Although, numerous large HP shareholders, including William Hewlett, publicly opposed the deal, the two companies merged. The merger was approved only after the narrowest of margins, and allegations of vote buying (primarily involving an alleged last-second back-room deal with Deutsche Bank) haunted the newly formed company. It was subsequently disclosed that HP had retained Deutsche Bank's investment banking division in January 2002 to assist in the merger. HP had agreed to pay Deutsche Bank $1 million guaranteed, and another $1 million contingent upon approval of the merger. On August 19, 2003, the United States Securities and Exchange Commission charged Deutsche Bank with failing to disclose a material conflict of interest in its voting of client proxies for the merger and imposed a civil penalty of $750,000. Deutsche Bank consented without admitting or denying the findings. (Wikpedia, Compaq - Wikipedia, the free encyclopedia, 2001)
The biggest industry benefit that HP gained from the merger was that it now was definitely a household name, ousting long seated rivals. Its largest competitors, EMC and IBM, in the commercial and enterprise quadrant are not household names per say. IBM has been around longer than the dinosaurs, but very few households actually have an IBM laptop that was purchased by an individual consumer for personal use. Since the merger, IBM’s PC division was purchased by Chinese manufacturer Lenovo in 2005. So, when people go to work, and they have three competitors standing in front of them, they choose the one they bought for home use because they feel comfortable with their products which leads us back to individual behavior and emotional versus rational purchasing.
Supply, Demand and Other Nefarious Economic Principles
The first economic principle that Fiorina failed to understand was the difference between total revenue and total cost opportunity. She simply did not recognize the nature and importance of profit. Fiorina either was misinformed, or did not use the sources within the company, including the firm’s finance, marketing, and/or legal department to obtain data about the implicit costs of her decision to merge with Compaq. The second economic principle that was overlooked was the amount that would have to be invested today at the prevailing interest rate to generate the given future value. The third principle that was not considered was the present value of the income stream generated by Compaq minus the current cost to acquire Compaq. (Baye, 2009, pp. 5-15)
Although Carly Fiorina had built herself into a fierce leader, as evidenced in 1998, she was soon to find out that leadership and management are quite different indeed. She was named the most powerful woman in American business, the then group president of Lucent Technologies' global service provider business, Fortune magazine proclaims in its Sept. 24 online edition. Talk-show producer Oprah Winfrey followed at number two. (AllBusiness, 1998) The text states, “Many companies fail because their managers get bogged down in the day-to-day decisions of the business without having a clear picture of market trends and changes that are on the horizon.” (Baye, 2009, p. 36) Supply and demand is a qualitative tool which allows managers to see the big picture. Some attributes that become apparent through this type of analysis are the ability to predict trends in the market to include price fluctuations of your products as well as your major competitors. These are import factors necessary to negotiate the proper pricing with input providers, suppliers, customers, as well as acquisitions. All of the following are signs that management have failed to receive the big picture:
- Running ads that no longer reflect competitive pricing
- Over hiring, or hiring too many employees
- Carrying too much inventory
- Negotiating poor price with acquisitions, suppliers, and/or customers
One of the most important fundamental economic factors to understand is the law of demand. Not only, is it important to understand the principles which have an effect on consumer demand, but also a clear mastery of the shifters that invoke or increase demand of the products your company sells. When Fiorina consummated the merger, she helmed HP for nearly three years. With a Medieval History and Philosophy degree, Fiorina was unable to wield the fundamental forces of economics to HP’s favor.
Performance since the Merger
HP’s turmoil leading up to the merger; Even though stocks gradually rose to a peak of $74.48 after Fiorina was hired from their value of $54.43 the day before she had joined HP, meeting growth targets proved difficult as both the company and the industry stumbled. As a result, HP was forced to cut jobs, to ask employees to take unpaid leave, and, in 2000, to scrap plans to buy the consulting arm of PricewaterhouseCoopers. By September 2001, HP’s stock value had fallen to less than half of its level when Fiorina was hired. Consequently, many analysts speculated that Fiorina, who had initially won accolades both inside and outside the company, had so fallen from grace that she was in danger of losing her job. (Williams, HP’s Deal for Compaq Has Doubters as Value of Plan Falls to $20.52 Billion, 2001)
Numbers in parenthesis above correspond with points labeled on the stock price graph shown below.
