years old when she joined HP.

In the 60-year history of HP, Carly Fiorina was first outsider and woman to be given the leadership reins. Also, she was the first non-engineer to occupy the position.  HP insiders said that there were 300 applicants who were considered for the position and she was thought of the right person to handle HP.

While working at Lucent, Carly Fiorina was responsible for expanding its international business, planning both its initial public offering and its eventual separation from AT;T. According to Michael Useem as quoted by Knowledge@Wharton (2005), Carly Fiorina has an excellent leadership style, very decisive and she has recognized the necessity of transforming the culture in HP.

With the foregoing, the most basic question may be asked on what is a merger and why did HP and Compaq merged. Most companies decide to acquire or merge with another in order to achieve the so-called economies of scale. Usually, the acquisition would pertain to a strong competitor.  However, the process of acquisition and finally of merging two companies are often easier said than done.

Andrews (2002) has given five key indicators to determine if the companies about to merge has a probability of being successful namely, compatibility of objectives, benefits in economies of scale,  synergy, location, potential growth.

The first consideration will be if the objectives of the company to be merged will jive. Otherwise, if the two companies are adversely directed on its goals and mission, then combining them will be a challenge in itself as it is imperative that one company has to have focus along the same direction.  The second consideration is if there will be actual rather than perceived economies of scale. If the resulting company is so big and becomes bureaucratic, then the expected benefits may not be achieved and time and money will be wasted streamlining the company instead of focusing on new products and sales growth.

Obviously, a bigger company does not necessarily mean a better one.  The third factor is the synergy of the resulting company.  If one company is the type that the existing regulations consist of jeans attire, flexi-time, first name basis organization and another is the rigid rules, formal type coat and tie affair, then it is a virtual challenge to enforce new rules for either one of the set of employees.  The resulting rules may not have general acceptance which can put down productivity of the employees. Fourth, it is suggested that the headquarters of the two companies to be merged must be located near each other.

The different work environment of the two companies will have an impact on the working relationships of the employees. If one company is located in a fast-paced environment and the other is based in a relaxed and comfortable work area, it is a potential problem.  Lastly, there should be a potential for growth because essentially, merging two companies is an investment and stockholders will expect a return of investment.  If one company has a technology which can open a new market and it is more cost efficient to buy the company rather than develop the technology, then it would be a good decision to buy.

Also, if the other company is a successful competitor and learning from them on the various areas of operation can be beneficial to the company, then it is also a good reason to acquire this company. However, if hiring some of the other company’s people will be more beneficial than acquiring the whole company, then it might not be a good decision to merge. Bottom line is,  in the acquisition or merger of two companies, a good background and feasibility analysis of the two companies and its resulting one is a must.

According to Hoopes (n.d.), the idea of merging HP and Compaq started in a telephone conversation between Carly Fiorina and Michael Capellas of Compaq sometime in June 2001.  The purpose of said call was regarding some licensing agreements but the conversation turned into a discussion on competitive strategy and the topic of a possible merger was started.

Ascierto and Meritt (2001) reported that the proposed merger would be an organizational challenge per Nathan Brookwood, president of market-research firm Insight64.  It must be remembered that when the merger of HP and Compaq was broached, the latter has not yet finished the struggle it had in its acquisition of Digital and Tandem. Reportedly, Nathan Brookwood said, “I think this will be a big challenge for HP, merging the cultures. With Compaq, I'm not sure they've finished the Digital Equipment merger at this point. So you've got, essentially, Compaq, Digital, Tandem and HP all coming together here."

Evidently, HP and Compaq’s merger was not really a match made in heaven.  The acquisition of HP would cost approximately $25 billion and some 15,000 employees have to be laid off.  The merged company will have a share distribution of 64 percent for HP shareowners and 36 percent for Compaq shareholders. Carly Fiorina will still be the CEO while Michael Capellas will be the President of the new company.  In the new set-up, HP’s and Compaq’s products will be consolidated into four major groups: services, imaging and printing, access devices, and information technology infrastructure.  Also read HP strategy analysis

Additionally, the opposing view, led by Walter B. Hewlett and David Packard who are the heirs of the founders, points out that getting the market share of Compaq does not really translate to becoming a leader.  Others pointed out that when talks of the merger started, Compaq was in a financial mess brought about by their recent acquisition of Digital Equipment Corporation and Tandem Computers Incorporated. Compaq offers no new technology/capabilities and upon the announcement of the merger, HP’s stocks plummeted.

