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Fusions Acquisitions: Compaq - HP Merger.

Extracts from this document...

Introduction

Jeffrey Baker DESS Paris XII Fusions Acquisitions Conf�rence de M. ANDRE Compaq - HP Merger Chapter 1 Introduction "There is no more dramatic or controversial activity in corporate finance than the acquisition of one firm by another or the merger of two firms. It is the stuff of which reporter's dreams are made, and it is also an embarrassing source of scandal."(Ross,S.1996) A merger refers to the absorption of one firm by another. The acquiring firm retains its name and its identity, and it acquires all of the assets and liabilities of the acquired firm. After a merger, the acquired firm ceases to exist as a separate business entity. In resent years, more and more merger and acquisition happened for those big companies as a result of intense competition in the business world. To maintain the competitive position in their respective industry, merger and acquisition become suitable strategic alternative, which would bring synergy to both companies. Revenue enhancement, cost reduction, lower taxes, and lower cost of capital can be the basic categories of possible sources of synergy. The merger of Compaq and HP companies is a resent case, which brings controversial discussion in the public media. When Hewlett-Packard CEO Carleton S. Fiorina and then-Compaq CEO Michael D. Cpellas met with investors last fall to sell their controversial merger, many comments present different opinions on this event. In this case study, it will focus on the pre-merger of HP and Compaq. By looking insight of the whole process of the merger, the motivation of the merger will be identified, as well as its expected synergy resulting from merger. Important analysis will be of whether the expected effects of the merger were a reasonable basis for going ahead with it at the time of the merger and the challenge facing the merger. Chapter 2 Background of Compaq and HP companies 2.1 Compaq company profile before merger Compaq Computer Corporation is a company which manufactures, designs and markets hardware, software, solutions and services for the NonStop TM Internet world. ...read more.

Middle

in the profitability of those businesses will benefit the long-term success of its imaging and printing business in new and emerging markets. At the same time, the boards of directors and management teams of both HP and Compaq rigorously analyzed numerous alternative strategies in order to position their companies to take advantage of the opportunities and address the challenges presented by these trends. As mentioned before, they have several strategic alternatives to choose, after reviewing and debating these strategic alternatives and the opportunities presented by the merger, the boards of directors and management teams of both HP and Compaq determined to pursue the merger instead of the other alternatives that were being considered independently. Because they believe that the merger provides a unique opportunity to position themselves broadly to address the strategic challenges of their industries. Furthermore, combining their companies provides the most comprehensive opportunity among their alternatives for improving the cost structures and improving the long-term profitability of the enterprise systems and PC businesses in a timely and efficient manner. In fact, the merger is a unique opportunity to create a combined company with a stronger, more efficient operating model than either company could achieve on its own. For example, the merger will enables them to improve the combined earnings by generating significant cost synergies for the combined company. "They expect to generate annual cost savings of at least $2.5 billion by the middle of the combined company's 2004 fiscal year, which translates into a present value of cost savings of approximately $5-$9 per share of the combined company. Moreover, even in an environment in which prices will remain under pressure, both companies believe that the combined company will be able to generate operating margins of 8%-10% by the combined company's 2003 fiscal year after realizing anticipated cost savings." ( http://www.business.com) 4.4Strategic benefit of the merger Firstly, the merger presents a unique opportunity to enhance the combined competitive position in key industries, at the same time strengthen the sales force of both companies. ...read more.

Conclusion

It could bring strategic benefit and financial benefit to both companies. From the aspect of strategy, the merger could expand and strengthen their product and service offerings, accelerating the combined company's leadership position as an end-to-end solution provider. From the aspect of financial benefit, the merger will generate substantial cost savings and increase the profitability for the combined business. The forecast financial benefit from the merger expected by the two companies is based on the reasonable assumption. In addition, shareowners value of both companies could be increased through improved earning. Accordingly, the merger is advisable and in the best interest of Compaq and HP. It should go ahead at that moment. As for the future of merger, whether it will really bring the benefit to the combined company will depend on the successful operation of the new combined company and the consistently changing IT industry. Appendix Financial performance of Compaq in 2001: FORTUNE 500 DATA $ millions % change from 2000: Revenues 33,554.0 -20.8 Profits -785.0 -238.0 Assets 23,689.0 -- Stockholders' Equity 11,117.0 -- Market Value 3/14/200218,190.0 -- Profits as % of % Revenues-2.3 Assets-3.3 Stockholders' Equity-7.1 Earnings Per Share 2001 $-0.47 % change from 2000: -242.4 1991 - 2001 annual growth rate %N/A Total Return to Investors % 2001 -34.7 1991 - 2001 annual rate18.9 http://cobrands.hoovers.com/ Financial performance of HP in 2001: FORTUNE 500 DATA $ millions % change from 2000: Revenues 45,226.0 -7.3 Profits 408.0 -89.0 Assets 32,584.0 -- Stockholders' Equity 13,953.0 -- Market Value 3/14/200 237,663.0 -- Profits as % of % Revenues0.9 Assets1.3 Stockholders' Equity2.9 Earnings Per Share 2001 $0.21 % change from 2000: -88.3 1991 - 2001 annual growth rate %-5.7 Total Return to Investors % 2001 -34.1 1991 - 2001 annual rate14.6 http://cobrands.hoovers.com/ Reference: Ross, S. 1996, Corporate finance, Richard D. Irwin, Chicago. Burrows, P. April 1, 2002, what price victory at Hewlett-Packard, Business Week, USA Burrows, P. May 20, 2002, what's in store for this happy couple, Business Week, USA. Edwards, C. June 17, 2002, HP and Compaq: IT's showtime, Business Week, Boston Source: Proxy statement http://thenew.hp.com/ http://www.compaq.com www.hp.com http://thenew.hp.com/country http://www.compaq.com/inside/merger/shareholder.html http://cobrands.hoovers.com/ http://www.business.com http://www.businessweek.com/ http://www.compaq.com/corporate ...read more.

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