Do you support Fiorina’s proposal to acquire Compaq? What are the pros and cons? State YOUR reasons for your position, which may or may not agree with the points raised by the management or the board members.
Fiorina’s proposal to acquire Compaq is an appropriate option for HP as the corporations suffer similar risks of standing still. In this case, despite growth in market value of HP’s share from $54.43 to $74.48 the company remained inefficient forcing it to cut down on jobs to remain competitive. The merger would offer HP more benefits than limitations as seen by its increased competition with major corporations in the industry such as IBM and DELL. Through the merger, the organization would eliminate one more player from the oversupplied PC market. The proposal to acquire Compaq also serves as an effective competitive strategy for the bidding company as it reduces its annual costs by $3 billion within three years in the redundant practices such as shipping, promotion, and marketing. This would better serve the HP shareholders who would earn more from their current ownership. The merger would also benefit the firm by emphasizing its core values of creativity, change, and innovation. Nevertheless, some of the problems that were noted included increased amount of risk and high level of investment due to the larger portfolio, the strategic aspect would remain unsolved as it will not result in affordable PCs, and potential conflict in merging the cultures of the two companies.
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In your opinion, are there any alternative solutions to HP’s struggling performance, other than the choice between merger and non-merger?
HP was struggling at the time for its lack of aggressive tactics in the PC industry. To curb this problem the organization could develop a more aggressive approach by creating value in its products. The PC market was valued at $800 billion in 2000 with a growth rate of 12% between 2000 and 2004. In this case, the company should demonstrate to its consumers why its products are an appropriate choice from those of its competitors. This would be possible by providing products that serve the changing requirements of the customers. The organization should gain major supporters in the firm particularly major shareholders and board members who identify the importance of enforcing the HP values. In this case, the company should extensively adopt its creativity, change, and innovation culture such that it develops different tactics of performance in the industry. This practice would help avoid a reduced role in the PC market share.
What is your assessment of the role played by third parties – consultants, investment bankers, analysts and institutional investors – in this deal?
Third parties in the merger had a major role to play in the potential success of the deal. Wall Street and its investors lampooned the idea of a merger as an action that would result in a deficit for the company stating that it was similar to 1+1=1.5 rather than 1+1=2. Other third parties including institutional investors were critical of the larger market share that HP would gain from the merger. It is evident that many of them believed that the strategic approach would result in a struggle for the company to absorb the loyal customers of Compaq products. As a result, the competitors like DELL and IBM would quickly swoop in and maintain a larger market share. The third parties would also influence the investors and major shareholders of either company which may result in a significant decline in the stock market value of the combined firm.
What is the estimated value of Compaq based on the given forecasts?
The estimated value of Compaq had been one of the primary reasons why major shareholders including Walter Hewlett and David Packard, sons of the late co-founders of the company, voted against the merger. The intrinsic firm value of Compaq was at $10.682 billion which is a lower fraction of the $25 billion offered by HP. However, projections show that the value of HP is likely to increase further with the Compaq merger as opposed to without it with a valuation of $82.564 to $47.378 billion. In this regard, the value of the synergy is estimated at $35.186 billion. This is a clear indicator that the organization is set to receive more than $10.186 billion in added value of their business had they not approved the merger.
