HP Compaq merger.

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Financial Management By: Catherine Syder HP Compaq merger Course: MA International Finance In September 2001, two leading companies in the computing industry announced that they were going to merge. As one of the biggest deals in the computer industry, Hewlett-Packard Company was going to purchase Compaq Computer Corporation for $25 billion. There were several reasons mentioned for the merger. The main reason was that the size of the new merged business would enable the company to purchase stock in large quantities and take advantage of the discounts offered. (This was mentioned in a report in BusinessWeek.) The newly appointed CEO, Fiorina had mentioned that the combined amount spent on supplies of the two companies was about $65 billion and the discount that could be achieved by buying in bulk would be about 3 or 4%. However, Fiorina's cost cutting techniques did not just consist of the savings on supplies and affected the employees. She decided on postponing pay rises for three months and less than a month after some staff had already agreed to take wage cuts, management announced that they were going to make 6,000 members of staff redundant.


Another of HP's press releases stated that the merger was expected to yield savings of $2.5 billion annually. It is good that the companies were expecting to make savings, but the current PC market was in decline and so would make it difficult to make any savings at all. These savings were due to come from Product Rationalization, Efficiencies in administration, procurement, manufacturing and marketing and improved direct distribution of PC's. The savings from product rationalization would be expected to come from using the same computer parts throughout their products, but in the low margin PC's and printer markets, this will not necessarily make any great savings. It would be possible to make savings in administration, procurement and marketing when the departments of the two companies merge as certain jobs which at the moment are done once for each company will only need to be done once. The direct distribution of PC's and servers will help to yield savings as long as HP manage to move to a more "Dell like model", although the HP's server sector does not look too optimistic for the future.


I have also looked at the gross profit margins of 2002 and 2003. In 2002, this figure was 25.3% and in 2003, this figure was 25.5%. Not only this, HP managed to return all their major business segments to profitability. The figures are both good profit margins compared to the industry which was reported to be 24.49% in January 2001. In 2003, HP managed to win large contracts with Proctor and Gamble, Bank of Ireland and Telecom Italia. These will be very profitable for the future. To summarise, the stakeholders in HP will have found that after the merger was announced they noticed a dramatic loss in value, and then in 2002 after the merger had taken place, the share prices took a further dip in value as the company got accustomed to the new changes. In 2003, HP started to introduce new products and improve profit margins again and they now have a much better outlook for the future. It is difficult to say whether shareholders would have had greater value if the merger had not gone ahead as we do not know what would have happened, but they would have had to pay the break up fee and had other problems to contend. It seems that HP made the best of a bad situation.

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