Hp and Compaq Merger

Webster University November 6, 2011 Hewlett- Packard Comp any(prenominal), referred to as HP, is an American multinational t apieceing technology confederacy. Its headquarters is based in atomic figure of speech 20 USA. The guild was founded in 1939 built in a Palo Alto renovation department by Bill Hewlett and David Packard and is straight iodin of the worlds largest in phase angleation technology companies operating worldwide in almost every coun exploit. It has 87,000 employees in 120 countries. HP specializes in developing, manufacturing computing, data w atomic rate 18housing, and ne iirking hardw be.In addition it designs bundle and delivers ser wrongs. A majority of HPs harvest-home lines include storage devices as well as computing devices, and a wide disgorge of imaging harvest-homes and last but not least, printers. Its harvestings are widely procurable to ho purpose utilises, sm every last(predicate) to medium sized bank linees, as well as by means of on line scattering, office cater retailers, and major technology vendors. It also caters to enterprises and office supply retailers. The late 90s brought innovation but execrable sales outgrowth, as HP facetd troubles in keeping up with the changing grocery.It was at the point where Carly Fiorina was appointed as the new(a) CEO. The attention thence became on guest and internet sales. Carly revamped organizational structure. This led to a gross growth however, share prices still declined and HP faced recession in 2001, which led to pay cuts and layoffs. Stock prices continues to soar which led to the consideration of acquisitions. HP is committed to the development of reapings, inorganization, and services that are widely accessible to everyvirtuoso including those with disabilities.The inscription it suffers in catering to everyone supports its diversity and Total Customer Experience objectives assure that its technological benefits serve all. According to Dave Packard , it is necessary that people work in concert in unison toward common objectives and avoid working at mark purposes at all levels if the ultimate in readiness and achievements is to be obtained. HP has a vision of diversity as creation a master(prenominal) ingredient that drives success as well as personal lead from everyone within the company.Their warring proceeds allows them to learn and to gear up through and through the discretion of their values. It is vital for HP managers to come together regularly in run to discuss and assess the HP Way which ensures their top priorities through glare be, information technology system ameliorations, enlarge in occupation growth, an returns in efficiency, and customer service improvements. HP is organized in the form of two aggroups. The first is the assembly line organization Customer Organization, and the second group is the Consumer affair Organization (Wagonfeld, Rubenstein, and Block, 2001).Both groups are supplied through the quest product divisions reason systems, imaging and printing systems, and embedded personal systems. In addition HP services are available which works between the consumer, the product, and the groups. Major product lines include personal figurer (PC), desktop and mobile personal computing devices, parcel solutions, copiers, scanners, networking solutions, and consulting services. In addition, the companys support group offers consulting, education, and solution support to its users.Compaq was founded in 1982 by Rod Canion, Jim Harris, and Bill Murto and its headquarters is based in Houston, Texas. The three founders invested $1,000 each in tramp to begin the formation of their company and began their first product, a portable personal ready reckoner to run all the software being veritable at the time for the IBM PC. Four old age into operation, the company was able to pave stylus to the Fortune 500 to a greater extent rapidly than any other company in the sa me domain. Compaq products were developed and bunsd in three different groups.The first group is the attempt Computing Group which designs and develops servers, internet products, and networking products. The second group is the Commercial PC Group which designs and develops commercial desktops, and wee and medium business solutions. The final group is the Consumer PC Group which designs and develops consumer products much(prenominal) as desktops, printers, and portables. Compaq securities industrys its products mainly to consumers from the follo break throughg sectors Business, home, authorities and education. In 2001, Compaq and HP engaged in a spinal fusion.The new HP pull up stakes become the second largest orbicular technology provider with nigh $87 billion in revenue as well as more opportunities to create competitive advantages with their existing resources. It then had the ability to provide a multiple number of solutions and will be in bit of competitive advantag e in comparison to the leader IBM. Prior to Compaqs uniting with HP, its spotter symbol was CPQ, however after the fusion its ticker symbol is now HPQ. . The managements reasons for the nuclear fusion reaction included the following Improved economics and innovation, complementary eadership in key markets, fortify business provides critical mass in key growth market, and pecuniary benefits. first-class honours degree of all, combining HP and Compaq would result in creating economies of scale, direct sales channel, and a more flexible distribution channel. Second of all, the uniting would facilitate the industry leading product line in the entire server category, and assume a broader portfolio of products and services. Thirdly, having around 65,000 IT architects in 160 countries accelerates growth and leads to better customer loyalty.Finally, financially, it estimated $2. 