A Detailed Case Study: Examining the HP and Compaq Merger's Impact

This case study analyzes the merger and acquisition between Hewlett-Packard (HP) and Compaq. The merger, structured as a stock-for-stock deal valued at $25 billion, aimed to create a stronger competitor in the computer industry. Despite initial skepticism from some analysts, the management of HP justified the merger by anticipating equilibrium in the market and cost reductions. The study examines the factors considered during the merger, such as revenue enhancement, operating economies, and market power. The case study highlights the mixed reactions to the merger and discusses its impact on HP's strategic and financial positions. Although the merger faced challenges and negative publicity, it ultimately proved successful, leading to revenue growth and increased market share for HP. The analysis includes a review of the financial outcomes, such as cost reductions and revenue increases, and provides insights into the strategic implications of the merger.

RUNNING HEAD: MANAGERIAL ECONOMICS
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Managerial Economics

Managerial Economics
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Mergers and Acquisitions
Hewlett Packard was founded in 1939 by Dave Packard and Bill Hewlett in California
and at the time of incorporation capital with the company was $538. Later on between 1999
and 2000, the company decided to expand and looking for different alternatives. In 2000, the
company opted for two options that were acquisitions and organic growth. On the other side,
Compaq was also distressed by its poor performance and looking for potential business
opportunities. Both the companies decided to come into a deal with the motive to become
next IBM. The structure of the merger was stock for stock and dealt close for $25 billion
with a 64% stake of HP and a 36% stake of Compaq (Tarba, Cooper, Sarala & Ahammad,
2016).
Some economic analysts criticized the merger and believed that the merger of both
companies created bigger problems in a bigger scenario. One of the analysts explained the
decision as [1+1=1.5 not 2]. But the management of HP justified it like that with this merger
computer industry demand and supply came to equilibrium because one player in the
oversupplied computer industry market had eliminated. It was also justified that the merger
leads to the elimination of redundant costs in shipping, marketing, and advertising. But on
the other side, shareholders and directors of HP combined a 5% vote against the deal
(Dykman, Davis & Lamb,2013).
The main motive of any merger is to increase the value of combined entities more
than the valuation of individual entities. There are many factors that need to take care at the
time of mergers that are revenue enhancement, operating economies, management position,
market power, and diversification. In a nutshell, considering and by analyzing all these

Managerial Economics
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factors it is identified whether decision making proves to be beneficial or not
(Hirschey,2008).
The deal of merger was not felt attractive to many of analyst as it made the HP
portfolio worse as more market position can increase cash drain and risk for HP and leads to
lower margin. Moreover, the Personal computer segment remains unattractive after mergers
and printing and imaging might grow. With that, it was identified that the merger could not
solve strategic issues that HP is facing. The merger of HP and Compaq faced the worst
scenarios and negative publicity in the market that is also the reason for failure. This merger
was beneficial for Compaq but did not add any value to HP. HP's strategic problems and
financial position and competitive position remain the same after the merger. Hence, the
merger of HP & Compaq proves to be successful as HP's revenue grew and the company held
a top position in terms of market share. In 2014, HP generated $3.2 billion in revenue that
was 4% growth in its revenues with a 25.4% increase in its market share and after three years
of operations, the new HP was able to cut its cost by $1 billion (Kumar, 2019). Hence, the
merger proves to be successful as the costs of the company reduced and revenues were
increased.

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References
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.
Hirschey, M. (2008). Fundamentals of managerial economics. Cengage Learning.
Kumar, B. R. (2019). HP Compaq Merger. In Wealth Creation in the World’s Largest
Mergers and Acquisitions (pp. 315-320). Springer, Cham.
Tarba, S. Y., Cooper, C. L., Sarala, R. M., & Ahammad, M. F. (Eds.). (2016). Mergers and
Acquisitions in practice. Taylor & Francis.