Case-HP-Compaq-merger

HP-CompaqMergerNecessaryPaininGrowth?2•Wasthemergersoundstrategically?UseSWOTanalysistoanswerthequestion.•First,whatarethethreatsandopportunitiesintheindustryHPandCompaqwerein?3SWOTanalysis•Industrydynamics–Threats/challenges•Maturingindustry–Morepricecompetition,slimmingmargins–Pressureforkeepingloweringcost:Dell,Epson,Lexmark–Favordirectdistributionmodels:Dell•Enterprisecustomerswanttodealwithjustafewglobalproviderswithintegratedend-to-endsolutions(thismayalsobeopportunity)•Enterprisecustomerswanttopartnerwithprimaryindustryinnovatorstonavigatetransitions(thismayalsobeopportunity)4SWOTanalysis–Opportunities•ManyenterpriseswanttooutsourcetheITfunctiontolowercost•Theindustry’sdisaggregationintothousandsofnicheplayersmakesITserviceaveryimportantandpromisingarea•Astheinternetusagebecomesprevalentandamountofdatagetsbig,thereisanincreasingdemandfordatastorageandmanagementproducts•(opportunitiesabroad,esp.inemergingmarkets)5•WhatarethestrengthsandweaknessesofHPandCompaq,respectively?6HP’sStrengthsandWeaknessesStrengths•Marketleaderinimagingandprintingbusiness•Stronginhigh-endserversWeaknesses•Weakincomputing(PCs,servers,andstorageproducts)•Only15%ofPCssolddirectly•Weakinindustry-standardservers•WeakinITservicebusiness7Compaq’sStrengthsandWeaknessesStrengths•MarketleaderinPCbusiness,andstrongglobalplayer•Marketleaderinfault-tolerantcomputingandindustry-standardservers•Leadingsupplierofstoragesystem,esp.SANWeaknesses•PCbusinessstilllosesmoney•WeakinUNIXmarket8Pre-MergedHP-Compaq•Iftheystayedseparate,howwellcouldtheyhavedealtwiththethreatsandopportunities,respectively?9MergedHP-CompaqIfwecombinethesetwocompanies,•PCbusiness–Scalegoesupanditbecomesamarketleader,butwhethermargincanbeimprovedisstillquestionable.–Astrongplayerinfault-tolerantcomputingduetoCompaq’sstrongposition•Servers–willbestronginbothindustry-standardandhigh-endservermarket10MergedHP-CompaqIfwecombinethesetwocompanies,•Storageproducts:–Aleadingplayerinstorageproducts,esp.SANproductsduetoCompaq’sstrongposition•ImagingandPrintingbusiness:–LeadingplayerduetoHP’sstrongpositionandCompaq’sstrongPCpresencemayhelpsellmoreHPprintingandimagingproducts•ITservice:–Maygetbetter,butstillweakerthanIBMasneitherofthetwocompaniesisstronginthis11MergedHP-CompaqSothemerger•MayprovideachancetoscaleupthePCbusiness•Mayexpandtheproductscopeandprovideamorecomprehensiveandintegratedsolution•Mayformadominantplayerinservermarket•MaybecomeastrongnicheplayerinstoragemarketButstill•WeakerthantheleadingplayerssuchasIBMinITservice12MergedHP-Compaq•Therefore,comparedwiththreatsandopportunitiesintheindustry,wefind–Themergermaypartlyaddressthethreatstheindustryandthetwocompaniesarefacing,esp.intheenterprisemarket–ThemergercanalsotakeadvantageoftheopportunityinthegrowingstoragemarketYet,–InITservice,theareawiththegreatestpotentialtogrow,themergedcompanystillhasmanyweaknessescomparedtotheleadingplayer–AndtheconsumerPCbusinessmaybechallengingduetothechannelproblemsinHPandCompaq13MergedHP-Compaq•Giventhat–Ifeachcompanystaysindependent,itwouldhavegreatdifficultiessurvivingthecompetitionandmissingtheopportunitiesintheindustry–Andthemergerprovidesplausiblechancestostaycompetitiveandsatisfyenterprisecustomers’changingneeds•Therefore,themergerisnecessaryandalsomakesstrategicsense•Update:HPQboughtEDSin200914Valueofthesynergies•Wheredothesynergiescomefrom?–Administrative/ITcosts–Cost-goods-soldbenefits–Sales-managementbenefits–R&Ddevelopmentefficiencies–Indirect-purchasebenefits–Marketingefficiencies15Valueofthesynergies•Whatisthevalueoftheprojectedsynergies?–Foryear2002:pretaxcostsavingwillbe$1billion,andpretaxprofitdeclinewillbe$100million.–Foryear2003:pretaxcostsavingwillbe$2billion,andpretaxprofitdeclinewillbe$200million.–For2004,pretaxcostsavingwillbe$2.5billion,andpretaxprofitdeclinewillbe$500million–From2004andafterwards,thefreecashflowwillincrease5%annuallyforever.–Thediscountrateis15%andtaxrateis26%.–Herewedonotconsidertheinflationfactor.Wedonotconsiderdepreciation,investmentandotherfactorsaffectingfreecashflow,either.16Valueofthesynergiesyr0yr1yr2yr3yr420012002200320042005pretaxcostsavings1,0002,0002,500pretaxprofitdecline100200500pretaxnetgain90018002000freecashflow(after-tax)900*(1-26%)=6661800*(1-26%)=13322000*(1-26%)=14801480*(1+5%)=1554Terminalvalue1480/(0.15-0.05)=14800presentvalueforeachyear(discount-edbackto2001666/(1+.15)=579.13(1332+14800)/(1.15*1.15)=12198.11SumofPresentValue579.13+12198.11=12,777.2417Valueofthesynergies•Oryoucantrythespreadsheetmodeltomakethecalculationsimpleandeasytotrack.•Youcanalsodosensitivityanalysisbychangingtaxrate,growthrate,anddiscountratetoseehowtheseassumptionsmayaffectthevaluation.•Theseprovideabasisfordealdecisionmaking,negotiation,andinvestmentdecisions.18Compaq’svalueIfHPpaid$25billiontogetCompaq,•HowmuchdoyouthinkHPvaluedCompaq?•DoyouthinkthatwasagooddealforHP?19Compaq’svalue•HPgettwothingsinbuyingCompaq:Compaq,andthesynergyfromthemergerHP’sofferprice=valueofsynergies+Compaq’sstand-alonevalue$25bn=$13bn+Compaq’sstand-alonevalueSoCompaq’sstan