5 billion in annual cost savings by mid 2004 and the merger would also allow HP to increase investment in the imaging and printing business. Reasons against the merger were the following HPs business portfolio would be worse out-of-pocket to an increased exposure in unprofitable PC business, and the PC market was expected to shrink. Second of all, the desegregation risk of the propresent merger is comforting as no merger involving computer companies had ever met prospects, and analysts estimated a revenue loss that could be as elevated as 15-17%.Third of all, it would pick out a negative impact on HP telephone circuitholders as a dramatic drop in stock price was announced after the proposal of the merger and Wall track predicted low estimates for future financial performance. A fourth reason against the merger is that HPs strategical ready will not strongly improve as neither company had a profitable business mock up nor successfully transitioned into a direct distribution model. Furthermore, a merger would not materially improve HPs market grade in high profit areas. D espite the debate for or against the merger, in that respect was a 51. % approval margin and supporters believed it was the outmatch option available for two firms. SWOT analysis The strengths of the merger are Compaq-Server category and all overall storage, HP high-end storage, and strong brand recognition. HP and Compaq were to save $2. 5 billion in operating costs by 2004. After their merger, there was an increase in cash flow. The weaknesses they faced are the development of a direct distribution model, consulting and outsourcing (low market share), and Compaq printers (low market share). Consumers were unsure about the reliability of new products, and HPs market share was to increase to 18. % only. The opportunities they were faced with are the improvement the merger could exact of economics and innovation namely economies of scale. It also strengthened market leadership in storage, and market growth in IT services. Finally, the threats posed were the increases of pressure by dell in the reject-end server market, and the entrants of IBM and Dell into the market that further eroded more market share. Michael E. porters beer draws upon Industrial alteration economics in order to derive the basketball team forces that determine the argument and the overall profitability of a market.For example, an unattractive industry would be one that combines the five forces that drives down overall profitability. The first force in ostiarys model is the threat of the entry of new adversarys. Profitable markets that publication high returns and will therefore attract new firms. The result of this is many new entrants which eventually decrease profitability for all firms in the industry. The merger that occurred between Compaq and HP raises a temperate level of threat for new entrants due to economies of scale that are achieved by the already existing players, and this is what results in their competitive advantage.In addition, there is need for high capital sine qua non for any new player that wants to enter the market. Another factor is product differentiation which results in a constant need for the improvement in technology in order to grab consumers attention. A third factor is moderate consumer switching costs. An example of this is the ease for customers to change their laptops due to the standardisation of most computer components. In addition, the access to distribution channels makes it aristocratic for consumers to approach the desired products, due to the availability of direct customer service and two(prenominal) internet and computer retailers.The second force in porters model is the dicker magnate of buyers. Moderate consumer switching costs makes it easier for consumers to be able to change their laptops, due to standardization of most computer components. A low number of suppliers are providing HP and Compaq products to consumers. In addition, suppliers track down with high fixed costs, which is the main reason there are a low number of suppliers. The third force in the model is the bargaining power of suppliers, which consists of a high number of customers that are fragmented and providing products to them is not an easy task, which is why suppliers bargain highly.There are however, a a few(prenominal) large suppliers which are trustworthy, reliable, and recognized. They provide good quality raw material such as Intel and Hitachi. A fourth force in ushers model is the threat of substitutes. Switching costs for consumers is high because of low price HP Compaq laptops that indicate its target towards the middle class and speeding middle class constituent. These people find it harder to switch from one product to another which is why they are more similarly to remain loyal. In addition, frequent product introductions and constant improvements in price serve as a cause for moderate threat.A final force in the model is rivalry. High fixed costs in the cost for apparatus of manufacturing units increases fixed cost, which makes it more difficult for the existing players to exit the market. Also, constant changes in products and price makes competition stiffer. It is classic to note that the two stupendous players that hold the top two market share spots in the computer hardware industry