Analysis of the HP-Compaq Merger: Pros, Cons, and Financial Impacts

This report provides an in-depth analysis of the 2001 merger between Hewlett-Packard (HP) and Compaq computers. It explores the motivations behind the merger, including the competitive pressures from companies like IBM and Dell, and the changing demands of the technology market. The report presents arguments both for and against the merger, discussing the potential for increased efficiency and market share versus the challenges of integrating different corporate cultures and strategies. Furthermore, it examines the financial performance of HP before and after the merger, using data from financial statements to assess the impact on revenue, earnings, and asset values. The conclusion summarizes the long-term outcomes of the merger, acknowledging both the initial criticisms and the subsequent positive results for HP, while also considering the cultural and strategic challenges that influenced the merger's success.

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1MERGER OF HP AND COMPAQ COMPUTERS
Executive Summary
The paper presents the reasons and various impacts of the HP-Compaq merger on the
performance of both the organisations. Both are the leading manufacturer of printing and
computer items. The paper begins by explaining the reasons behind the merger. Later its
debates on the arguments in favour and against the merger. The study also incorporates the
pre and post-impact of the merger on the financial performance of the organisation.

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Table of Contents
Introduction................................................................................................................................3
The reason behind the merger of HP-Compaq...........................................................................3
Advantages and disadvantages associated with the merger.......................................................4
Arguments in favour of the merger........................................................................................4
Arguments against the merger...............................................................................................5
Performance before and after the merger of HP-Compaq computers........................................6
Conclusion..................................................................................................................................7
References..................................................................................................................................8

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Introduction
The merger between the Compaq computers and the Hewlett-Packard (HP) took place
in 2001. Both the computer-producing organisations are known as the key or leading parties
in the global computer manufacturing and other technology-based gadgets producing industry
(). The merger did not turn out to generate effective outcomes for both the companies and
was thoroughly criticised in the business world (Dykman, Davis & Lamb, 2013). The
companies agreed and decided to merge concerning various movements in the computer
manufacturing market. Consequently, the merger yielded a negative result for both the
business groups. Therefore, the following study is prepared to provide the various pros and
cons of the merger of the tech-hub companies. The study initially begins by providing various
reasons behind the merger of the group. It analyses the performance of the companies after
the merger took place.
The reason behind the merger of HP-Compaq
The market for computers or any other technology-oriented companies is enormous.
In this modern era, the technology sector, especially the computer production market, faces
stiff competition from the existing competitors. Similarly, HP was suffering a massive threat
from rapidly increasing competition and changing needs and demands of the consumers. The
behaviour of consumers is relatively fragile when it comes to the demand for technology-
based products or new generation computers (Kumar, 2019). Since the evaluation of the
modernised era, there is continuous innovation in the field of computers. As a result, there is
a continuous entry of new firms in the market. The existing firms are facing a threat and
severe challenges from changing the needs of the consumer and the rapid innovation in the
computers.

4MERGER OF HP AND COMPAQ COMPUTERS
The introduction of new generation computers is dividing the market profit of tech
firms like HP. The increasing need for consumers is shifting their preference curve towards
new age computers. Moreover, consumers are attracted to computers that contain new
technology at reasonable prices. This has transformed the requirements as well as the needs
of the buyers in the current generation. Additionally, the collaboration of Intel and HP in the
production of “itanic” rendered a considerable loss to HP. This is because both the firms
invested billions of dollars in the research and development of the chip.
Furthermore, the market power of IBM and Sun affected the large market
capitalisation of HP. At that point, HP found that the dell process is attractive that grabbed a
significant portion of the total market share (Bouwman, 2013). Thus, this induced HP to
merge with Compaq. Despite the criticism and opposition of the shareholders, HP merged
with Compaq, hoping for a brighter future in the upcoming years.
Advantages and disadvantages associated with the merger
The merger of HP and Compaq witnessed several criticisms from the spectators.
Initially, the shareholders were strictly against the decision of the CEO of HP. The merger
deal decided to formulate at 25 million dollar deal (Dykman, Davis & Lamb, 2013). Both the
firms, especially HP, expected that the deal could generate fruitful as well as desired
outcomes. However, it turned out to generate negative results for both the operating firms.
Several debates and economic analysis suggests that the merger gave shocks to the business
performance of the economy. Thus, the following section provides arguments for and against
the merger activity of the computer-manufacturing firms.
Arguments in favour of the merger
Both HP and Compaq were witnessing similar risks from the increased
competitiveness in the market. The major competitors in the market of computers were IBM

