Description
Describes about the Analysis HP Compaq merger strategy and valuation and covers its swot, positive and negative aspects, value of HP.
GROUP 5
THE MERGER OF HEWLETT-PACKARD AND COMPAQ(A): STRATEGY AND VALUATION
Investment Banking
Harini V Valluri (10313) Rakesh Salecha (10138) Ranjeetha V (10141) Shiva kumar Awati (10161)
8/3/2011
SWOT Analysis:
i.)
Objectives of Merger:
? Increase competition with major competitors. i.e. IBM, Dell. ? Cut costs by $3 billion annually by 2004 ? Increase earnings for shareholders
?
Face the challenge of a shrinking market
ii.)
Investors Benefits:
? A big chunk of the savings--$1.5 billion annually--will come from trimming the payroll. ? And investors could benefit big time from huge cost savings. By eliminating redundant administrative functions, HP cost savings would reach $2.5 billion a year by 2004.
SWOT Analysis Strengths. The merger between HP and Compaq will increase the companies’ competitiveness when it comes to the possible new product lines and services that they will offer as a single company to the clients and customers. The integration strategy likewise resulted fewer market competition within the context of large international corporations that also belong to the international IT and electronics industry. Costs will be reduced as expenditures in business operations such as manufacturing and production are now handled and managed as a single proprietorship. The research and development arm of HP and Compaq can now work together as single company with similar technological and economic goals. Strengths: • Compaq-Server category and over all storage; • HP-High-end storage; •Strong brand recognition.
Weaknesses. The integration strategy between HP and Compaq, on the other hand, resulted to the need to lay off thousands of employees since their services will be no longer needed particularly those who have similar functions. Cultural integration within the workplace is also a serious issue since HP and
Compaq are composed of different individuals and employees who are used to different working environments as well as career expectations. The Human resource department will be confronted with problems and issues regarding the new members of the company’s workforce. Technical operations will also experience drawbacks from the changes that will transpire within the business processes of the company. Weaknesses: •Consulting and outsourcing (low market share); •Overlapping management •Overlapping product lines
Opportunities. The issues and problems that may result from the merger in terms of workforce differences can be perceived as an avenue fro improvement when it comes to workplace culture of the company. The management should be able to device means to exhaust diverse knowledge and skills that characterize the members of the company’s labor force. Operations should likewise be restructured and reengineered in order to come up with better manufacturing and production processes that take into account efficiency and product quality. Opportunities: •Merger could improve economics and innovation •Economies of scale; •Strengthen leadership in storage; •Market growth in IT services.
Threats. The failure of the merger strategy is also possible if HP and Compaq are not able to resolve issues caused by differing workplace cultures. The vulnerability of the merged company is likewise exposed since it is only a couple of years since the merger contract was signed. There is still so much to do for the full implementation of the merger strategy and existing competitors will aggressively take the opportunity of the changes that transpired within the new HP-Compaq company. Both internal and external factors may contribute to the challenges and difficulties that HP-Compaq will experience in the future in the effort to succeed in the international market competition.
Threats: •Dell increases pressure in the low-end server market; •IBM, Dell and new entrants erode more market share. •Economic downturn
Image Source: Quebec HPQ merger
2.) Was the Merger strategy sound?
Strategically, it was a sound merger. For the Compaq, it helped to keep its survival in the commodity personnel computer business of which it had incurred losses. As for the HP, the merger helped to strengthen its business in personal computer, servers, storage or services market and expand its sources of future growth. The newly merged company would be better positioned to compete with those computing giants such as IBM and DELL by capturing increased market share in personal computers, servers, storage or services. Through the merger, the new company could achieve economy of scale, enabling it to effectively allocate resources for growth in enterprise – computing business through fixed costs reduction in R&D expenditures and offer to its enterprise customers with a more comprehensive array of products.
Positive Aspects: ? ? ? ? ? such a merger to be an occasion to take a competitiveadvantage over its rivals like IBM Development of Markets Propagated Efficiencies Allowances to use more resources Better Opportunities
Negative Aspects: ? ? ? ? ? ? Legal Contemplations Compatibility problems Fiscal catastrophes Human Resource Differences Lack of Determination Risk management failure
3.) What was the Value of synergies?
