Project on

Merger & Acquisition

HP-COMPAQ Merger

Submitted to Dr. Hetal Jhaveri

By –
Supan Shah (A-49)
Abhinay Singh (A-50)
Vinay Vasava (A-60)
Reshma Pillai (B-40)

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 INDEX

Particulars Page no

Introduction 3
-HP 3
-COMPAQ 4

The Deal 6
-Reasons for Merger 6
1) For Acquirer 6
2) For Target 9
- Method of M&A 11
- Advantages of the Merger 12
- Advantages to Shareholders 13
- Opposition to Merger 13
- Expectations From Merger 15

Valuation 17
-Deal Valuation 17
-Financial Highlights 17
-Relative Historical Cost price performance 18
-Exchange ratio based on MPS 18
-EPS Calculation 18
-Cost Benefit Analysis 19
-Other Methods Used 21

Post Merger Scenario and Evaluation 23

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HP (Hewlett Packard)

Bill Hewlett and Dave Packard University in 1935. The company originated in a
fellowship they had with a past professor, Depression. Terman was considered a mentor
to them in forming Hewlett1939, Packard and Hewlett established Hewlett initial capital
investment of US$538. The company they founded would be called Hewlett won the coin
toss but named their electronics manufacturing enterprise the "Hewlett Company". HP
incorporated on August 18, 1947, and went public on November 6, 1957. The company
has been prospering ever since as its profits grew from five and half million dollars in
1951 to about 3 billion dollars in 1981. The pace of growth knew as HP's net revenue
went up to 42 billion dollars in 1997. Starting with manufacturing audio oscillators, the
company made its first computer in the year 1966 and it was by 1972 that it introduced
the concept of personal computing by a calculato advanced into a personal computer in
the year 1980. The company is also known for the laser-printer which it introduced in the
year 1985.

SWOT ANALYSIS OF HP

Strengths:
• Compaq-Server category and overall storage
• HP-High-end storage
• Strong brand recognition

Weaknesses:
• Developing a direct distribution model
• Consulting and outsourcing (low market share)
• Compaq-Printers (low market share)

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Opportunities:
• Merger could improve economics and innovation
• Economies of scale
• Strengthen leadership in storage
• Market growth in IT services

Threats:
• Dell increases pressure in the low-end server market
• IBM, Dell and new entrants erode more market share

COMPAQ

The company is better known as Compaq Computer Corporation. Compaq was founded
in February 1982 by Rod Canion, Jim Harris and Bill Murto, three senior managers from
semiconductor manufacturer Texas Instruments. Each invested $1,000 to form the
company. Their first venture capital came from Ben Rosen and Sevin Rosen Funds. The
original Compaq PC was first sketched out on a placemat by the founders while dining in
a local Houston restaurant, House of Pies. It had the charm of being called the largest
manufacturers of personal computing devices worldwide. The company was formed by
two senior managers at Texas Instruments. The name of the company had come
from-"Compatibility and Quality".

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The company introduced its first computer in the year 1983 after at a price of 2995
dollars. In spite of being portable, the problem with the computer was that it seemed to be
a suitcase. Nevertheless, there were huge commercial benefits from the computer as it
sold more than 3,000 units in the first year with a revenue generation of 111 million
dollars.

HP AND COMPAQ

On September 3, 2001, HP announced that an agreement had been reached with

Compaq to merge the two companies. In May, 2002, after passing a shareholder vote, HP
officially merged with Compaq. Prior to this, plans had been in place to consolidate the
companies' product teams and product lines.
The merger occurred after a proxy fight with Bill Hewlett's son Walter, who objected
to the merger. Compaq itself had bought Tandem Computers in 1997 (which had been
started by ex-HP employees), and Digital Equipment Corporation in 1998. Following this
strategy, HP became a major player in desktops, laptops, and servers for many different
markets. After the merger with Compaq, the new ticker symbol became "HPQ", a
combination of the two previous symbols, "HWP" and "CPQ", to show the significance
of the alliance and also key letters from the two companies Hewlett-Packard and Compaq
(the latter company being famous for its "Q" logo on all of its products.)