are IBM and Dell. IBM has strong research and development and market and gave rise to PC industry with Microsoft Windows OS. IBM global services also have strong customer assistance.The latter is a direct business model with low inventory costs, and Dells close relationships with its consumers helped build loyalty, and it ranked number one in the global PC market in 2001. In July 1999, Carly Fiorina was appointed as the CEO of HP, and the board believed she was the saviour of HP. Her ending was to reinvent the company according to the HP way. Her motto was Preserve the best and reinvent the rest. At the time Carly took over, it was a collection of independent businesses, each se lling a different kind of product.Her role was to execute an e-services outline that would unify them into one profitable undivided. After merging with Compaq, the main strategies that are focused on are the following Sustainability where the new HP of the essence(p) both retain and grab additional market share, Uniqueness by being the largest IT company world-wide, value added by which the merger must face success, an increased product line through enhancement, adaptation to market forces through flexibility, and the retention of customer base through stability. Fiorina promised balanced revenue and network growth, targeting 12%-15% growth in 2000.The problem was that Carly Fiorina held too many offices as she was CEO, COO, and Chairman of the board. This led to an abuse of power, poor decision-making, and miscommunication. Both Compaq and HP were in an unwinnable price war with Dell. The merger of HP and Compaq clearly benefited both companies. From Porters five forces model of HP-Compaq, it is evident that there are moderate entry barriers, moderate threat of substitutes, high competition, moderate bargaining of power of buyers, and high bargaining power of suppliers.HP focuses on making technology more simple for its users from individual customers to large businesses. Its top priorities are to lower costs, improve its technology systems, increase business growth, and improve both efficiency and customer service. Despite the fact that both HP and Compaq were mature companies in front the merger, the merger is still considered to be under restructuring, which resulted in the company losing few of its ground as a mature company. Blending the culture of both companies resulted in more innovative ideas and is now more supportive in providing more effective customer service.Through the successful merger of HP and Compaq, their costs were reduced by $3 billion annually. From the information provided above, it is important to note that the introduction of improved and more innovative products should be of focus as competition in existing players is high in order to gain market share and competitive position in the market. The company is focusing on its strategies in order to ensure achieving all business priorities by adjusting and optimizing the product line and enhancing high end services.When analyzing a merger between two companies like Compaq and HP, it is worth noting that if we were to do a segment analysis of this merger, a different conclusion would be drawn than an increase of profits in the co-ordinated firms. In a segment analysis, the unite firms would adversely lose money while trying to gain advantage over its product line in the business sector for example. A large business segment would only see a small increase in profits in this case. Depending on the gingersnap in the market and the relevant position of the firms involved, the effects of a merger would switch significantly across different segments.For example , if Dell and Compaq were to have merged in 1998, it would have resulted in a negative consumer surplus. This in turn allows us to assume that the use of segment analysis can be semiprecious in assessing what impacts a merger could result in in respective(a) markets that have different consumer segments. The evolution of the market also plays an important factor. In the case of the HP-Compaq merger, if the same merge had occurred at a different occlusive like 4 years earlier there would have been a smaller consumer welfare as opposed to the results yielded in its 2001 merger.Baker and Breshnan (1985) proposed a strategy of contain and supply to evaluate the effects of mergers. Products and consumers are find by market participants according to Baker et. al, which in turn will be correlated with equilibrium prices which will lead the price coefficient to be biased towards zero. Furthermore, providing the consumers with a chance to not purchase any of the products available in re gards to personal computers plays an important role as it allows the changeless price increase to change the quantities purchased.In addition, by using the indigence parameters that are estimated, price-cost margins and marginal costs can be deliberate without the use of actual cost information. According to Nevo (2000), in the HP-Compaq merger, marginal costs and the number of products are held constant in their pre-merger level. Furthermore, post-merger equilibrium stretchyities are calculated based on the demand parameters in the pre-merger phase. From this, we can make the self-reliance that both consumer preferences and the value of the good did not change after the firms merged.However, one cannot ignore the fact that changes in the strategy after the merger took place measureed for price sensitivity and particularly changes outside the industry that could impact demand for the product places doubt on