The merger helped HP realize a projecting recurring, annual, pretax cost savings of USD 2.5 bn or USD of 5 - USD 9 per share by mid 2004. Besides, HP could expect to produce improved overall operating margins of 8 -10 percent in the company’s 2003 fiscal year.
In Millions Assets Revenue EBIT
HP Compaq 32584 23689 45226 33554 2030 479
Individual values: HP assets of 32b and Compaq assets of 23b. EBIT margins of 4.5% for HP and 1.4% for Compaq.
Value of Synergy:
HP No. Of Shares Share Price(Sept 4, 2001) Market Capitalisation Share price of Compaq + premium Market Capitalisation(premium) Compaq 1936 1689 18.87 11.08 36532.32 18714.12 11.94 20166.66
? Synergy of 2500 million “HP cost savings would reach $2.5 billion a year by 2004.” Terminal Value: = 2500/(cost of capital – growth). T.V = 2500/(0.15 – 0.0 ) Growth of synergy is assumed to be 0%.
Synergy T.V 2500 16666.67
Therefore, terminal value of benefits of synergy is 16667 millions.
Present value of HP + Compaq = PV of HP + PV of Compaq + value of Synergy
PV of HPQ = 36532.32+18714.12+16667 = 71913.11
PV Compaq Shareholders
71913.11 0.36 25888.72
Compaq shareholders of 36% Value of Compaq of 25888.72 ( Including Synergy ) Value paid to shareholders = 11.94*1679 = 20166.66
Value of Synergy = 25888.72 – 20166.66 = 5722.058 millions.
4. What was the appropriate valuation range for the merger?
From Balance sheet we can calculate P/S and P/EBIT multiple.
P/S P/EBIT 0.807773 0.557731 17.99622 39.06914
Sales of Compaq = 33554 million P/S * S = Market capitalisation of Compaq = 18714.12
Benefits of synergy ( question 3 ) = 5722 million.
Total value including synergy = 18714.12 + 5722 = 24436 million.
millions
Range
MIN 18714.12
MAX 24436
doc_885711978.docx
Describes about the Analysis HP Compaq merger strategy and valuation and covers its swot, positive and negative aspects, value of HP.
GROUP 5
THE MERGER OF HEWLETT-PACKARD AND COMPAQ(A): STRATEGY AND VALUATION
Investment Banking
Harini V Valluri (10313) Rakesh Salecha (10138) Ranjeetha V (10141) Shiva kumar Awati (10161)
8/3/2011
SWOT Analysis:
i.)
Objectives of Merger:
? Increase competition with major competitors. i.e. IBM, Dell. ? Cut costs by $3 billion annually by 2004 ? Increase earnings for shareholders
?
Face the challenge of a shrinking market
ii.)
Investors Benefits:
? A big chunk of the savings--$1.5 billion annually--will come from trimming the payroll. ? And investors could benefit big time from huge cost savings. By eliminating redundant administrative functions, HP cost savings would reach $2.5 billion a year by 2004.
SWOT Analysis Strengths. The merger between HP and Compaq will increase the companies’ competitiveness when it comes to the possible new product lines and services that they will offer as a single company to the clients and customers. The integration strategy likewise resulted fewer market competition within the context of large international corporations that also belong to the international IT and electronics industry. Costs will be reduced as expenditures in business operations such as manufacturing and production are now handled and managed as a single proprietorship. The research and development arm of HP and Compaq can now work together as single company with similar technological and economic goals. Strengths: • Compaq-Server category and over all storage; • HP-High-end storage; •Strong brand recognition.
Weaknesses. The integration strategy between HP and Compaq, on the other hand, resulted to the need to lay off thousands of employees since their services will be no longer needed particularly those who have similar functions. Cultural integration within the workplace is also a serious issue since HP and
Compaq are composed of different individuals and employees who are used to different working environments as well as career expectations. The Human resource department will be confronted with problems and issues regarding the new members of the company’s workforce. Technical operations will also experience drawbacks from the changes that will transpire within the business processes of the company. Weaknesses: •Consulting and outsourcing (low market share); •Overlapping management •Overlapping product lines
Opportunities. The issues and problems that may result from the merger in terms of workforce differences can be perceived as an avenue fro improvement when it comes to workplace culture of the company. The management should be able to device means to exhaust diverse knowledge and skills that characterize the members of the company’s labor force. Operations should likewise be restructured and reengineered in order to come up with better manufacturing and production processes that take into account efficiency and product quality. Opportunities: •Merger could improve economics and innovation •Economies of scale; •Strengthen leadership in storage; •Market growth in IT services.