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THE DEAL

Carly Fiorina: Mike Capellas:

C.E.O. of Hewlett-Packard C.E.O. of Compaq

Reasons for merger

1) For Acquirer

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A very simple question that arises here is that, if HP was progressing at such a
tremendous pace, what was the reason that the company had to merge with Compaq?
Carly Fiorina, who became the CEO of HP in the year 1999, had a key role to play in the
merger that took place in 2001. She was the first woman to have taken over as CEO of
such a big company and the first outsider too. She worked very efficiently as she travelled
more than 250,000 miles in the first year as a CEO. Her basic aim was to modernize the
culture of operation of HP. She laid great emphasis on the profitable sides of the business.
This shows that she was very extravagant in her approach as a CEO. In spite of the
growth in the market value of HP's share from 54.43 to 74.48 dollars, the company was
still inefficient. This was because it could not meet the targets due to a failure of both
company and industry. HP was forced to cut down on jobs and also be eluded from the
privilege of having Price Water House Cooper's to take care of its audit. So, even the job
of Fiorina was under threat. This meant that improvement in the internal strategies of the
company was not going to be sufficient for the company's success. Ultimately, the
company had to certainly plan out something different. And So it was decided that HP
would be acquiring Compaq.

Apart from these reasons there are other driving factors that contributed to this merger are
described below:

• For HP, the merger can be considered to be an occasion to take a competitive

advantage over its rivals like IBM as in this case and also be of some interest to the
shareholders as well.

• If one sees this merger from the eyes of Fiorina, it would be certain that the
shareholders have a lot to gain from it. The reason for the same is the increment in the
control of the market. So, even of the conditions were not suitable from the financial
perspective, this truth would certainly make a lot of profits for the company in the
future.

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 • Two organizations get involved in mergers as they want to expand their market
both on the domestic and the international level. Integration with a domestic company
doesn't need much effort but when a company merges internationally as in this case, a
challenging task is on head. A thorough situation scanning is significant before putting
your feet in International arena. Here, the competitor for HP was Compaq to a large
degree, so this merger certainly required a lot of thinking. Organizations merge with the
international companies in order to set up their brands first and let people
know about what they are capable of and also what they eye in the future. This is the
reason that after this merger the products of Compaq would also have the logo of HP.
Once the market is well-known, then HP would not have to suffer the branding
created by Compaq. They would be able to draw all the customers of Compaq as well.

• Any company by acquiring another or by merging makes an attempt to add to its

efficiencies by increasing the operations and also having control over it to the
maximum extent. We can see that HP would now have an increased set of employees.
The only factor is that they would have to be controlled properly as they are of
different organizational cultures.

• An improvised organization of monetary resources, intellectual capital and raw

materials offers a competitive advantage to the companies. When such companies
merge, many of the intellects come together and work towards a common mission to
excel with financial profits to the company. Here, one can't deny the fact that even the
top brains of Compaq would be taking part in forming the strategies of the company
in the future.

• When companies merge with another company, later they can put up for sale as
per as the needs of the company. This could also be done partially. If HP feels that it
would not need much of warehouse space it can sell the same at increased profits. It
depends on whether the company would now be regarded a s a make to stock or a make
to order company.

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 • Services get copyrights which enhances the level of trade. Additional Warehouse
services and distribution channels offer business values. Here HP can use all such
values integrated with Compaq so as to increase its prospects.
2) For Target

