The Merger of Compaq and Hewlett Packard - Case Study Example

The Problems inside Compaq and the Merger with HP Introduction With every organization wanting to expand their reach and make an imprint in various markets, there will be enough opportunities for it, to make that impression. So, when the organization has enough opportunities, it can set targets and formulate various strategies to achieve those targets and thereby beat off the competitors. When two competing organizations has the same number of good opportunities and has equal standing, these organizations could explore the possibility of merger. Although, in most cases, the two competing organizations will try to go one up, in some cases the rivals could come together in the form of merger for the benefit of both the parties. This is what happened during the merger of Compaq and Hewlett Packard. Both Compaq and HP are long time rivals in the field of computer hardware and components. However, looking at the benefits of their merger, both the companies as part of each others’ strategic management initiated the merger drive. This paper will review the merger between HP and Compaq in 2001, identifying the strategic management issues that preceded the merger on both sides, along with the changes in the management strategy resulting from the combined operations. Background of Project The ‘seeding’ of the merger was an unrelated phone call that took place between Carly Fiorina, then CEO of HP and Michael Capellas, then CEO of Compaq in late June 2001. The original purpose of the phone conversation between the two CEOs, who had met at a policy meeting in Washington 18 months earlier, was to discuss a possible licensing agreement. However, their conversation led to a discussion of competitive strategy and the idea of a merger between the two companies was broached. (Hoopes, 2004). By next month, all the basics of the deal were formulated and by September first week, the merger was approved by both boards of the companies. Although key stakeholders in HP particularly the scions of the founders opposed the merger deal, the merger was actualized by the narrowest of margins. The merger was expected to yield savings projected to reach $2.5 billion annually by 2004. (Hoopes, 2004). These savings were expected to come from: Product rationalization. Efficiencies in administration, procurement, manufacturing and marketing. Improved direct distribution of PCs and servers Instead of creating a challenge and competition between the two major but different corporations, the HP-Compaq merger suggested that the cooperation will give much better results for the both of two corporations. By sharing experiences and Trade Marks, the merger (but of course based on the long term results) will aid both the companies or the combined entity to reach the required targets Aims To identify the strategic management issues that arose out at Compaq and Hewlett-Packard respectively in the lead up to the merger in 2001, and the changes in strategic management that resulted after the merger within the newly merged operation. Objectives: - 1. To identify the strategic management policy and application of Compaq prior to the merger. Compaq Computer Corporation, American PC Company, was founded in 1982 by Rod Canion, Jim Harris and Bill Murto. It existed as an independent corporation for 20 years exhibiting good growth until 2002, when it merged with HP. Although Compaq was growing at a good rate as an independent corporation in the server market and retail PCs, as part of strategic management policy it wanted to expand its reach, particularly in the consulting arena. Consulting the corporates regarding the IT structures was a growing field and so Compaq bought Digital Equipment in 1998 to actualize that goal. Then as an important step towards its transition as a consulting power providing corporate solutions, Compaq and its CEO Michael Cappellas utilized the offer put forward by Carly Fiorina. “Compaq, which has a global services division of almost 40,000 employees, is moving strategically towards IT business solutions in the key markets, where together with HP, they can compete effectively against IBM, Dell, and Sun.” (Cormia, 2002). Critics inside Compaq as well as outside were skeptical of s this strategic management policy on the basis of customer and product overlap. That is, as HP also operated in the same market segment catering to a similar kind of customers, they felt ‘cannibalization’ could occur and there will not be a complimentary relationship. However, Cappellas and the upper management team looking at the potential and the standing of HP went ahead with the merger. As Compaq had a strong strategic management policy of expansion into the consulting arena, the merger was the best feasible option for them. 2. To identify the strategic management policy and application of Hewlett-Packard prior to the merger. Hewlett-Packard Company is a technology corporation which merged with Compaq as part of its strategic management policy of consolidation. HP was already a world leader in printer and print-cartridge products, however its strategic management policy was to enter the PC segment. That is, it wanted to include PC assembling and retailing in its ‘resume’ and thereby become a full-service technology company. A full service technology company who can do all the IT related works and thereby take on the leaders Dell and IBM. “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.” (Hoopes, 2004). It would also 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. (icmrindia.org). Apart