Compaq Proposal: Pros and Cons

Compaq scheme Pros and Cons(1) Do you support Fiorinas proposal to fix Compaq? What ar the pros and cons? Will you the amalgamation with Compaq bring HP closer to Dell, or IBM?Assuming that the merged in the altogether-sprung(prenominal) HP can overcome well-nigh issues, we would support Fiorinas proposal to acquire Compaq because the followers benefits would outweigh the negatives.ProsThe jointure would create a full-service engineering smart set capable of doing everything from selling PCs and printer to setting up complex ne bothrks in entire categories.PCs The fusion would improve the economics and innovation of their PC contrast to compete with industry leader Dell.Server and Storage As a result of the acquisition, their combined emcee and storage intersection lines would give unfermented HP a significant boost due to fully cover result categories and technologies to compete with IBM.IT service The combined unassailable would have 65,000 IT architects operate in 160 countries. The new HP would be leading stain in twain mission- life-sustaining service and multivendor support.Financial Benefit The merged firm could eliminate redundant product groups and cost in marketing, advertising, and shipping. harmonise to the plan, the spinal fusion would generate $2.5bn in annual cost savings by mid-2004.ConsHPs business portfolio will be worse due to increasing exposure to an delusive PC business.here atomic number 18 many overlapping units that have no complementary benefit.HPs management has no experience with huge nuclear fusion reaction.The merged labyrinthine sense sheet would be worse than that of a complete HP.The acquisition would urinate a firm with total revenue only slightly slight than that of IBM. The merged firm would become a stronger competitor for IBM in the server market, and Dell in the PCs business. In conclusion, the new HP would be in a position to compete with IBM and Dell across its entire product line.(2) Why was the lineup so divided on this issue? What stage would you give HPs board in the representation they handle this complicated strategical issue?The main reason that the board was so divided on this issue is the conflicts in the interests between the management and share carriers of HP.For the management team, as mentioned in question 1, chief executive officer Fiorina was hired to execute an e- service strategy which could swear out HP to meld the independent businesses into a powerful and paid whole. plainly the performance of the business turned out to be frustrating. The sales harvest-tide kept declining and the share price trailed substantially especially in pipeline 2001 when the states met with elephantine recession and 911 attack. The management team must take some actions to turn the situation around. In this case, nuclear fusion reaction with Compaq became crucial for HP to reverse the tide.But on the other hand, the shareholders of HP led by Walter Hewlett, th e director, fight to this acquisition. They considered the jointure would destroy shareholders benefits. From the date the proposed merger was informd, Hewlett-Packard stockholders have lost $7.0 gazillion relative to an index of comparable companies.1 Also, the dramatic reduction in the net income forecast for Compaq since the announcement means that HP stockholders are getting likewise little of the merged company relative to HPs component to earnings. Furthermore, when compared to a stand-alone HP, the combined firm represents a lower credit rating with great equity risk and a higher(prenominal) cost of capital.In this case, considering the big conflicts between the board members on this merger, we would grade C to HPs board in the way they handled this complicated strategic issue.(3) Why did Walter Hewlett right to vote for the deal in the board room, and vote against it as an inventor?Walter Hewlett had not choice and had to do like this.As an investor, he believed tha t the merger would destroy the share holder value. He believed that 1) the merger would dilute HP shareholders interest in the profi plank printing and imaging business and increase their exposure to an unprofitable PC business and therefore the HP business portfolio would be worse 2) the integrating risk was rather substantial 3) in that location would be negative and 4) There wont be a significant improve of the company position. He personally opposes this transaction and had voiced his opinion for many times.Despite Walters opposition, the CEO insisted to pursue the deal. Actually, if Walter vote against in the board room, the agreement could not be signed without renegotiation, which might result in HPs having to pay a higher price. Since the merger would be okay even without his vote and he tangle that it was his duty to negotiate the lowest possible price. He was forced to vote for the deal in the board room.That is why Walter Hewlett voted for the deal in the board room, and voted against it as an investor(4) What is your assessment of the role played by third parties consultants, investing bankers, analysts, and institutional investors in this deal?The third parties played significant roles in this deal by either advising for or against it. There are the following third partiesConsultants (McKinsey and Accenture) who evaluated strategy and operations due diligence of H-P and Compaq, respectively. Without positive findings from