A big reason Compaq had been troubled was its failure to do much with their acquisition
of DEC in 1998. Another reason was its reliance on the PC market, where it struggled
against fellow Texas rival, Dell Computer, and its low-cost, build-to-order model with
direct distribution. At the time of the merger announcement, HP’s operating margin on
PCs was estimated at breakeven at best. Compaq made an estimated 1.5 percent in PCs
while Dell, with its relentless focus on cost containment, managed to earn an estimated
margin of 7 percent in PCs.10 In 2001, PCs accounted for about 44 percent of Compaq’s
revenue, while enterprise systems comprised 32 percent and services made up 24 percent.
Even before Fiorina and Capellas started discussing a merger, Compaq had been trying to
increase its presence in the services market. Over 55 percent of Compaq’s 68,000
employees worked in its services division. The company aimed to derive 30 percent of its
total revenue from services. To achieve this growth, Compaq budgeted $500 million for
acquisitions of small and mid-sized service companies. Some analysts were concerned
about the nature of Compaq’s current services business. One estimated that between 25
and 30 percent of Compaq’s services business was derived from supporting older and
declining Tandem and Alpha products.11 The highest fees and margins were earned in
the consulting and outsourcing segments of the service industry. However, much of HP
and Compaq services had been focused on providing product support, which was a lower
margin business.

From the Compaq Side

The call must have gone well, because soon Fiorina and Capellas were meeting face-to-
face to discuss a merger. Initially, the group discussing the merger was limited to four
executives: Fiorina, Capellas, HP’s Duane Zitzner, who at the time headed the company’s
PC business, and Shane Robison, then Compaq’s senior vice president and chief
technology officer of Strategy and Technology.

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Robison discussed the reasons Compaq had been willing to surrender its independence:
“Market share and scale matters; and size matters; it’s basically a portfolio play. As we
looked at the two companies, we found that while we appeared to be competing, our
strengths and our weaknesses were perfectly complementary. So it made a really nice
merger strategy.”

A merger with HP was not the only option Compaq considered. Robison led Compaq’s
review of other strategic possibilities, but his analysis, like Fiorina’s, pointed to a HP-
Compaq merger. Robison recalled: “We considered pretty much everything. I had a
process I was running as part of corporate strategy to analyze all combinations of
different partnerships. There were very few that had a strategic, cultural, product, and
customer fit like this one. When you get through with the analysis, it’s almost a no-
brainer.”

Capellas’ phone call to Fiorina came at the end of a tumultuous period for Compaq. The
company never recovered from its purchase and failed integration of DEC in 1998.
Compaq had been riding high when it bought the minicomputer pioneer for $9 billion. In
1998, Compaq was growing at a heady 30 percent per year, twice the industry average
and was the world’s largest maker of personal computers (PCs), ahead of IBM, Dell and
HP. Just a year prior, Compaq had purchased Tandem, a maker of robust “fault-tolerant”
servers that companies used to run critical applications, such as NASDAQ’s trading
operations and airline booking services. However, by 2000, the merger had gone so badly
that, as stated above, Eckhard Pfeiffer, Compaq’s CEO who engineered the deal, had
been fired, the company’s share price lost about half of its value (this during the boom
time for technology stocks), and the company itself lost $2 billion. Compaq’s board,
failing to find an outsider willing to lead the company, promoted Compaq’s then COO,
Michael Capellas, to the position of CEO.

The acquisition had been an attempt to move Compaq into new growth areas such as
services and high-end enterprise servers. At the time of its acquisition by Compaq, DEC’s
services business had been number three in the industry. Twice before, in 1995 and again
in 1996, Compaq tried to acquire just the services portion of Digital, but was rebuffed

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when a price could not be agreed. By 1998, DEC had been performing so badly that
Compaq was able to buy the whole company. That meant that Compaq acquired DEC’s
high-performance, 64-bit processor called Alpha, its group of services customers, and a
line of products that were largely complementary to Compaq’s.

By most accounts, Compaq botched the DEC merger integration. Compaq had been slow
to blend DEC into its portfolio, perhaps distracted by the turmoil in its core PC business
that emerged at the time. Compaq was losing money and slipping behind IBM, Dell and
HP in PC sales. According to The Economist, Compaq hired three consultancies to advise
it on integration strategy and set up more than 200 internal committees to discuss DEC’s
integration, but made little real progress.