On the other hand, those supporting the merger argue that it is all about competitive positioning. It will make the merged company the market leader after the merger, service business will grow, annual cost savings will be $2.5 billion and it will improve the financial and market position of the company.

Moreover, Andrews (2002) further commented that the merger was not really as successful as what was expected. He cited factors such as diverse culture between HP and Compaq, a sales force which is cross-competing eventually resulting to distracted and confused clientele thus resulting to loss of good customer relationships.

According to him, the HP and Compaq merger does not address the direct selling of Dell, the service and service outsourcing of IBM and the large-server sales of Sun.  In short, HP and Compaq’s merger may create a bigger company and may have bigger sales but there is no focus on challenging the competition hence, the revenues is not for a long.

Many commentators/analysts agreed with Andrews (2002).  In fact, they claim that the fact that Carly Fiorina was eventually fired in February of 2005 is a manifestation that she did not achieve the objectives of the merger. Andrews (2002) attributed the recent improvement in HP’s performance on the fact that it has “refocused on its core business”.

On the other hand, Keefe and Zehr (2007) reported that the merger was now reaping its fruits. They reported that the HP/Compaq has surpassed the revenues of IBM in 2006 and also beat Dell as the number one PC company in the world. They stated that in their interview with Carly Fiorina, she said that she was happy her effort to merge the companies paid off.    However, it was also reported that the credit goes to Mark Hurd, the replacement of Carly Fiorina who was more of an operations man.

Michael Useem, director of Wharton’s Center for Leadership and Change Management as interviewed by Knowledge@Wharton (2005) captured what could have gone wrong when he said, “xxx Fiorina scored high on leadership style, but she failed to execute strategy.” Notably, HP/Compaq shares surged after the announcement of Carly Fiorina’s separation from HP./Compaq.

In its 2006 HP Annual Report, it stated that HP it is now aiming to be the number one IT company in the world.  Its revenue is reported to have increased by six percent or revenue of $91.7 billion. In said report, it has also been admitted that HP is still in the process of transforming and has not yet fully transformed.

In the same report, it said that there are three management levers being considered namely, targeted growth, operational efficiency and capital strategy. Essentially targeted growth has acknowledged that although the philosophy of believing that customers will seek out a company with a good product has to some extent worked before, it is thought to be better if a good sales force will push the products. In operational strategy, streamlining the operations to be more efficient is the drive. Lastly, it is the objective of the company to have more capital by lowering the cost.

Indeed, HP has gone a long way from its garage beginnings. Whether its merger with Compaq, which also had its share of success, will translate to a long term product leadership will remain to be seen.

References

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Ascierto, J. and Merritt, R.(2001, September). Analysis: HP-Compaq merger catches industry off guard. EE Times. http://www.eetimes.com/story/industry/systems_and_software_news/OEG20010904S0092

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Carlock, R., Florent-Treacy, E. and Cooper, R. (2003). The HP-Compaq Merger A Battle for the Heart and Soul of a Company.  INSEAD Case Study: The HP-Compaq Merger. Retrieve on October 11, 2007 from http://knowledge.insead.edu/abstract.cfm?ct=11865

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Hewlett – Packard Company. (n. d.) Carly Fiorina. Retrieved on October 11, 2007 from http://www.hp.com/hpinfo/execteam/fiorina/index.html

Hewlett – Packard Company. (n. d.) Carleton S. Fiorina. Retrieved on October 11, 2007 from http://www.hp.com/hpinfo/execteam/bios/fiorina.html

Hoopes, C. (n. d.) The Hewlett-Packard and Compaq Merger: A Case Study in Business Communication. Retrieved on October 11, 2007 from

Inquirer Staff. (2005, February 9). HP’s Carly Fiorina Fired. Retrieved on October 11, 2007 from http://www.theinquirer.net/en/inquirer/news/2005/02/09/hps-carly-fiorina-fired

Jaques, R. (2006, November 8). Five years on: HP Compaq Merger Declared A Success (IDC believes the deal has achieved its main objectives). Retrieved October 11, 2007 from http://www.vnunet.com/vnunet/news/2168205/five-years-hp-compaq-merger

Keefe, B. and Zehr, D. (2007, April 29). HP flying high five years after merger with Compaq. COX NEWS SERVICE. The San Diego Union Tribune. Retrieved on October 11, 2007 from http://www.signonsandiego.com/uniontrib/20070429/news_1b29hp.html

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