these consultants, the merger process might not have happened.Investment banks (Goldman Sachs and Salomon) who advised merger for H-P and Compaq, respectively. The investment banks provided financial aspects such(prenominal) as permute ratios. With the financial analyses, both boards were able to approve the merger.Other investment advisors were hired (Laurence Hoagland, FFL, Booz-Allen) to independently evaluated merger for Hewlett Foundations, the Trust, Packard Foundation. The findings from these advisors were used to fight against the mergers.Institution investors in the end played critical roles in determination of the merger. Strongly opposed the merger, Hewlett lined up several(prenominal) important institution investors (the Trust, Foundations, Packard families etc) to fight the merger. By going public to announce his opposition and the analyses from investment banks, he had significantly impacted the investors. Although the merger was approved by 51.4% of votes, the marginal approval votes showed the deeply divided institution investors on the merger.A key third party was ISS without favorable evaluation from ISS, the merger would be highly likely to fail.Analysts opinions also affected investors. Again, analysts were divided on the merger, with some analysts were in favor of the deal, others were not.(5) In Exhibit 6, Goldman Sachs performed a contribution analysis and listed some implied exchange ratios. What are the pros and cons of this burn down in find the exchange ratio in a stock -for-stock deal? What about the diachronic exchange ratio analysis in Exhibit 7?The approach followed is a standard industry practice where the following are excludedgains/ losses from synergiesacquisition accounting such as reconciling GAAP, IFRS standardsfinancing adjustments such as tax or debt servicing benefitsHence, the contribution analysis provides a useful side-by-side comparison of each companys contribution to various line items on the combined business income statement. Also, it helps in obtaining a kitchen stove of exchange ratios that ultimately help in finalising the appropriate exchange ratio during the actual merger deal offered to the stockholders.However, since the approach doesnt factor the premium paid to the stockholders of the acquired company and misses the expenses accrue due to merger process, there is a danger of mis-valuation. Appropriate adjustments contract to be done in the final value to reflect the same. Moreover, forecasted revenues post-merger are subject to the realisation of the assumptions in the valuation model used.Exhibit 7 shows that the historical implied exchange ratio is closest to 0.6325 when 3-month high data is considered. The table also shows that a premium is being paid in the range of 10-18% over and above the fair price as indicated by the implied exchange ratios.(6) Large technology mergers had a history of failure. What are the common risks in orotund technology deal?Common risksFrequent changes of the industryThe technology industry is highly competitive and marked by frequent product introductions, continuous improvement in product performance characteristics, and fierce competition. The companies should promptly tailor their product and service offerings to satisfy the new taste of customers, so that to operate profitably. However, merger deals often take a very presbyopic time to prepare until being finally completed. It would result in remote strategy to beat the target when deals are done.Cha nges in business portfolioAccording to the article, most botched tech mergers involved companies trying to buy their way into new business they knew little about. Marketplace is changing, with the increasingly changes in divergent products demand. The large tech mergers would possibly fail to maintain the profitable position and establish as good brand image as forrader in new acquired areas. Also, too much time and cost are spent on acquisition would inevitably delay the research for new emerged product, which leaves chances for rivals to compete for customers.Cultural conflictsDifferences in culture between two large tech mergers are also responsible for the failure. After the acquisition, each of the two firms may prefer the old way of working style and direct strategies. This would lead to the conflicts and negative effect in implementing plans and actions.Intellectual lossIntellectuals are the biggest assets in technology companies. Product research and innovations are heav ily relied on the personnel. High turnover rate of employee, which is resulted from the unsatisfied working environment and unsporting payroll, would also be the risk for merger failure.BibliographyProfessor Cong Wang (2010), FIN6170A Mergers Acquisitions, The Chinese University of Hong Kong, MBA course materialThe New York Times, Hewlett-Packard in Deal to Buy Compaq for $25 one million million in Stock (http//www.nytimes.com/2001/09/04/business/hewlett-packard-in-deal-to-buy-compaq-for-25-billion-in-stock.html?pagewanted=1), September 2001CNET news, HP to buy Compaq for $25 billion (http//news.cnet.com/2100-1001-272519.html), September 2001E-Commerce Times, Analysts Applaud HP-Compaq Merger (http//www.ecommercetimes.com/story/18917.html), August 2002 manoeuver Web, Walter Hewlett The Consequences of the HP-Compaq Merger (http//www.crn.com/it-channel/18827986jsessionid=0JJA0XBMKGC13QE1GHRSKH4ATMY32JVN), March 2002