5MERGER OF HP AND COMPAQ COMPUTERS
and Dell. Thus, the organisations were witnessing severe challenges and risks from the
shrinking market condition. Thus, the CEO of HP Carly Fiorina decided to merge with
Compaq to enhance the business performance of the company. The merger was anticipated to
create individual as well as a complimentary chain of supply for the business of both the
companies as the companies were affected by the increase in cost and rapid inflationary
pressure. The merger acted as a relief for the cost structure of the business. The cost of
production declined after the merger and the magnitude of fall was about 3 billion dollars.
Additionally, the merger of HP and Compaq yielded higher returns to the shareholders of the
company.
Apart from the increased earnings and reduced costs of the business, the merger
generated a positive impact on the economy and the entire community. The merger helped in
raising the rate of innovation and improved the economics of the sector. As a result, the
market for computers transformed and witnessed growth. The business of both organisations
was positively affected by the output derived from the merger and gave financial benefits. In
addition to this, the company was able to regain its leadership in the computer-manufacturing
department.
Arguments against the merger
Several critics portrayed the merger to be a complete failure of the decade. Together
both the companies lost about 13 billion US dollars. This loss of market capitalisation took
place in the next two days of the merger. Critics blamed that the merger failed because of the
loopholes in the strategy. The management of the companies was strict and centralized; that
is, the authority is neither free nor flexible. Additionally, there was a difference in
engineering and sales patterns between both the companies. This deteriorated the business
portfolio of HP. As a result, the stockholders of HP witnessed the negative impact on their

6MERGER OF HP AND COMPAQ COMPUTERS
financial investments in the company. In addition to these factors, the material position or the
assets of the company deteriorated post-merger. Arguments indicated that cultural issues or
conflict-affected the merger of both the companies. The culture of HP is based on
engineering as well as compromise. This factor of HP conflicted with the hard-charging sales
structure of Compaq. All these instigated the failure of the merger (Denison & Ko, 2016).
Performance before and after the merger of HP-Compaq computers
Before the merger took place in 2001, the market share of both companies was
substantial (Sec.gov, 2001). The net revenue was high in 2000, which reduced in 2001. The
net earnings and total assets of the firm were substantially high in 2000. However, soon after
the merger took place, there was a drastic fall in revenue, earnings and total assets of HP. In
2001, there was a fall in earnings, assets and revenue of the company. In 2002, HP
encountered a loss in earnings. However, compared to 2001, HP managed to increase its
revenue as well as assets. Additionally, post-merger, HP raised its revenue. The data of 2003
and 2004 indicates that there is a continuous increase in net revenue earned, net income and
total assets of the firm. Thus, this can be said that HP gained profit from the merger. This is
summarised in the table below. Even in the current era, HP is earning positive profits and has
built a substantial amount of assets (Annualreports.com, 2018).

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Figure 1: Financial statement of HP
(Source: S2.q4cdn.com, 2004)
Conclusion
Therefore, to conclude the report, this can be said that though the merger was
thoroughly criticised, it generated positive long-run results for HP computers. The merger
was opposed because of the immediate fall in revenue and income of HP. Additionally, the
culture of both the leading companies was substantially different. There was a sudden drop in
the market share as well as the asset structure of the company. However, HP turned out to
generate better results in subsequent years. Thus, despite the economic downfall of the
system, the company fared well and managed to leave a mark in the sector.

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References
Annualreports.com, (2018). Retrieved 30 January 2020, from
http://www.annualreports.com/HostedData/AnnualReports/PDF/NYSE_HPQ_2018_6
c1e48622a25407c9bd50f56274885db.pdf
Bouwman, C. H. (2013). The role of corporate culture in mergers & acquisitions. Mergers
and acquisitions: Practices, performance and perspectives, NOVA science publishers.
Denison, D. R., & Ko, I. (2016). Cultural due diligence in mergers and
acquisitions. Advances in Mergers and, 53-72.
Dykman, C. A., Davis, C. K., & Lamb, A. J. (2013). A case of mergers: the HP
experience. Journal of the International Academy for Case Studies, 19(1), 29.
Investor.hp.com, (2020). HP - Financials - Annual Reports & Proxies . Investor.hp.com.
Retrieved 30 January 2020, from https://investor.hp.com/financials/annual-reports-
and-proxies/default.aspx
Kumar, B. R. (2019). HP Compaq Merger. In Wealth Creation in the World’s Largest
Mergers and Acquisitions (pp. 315-320). Springer, Cham.
S2.q4cdn.com, (2004). Retrieved 30 January 2020, from
https://s2.q4cdn.com/602190090/files/doc_financials/annual/hp2004-10k.pdf
Sec.gov, (2001). Retrieved 30 January 2020, from
https://www.sec.gov/Archives/edgar/data/714154/000095012901500125/h86487e10-
qpdf.pdf