Threats. The failure of the merger strategy is also possible if HP and Compaq are not able to resolve issues caused by differing workplace cultures. The vulnerability of the merged company is likewise exposed since it is only a couple of years since the merger contract was signed. There is still so much to do for the full implementation of the merger strategy and existing competitors will aggressively take the opportunity of the changes that transpired within the new HP-Compaq company. Both internal and external factors may contribute to the challenges and difficulties that HP-Compaq will experience in the future in the effort to succeed in the international market competition.
Threats: •Dell increases pressure in the low-end server market; •IBM, Dell and new entrants erode more market share. •Economic downturn
Image Source: Quebec HPQ merger
2.) Was the Merger strategy sound?
Strategically, it was a sound merger. For the Compaq, it helped to keep its survival in the commodity personnel computer business of which it had incurred losses. As for the HP, the merger helped to strengthen its business in personal computer, servers, storage or services market and expand its sources of future growth. The newly merged company would be better positioned to compete with those computing giants such as IBM and DELL by capturing increased market share in personal computers, servers, storage or services. Through the merger, the new company could achieve economy of scale, enabling it to effectively allocate resources for growth in enterprise – computing business through fixed costs reduction in R&D expenditures and offer to its enterprise customers with a more comprehensive array of products.
Positive Aspects: ? ? ? ? ? such a merger to be an occasion to take a competitiveadvantage over its rivals like IBM Development of Markets Propagated Efficiencies Allowances to use more resources Better Opportunities
Negative Aspects: ? ? ? ? ? ? Legal Contemplations Compatibility problems Fiscal catastrophes Human Resource Differences Lack of Determination Risk management failure
3.) What was the Value of synergies?
The merger helped HP realize a projecting recurring, annual, pretax cost savings of USD 2.5 bn or USD of 5 - USD 9 per share by mid 2004. Besides, HP could expect to produce improved overall operating margins of 8 -10 percent in the company’s 2003 fiscal year.
In Millions Assets Revenue EBIT
HP Compaq 32584 23689 45226 33554 2030 479
Individual values: HP assets of 32b and Compaq assets of 23b. EBIT margins of 4.5% for HP and 1.4% for Compaq.
Value of Synergy:
HP No. Of Shares Share Price(Sept 4, 2001) Market Capitalisation Share price of Compaq + premium Market Capitalisation(premium) Compaq 1936 1689 18.87 11.08 36532.32 18714.12 11.94 20166.66
? Synergy of 2500 million “HP cost savings would reach $2.5 billion a year by 2004.” Terminal Value: = 2500/(cost of capital – growth). T.V = 2500/(0.15 – 0.0 ) Growth of synergy is assumed to be 0%.
Synergy T.V 2500 16666.67
Therefore, terminal value of benefits of synergy is 16667 millions.
Present value of HP + Compaq = PV of HP + PV of Compaq + value of Synergy
PV of HPQ = 36532.32+18714.12+16667 = 71913.11
PV Compaq Shareholders
71913.11 0.36 25888.72
Compaq shareholders of 36% Value of Compaq of 25888.72 ( Including Synergy ) Value paid to shareholders = 11.94*1679 = 20166.66
Value of Synergy = 25888.72 – 20166.66 = 5722.058 millions.
4. What was the appropriate valuation range for the merger?
From Balance sheet we can calculate P/S and P/EBIT multiple.
P/S P/EBIT 0.807773 0.557731 17.99622 39.06914
Sales of Compaq = 33554 million P/S * S = Market capitalisation of Compaq = 18714.12
Benefits of synergy ( question 3 ) = 5722 million.
Total value including synergy = 18714.12 + 5722 = 24436 million.
millions
Range
MIN 18714.12
MAX 24436
doc_885711978.docx