from this key policy, HP also had the strategic management policy of eliminating at least one player in an oversupplied PC marketplace. HP and Fiorina also hoped that the merger would cut down costs in marketing and shipping as there will be coordinated marketing efforts. Although, there was opposition from the sons of HP founders, Walter Hewlett and David Woodley Packard, HP and Fiorina went ahead with the plans. This merger was given the go ahead also because it justified HP’s major strategic management policy or organizational culture of “HP Way”. That is, the HP Way has always been about bold change to innovation and creativity and the merger fulfilled that objective. Fiorina emphasized that the important values of HP’s culture (i.e., creativity, change, and innovation) were the very values that justified the merger. (Hoopes, 2004). 3. To evaluate the value-adding opportunity of the merger between both companies for the newly-formed organization. The merger between the two majors actualized mainly because of the value adding opportunity for both the companies. That is, although both the companies had certain specific strategic management policies respectively, there was a key value adding opportunity for both the companies in the consulting arena. “A major part of HPs ambition is to give IBM "a competitor thats strong enough, bold enough, and talented enough to take them head-on in the enterprise space," (Shankland, 2001). Consulting space or enterprise space consists of big businesses who sign multimillion-dollar computing contracts to set up complete IT structures. Server sales will mainly open the door to consulting contracts, which then can be extended to database management, sales and software licenses. With the merger and Compaq under its wing, the new HP manufactures the highest number of servers in the world. This important value adding opportunity in the consulting arena was effectively actualized because both HP and Compaq had already started initiatives in that direction. That is, like Compaq, HP also had plans to enter the consulting arena focusing on the corporates and Compaq’s initiatives and acquisitions in that front, pushed HP for the merger plans. “Fiorina opted to acquire Compaq, which, while best known for its PCs, also had enterprise businesses that it had built up through earlier acquisitions of its own…So, for [H-P and Compaq] it made sense to merge because of these complementarities." (knowledge.wharton.upenn.edu, 2004). By becoming a single entity, Hewlett-Packard and Compaq Computer had the value adding opportunity to take on IBM and become a leader in services, servers, software and storage. 4. To critically evaluate the effectiveness of the merger and the strategic management policy that resulted. HP and Compaq merger resulted in the consolidation of both the companies’ separate product lines into four major operating groups. The four groups which the merged entity focused and dealt are services, imaging and printing, access devices, and information technology infrastructure. This strategic management policy of forming four groups was implemented immediately after the merger and it resulted in certain benefits. So, although the new company would remain competitive in individual product segments, the merger created a full-service technology firm capable of integrating hardware and software into solutions while providing services at the same time. (Hoopes, 2004). This clear differentiation of focus gave the merged entity clear set of goals. However, there were certain setbacks like good number of employees from Compaq leaving immediately after the merger. This attrition was blamed on the Compaq’s lack of effective employee centric strategic management. That is, the leadership of the company at that time was more concentrating on marketing and neglected key strategic areas like the employees’ motivation and satisfaction levels. Carly Fiorina, who was the architect of the merger, simply did not have the skills to manage one of the worlds largest technology companies. For almost three years, the company failed to realize the potential of the combined companies. (Rosen, 2008). After the board picked Mark Hurd to replace Fiorina, the merged HP started showing good results. He took the pieces assembled by Fiorina, applied his management skills to them, and created a growing, profitable and increasingly valuable company (Rosen, 2008). References Cormia, B. (2002). Analysis of the Proposed HP-Compaq Merger via the Value Framework. Retrieved November 11, 2009 http://www.allbusiness.com/buying-exiting-businesses/mergers- acquisitions/193783-1.html Hoopes, CL. (2004). The Hewlett-Packard and Compaq Merger: A Case Study in Business Communication. Retrieved November 11, 2009 http://www.awpagesociety.com/images/uploads/HP-Compaq-case.pdf icmrindia.org. HP’s Compaq Acquisition (B). Retrieved November 11, 2009 http://www.icmrindia.org/casestudies/catalogue/Business%20Strategy3/HP %20Compaq%20Acquisition%20B.htm knowledge.wharton.upenn.edu. (2004). The H-P Compaq Merger Two Years Out: Still Waiting for the Upside. Retrieved November 11, 2009 http://knowledge.wharton.upenn.edu/printer_friendly.cfm?articleid=1053 Rosen, B. (2008). The Merger That Worked: Compaq and Hewlett-Packard. Retrieved November 11, 2009 http://www.benrosen.com/files/430fed1618e6b4800087ae86eabffc89-26.html Shankland, S. (2001). Services, servers to challenge HP, Compaq. Retrieved November 11, 2009 http://news.cnet.com/Services,-servers-to-challenge-HP,-Compaq/2100-1003_3- 272645.html Read More