whether such an assumption is valid. A way one can look at the estimat es of different segments is by feel at the aggregate demand elasticities over time. This is portrayed in a report by Foncel and Invaldi (2000). It is important to note that the total elasticity for the whole market is increasing over time.This is turn means that consumers are being less sensitive as the market is approaching its maturity, this would lead to the expectation that the demand for personal computers would be more elastic. Income effect plays a big role here as soaring prices means that purchasing a PC would become a smaller share of the budget over time. In addition, further developments in software widened the use of computers and have now become a necessity in our daily lives. The total elasticity of the home segment is the one that faces the largest rise.The reason for this is that this segment became less elastic over time due to two reasons. The first reason was due to high income elasticity and the second was due to higher usage of few(prenominal) developments i n other domains such as the internet. Qualitative analysis of co-ordinated effects in the HP-Compaq merger is essential in understanding the formation of the merger that took place between both companies. In order to devise firms that are looking into merging should be able to come to an balance which is not always easy as products in both firms are complex and differentiated.Compaq and HP should monitor one anothers demeanor closely to detect factors such as undercutting, and keeping rivals out by collectively coordinating behaviour between them, Stigler (1964). The distribution of brands and market shares varies both in time and across markets. Most firms are multi product firms which is why it is essential to bear in mind that there is a substantial number of products. Another important factor here is that firms may face elastic demands which arise from the consumers substitution of products in quality segments.In addition, market transparency ensures that all coordinating ol igopolists are aware of the changes in the evolving markets. In the HP-Compaq merger, there are several market features that pave way for coordination in the server industry and others that prevent it from occurring. Also, competitors like Dell and IBM did not try to stand in the way of the merger. According to Freidman (1971), the merger between HP and Compaq affects the incentive to cooperate, yet it actively decreases the firms incentives to cooperate in a strategic manner.Freidman also goes on to portray that his model does not take into account either the entry or exit of a product, nor uncertainty. The reduction of costs, and enrichment of revenues, growth of the industry, and need of product diversification are several reasons why mergers and acquisitions have become proliferate over the last decade or so. When analyzing the financial results of the HP-Compaq merger, it is important to look at the profitability and efficiency ratios of the companies in the pre-merger and post -merger stages.In order to maximize profit and minimize products, HP and Compaq understand and adjust to the constantly shifting and changing markets, which technologies need acceleration, value creation for its consumers, and global development which serves as a shield against competitors like Dell and IBM. It is essential for a firm to understand its position in the industry curiously in a market that is saturated with competition like the computer industry where competitors such as Dell, IBM, Toshiba, Sony, Vaio, are present.An organization must be able to identify the factors that have an effect on the firm such as its suppliers, consumers, and competitors. Those factors enable the industry to know how to maintain itself in such a marketplace in order to be in a win-win situation. One of the benefits that resulted from the HP-Compaq merger is the following. Both firms were in a no win situation price war with Dell. The merger resulted in Compaq and HP to hold on competing with one another. In February 2001, Dell, the biggest competitor of HP-Compaq launched a campaign to become the largest competitor in the PC industry.In an attempt to grab the market share, Dell announced and intentional undercut in its prices by 10%. Although some mergers produce marginal results or lead to the sinking of companies, HP and Compaqs merger created a new corporate culture. This helped the company focus its product development efforts. The company improved its position in a number of core markets. By completing the merger when they did, HP was able to position itself by taking the extra leap ahead of trends that were working against the two companies when they existed as independent entities.In addition, its commitment to cultural change helped the merger go through a smoother transition, although HP took certain measures like reducing its workforce size, the change of 2 CEOs, and the reorganization of the managements structure. The HP-Compaq merger established what it had set out to. Its main bewilder was to provide the essential mass and ensure a long term-role in an industry that was undergoing a fundamental transition, according to Jean S. Bozman, research vice president in IDCs world-wide Server Group.Furthermore, he added that this deal enabled the merged company to grow revenue and profits in an increasingly competitive marketplace. References Anon (2002) Investor relations- taking a fair share of the responsibility, Strategic Direction. 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