The merger meets opposition; On November 7, 2001 at 10 o’clock that morning, Walter Hewlett, son of HP co-founder William Hewlett, called Ms. Fiorina, chairman and CEO of Hewlett-Packard Co. (HP). In their brief conversation, the co-founder’s son informed Fiorina that he and his family would publicly oppose the planned merger between Hewlett-Packard and Compaq. In addition, Hewlett told Fiorina that he would be issuing a news release within the hour to announce their decision. Then, just hours later, David Packard Jr., the oldest son of the other Hewlett-Packard co-founder, issued a statement announcing that he would also vote against the merger. (Hoopes, 2003)
Suddenly, the future of HP—the company that created Silicon Valley—seemed to rest in the hands of heirs who had never wanted an active role in their fathers’ company. (Williams & McWilliams, Family Affair: HP Deal’s Fate Rests with Skeptical Heirs, 2001) Had Fiorina failed to effectively “sell” the deal to Hewlett and Packard family members before making it public? Had she underestimated the power and influence these family members might have in determining the future of the company? (Hoopes, 2003)
Despite the cold reception of the deal by many investors and analysts, once approved by the boards at both HP and Compaq, the merger could be stopped from going through in only a handful of ways. The deal could be terminated if the companies mutually agreed to cancel it, if either company experienced a material adverse change, or if regulators rejected it. In addition, either company could decide to break up the deal; however, it would have to pay the other company a $675 million termination fee to do so. Finally, and perhaps most importantly, as a stock transaction, the deal could be terminated if shareholders of either company rejected it. (Williams, Hewletts Reject Deal to Join HP, Compaq, 2001)
On September 3, 2001, Walter Hewlett voted with the rest of HP’s board to O.K. the proposed merger. However, in the months leading up to the board’s vote, Hewlett had expressed concern about the deal and its impact on his family’s charities. But just days before the vote, he learned that the merger agreement called for unanimous board approval in order to ensure the best possible shareholder reception. Believing that the board would find a way to approve the merger regardless of how he voted, Hewlett reluctantly cast his final vote in favor of the deal. (Hoopes, 2003)
CONCLUSION: Ask Carly Fiorina
Although the merger met with poor reception from Wall Street and industry analysts, Fiorina did not back down. She argued that the merger would eliminate one player in an oversupplied PC marketplace. Fiorina often spoke out of context for true economic theory, she needed guidance, yet skirted topics key to point such as integration and merger activities and vertical integration versus horizontal integration. On the other hand, a horizontal merger, by its very definition, reduces the number of firms that compete in the product market place, so maybe she was right. The merger would also eventually improve HP’s market share across the hardware line and double the size of HP’s service unit—both essential steps in being able to compete with industry-giant IBM. In addition, Fiorina argued, the merger would create a full-service technology firm capable of doing everything from selling PCs and printers to setting up complex networks. The merger would eliminate redundant product groups and costs in marketing, advertising, and shipping, while at the same time preserving much of the two companies’ revenues. (Hoopes, 2003)
To critics who questioned HP’s motives for the deal, Fiorina emphasized that the chief driver for the HP-Compaq merger was competitive positioning. To those who questioned the chances that the merger would succeed, Fiorina pointed out that the distinguishing characteristic of successful mergers is the focus on consolidation, not diversification—exactly what HP planned to do after its merger with Compaq. (Hoopes, 2003)
To Fiorina’s defense, IBM sold its PC division to Chinese manufacturer Lenovo. The company did eventually do everything that she set out to do, only not under her leadership. I believe that she had the vision statement down; it was the mission statement that needed some work. She did not fail in providing vision; she simply did not succeed in her execution of the mission.
HP provided pink slips to thousands of former Compaq, DEC, HP, and Tandem employees, and its stock price generally declined and profits did not perk up. Though the merger initially helped HP make it to the top as the number one PC maker, it soon lost the lead along with further market share to Dell. In addition, the merging of stagnant Compaq with HP's lucrative printing and imaging division was criticized as that overshadowed the latter's profitability. In February 2005, the Board of Directors ousted Fiorina. Former Compaq CEO, Capellas, was mentioned by some as a potential successor, but several months afterwards, Mark Hurd was hired as CEO. (Flyer, 2008)
In late 2005, HPQ seemed to find its feet under the new leadership of Mark Hurd. At this same time, Dell seemed to be faltering and HPQ took back the number one sales position. Hurd separated the PC division from the imaging and printing division. HP's PC segment has since been reinvigorated and now generates more revenue than the traditionally more profitable printers. (Wikpedia, Compaq, 2009)
Most Compaq products have been re-branded with the HP nameplate, such as the company's market leading ProLiant server line, while the Compaq brand remains on only some consumer-orientated products, notably Compaq Presario PCs. HP's business computers line was discontinued in favor of the Compaq Evo line, which was rebranded HP Compaq. HP's Jornada PDAs were replaced by Compaq iPAQ PDAs, which were renamed HP iPAQ. (Wikpedia, Compaq, 2009)
In May 2007, HP in a press release announced a new logo for their Compaq Division to be placed on the new model Compaq Presario. In 2008, HP dropped the "Compaq" name from its "HP Compaq" business notebooks and is now marketing them as the "HP EliteBook" and as of early 2009, the "HP ProBook", leaving the Compaq name for HP's entry-level consumer platforms. (Wikpedia, Compaq, 2009)
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