Compaq was not able to successfully deploy DEC’s service arm. DEC’s customers were
reputed to be loyal to the company, but Compaq rebranded all products and services
under its own name, which carried little cachet with DEC’s customers. Cultural
differences between Compaq and DEC persisted after the merger.

In making a bet on scope and scale, Fiorina wagered a huge amount of HP’s resources
and the shareholders’ value on her vision for the future of the technology industry, and
the ability of companies to provide differentiated technology solutions to a wide variety
of needs. Fiorina said, “Technology now is so critical to business success, it is so central
to solving fundamental problems like healthcare—it’s so much a part of the fabric of life
—that customers are no longer going to be willing to make the kinds of compromises and
tradeoffs that they used to make.” By combining HP with Compaq, Fiorina planned to
offer, under one roof, the solutions to meet the growing technology needs of customers.

The Deal – Method of M&A

As discussed earlier, it was decided that the company would be acquiring Compaq in a
stock transaction whose net worth was 25 billion dollars. Initially, this merger was not
planned. It started with a telephonic conversation between CEO HP, Fiorina and

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Chairman and CEO Compaq, Capellas. The idea behind the conversation was to discuss
on a licensing agreement but it continued as a discussion on competitive strategy and
finally a merger. It took two months for further studies and by September, 2001, the
boards of the two companies approved of the merger. In spite of the decision coming
from the CEO of HP, the merger was strongly opposed in the company. The two CEOs
believed that the only way to fight the growing competition in terms of prices was to have
a merger. But the investors and the other stakeholders thought that the company would
never be able to have the loyalty of the Compaq customers, if products are sold with an
HP logo on it. Other than this, there were questions on the synchronization of the
organization's members with each other. This was because of the change in the
organization culture as well. Even though these were supposed to serious problems with
respect to the merger, the CEO of HP, Fiorina justified the same with the fact that the
merger would remove one serious competitor in the over-supplied PC market of those
days. She said that the market share of the company is bound to increase with the merger
and also the working unit would double.

Advantages of the Merger

Even though it seemed to be advantageous to very few people in the beginning, it was the
strong determination of Fiorina that she was able to stand by her decision. Wall Street and
all her investors had gone against the company lampooning her ideas with the saying that
she has made 1+1=1.5 by her extravagant ways of expansion. Fiorina had put it this way
that after the company's merger, not only would it have a larger share in the market but
also the units of production would double. This would mean that the company would
grow tremendously in volume. Her dream of competing with the giants in the field, IBM
would also come true. She was of the view that much of the redundancy in the two
companies would decrease as the internal costs on promotion, marketing and shipping
would come down with the merger. This would produce the slightest harm to the
collection of revenue. She used the ideas of competitive positioning to justify her plans of
the merger. She said that the merger is based on the ideologies of consolidation and not
on diversification. She could also defend allegations against the change in the HP was.
She was of the view that the HP has always encouraged changes as it is about innovating

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and taking bold steps. She said that the company requires being consistent with creativity,
improvement and modification. This merger had the capability of providing exactly the
same.

Advantages to the Shareholders

The following are the ways in which the company can be advantageous to its
shareholders:

• Unique Opportunity: The position of the enterprise is bound to better with the
merger. The reason for the same was that now the value creation would be fresh,
leadership qualities would improve, capabilities would improve and so would the
sales and also the company's strategic differentiation would be better than the
existing competitors. Other than this, one can also access the capabilities of
Compaq directly hence reducing the cost structure in becoming the largest in the
industry. Finally, one could also see an opportunity in reinvesting.
• Stronger Company: The profitability is bound to increase in the enterprise,
access and services sectors in high degrees. The company can also see a better
opportunity in its research and development. The financial conditions of the
company with respect to its EBIT and net cash are also on the incremental side.
• Compelling Economics: The expected accumulation in IIP gains would be 13%
in the first financial year. The company could also conduct a better segmentation
of the market to forecast its revenues generation. This would go to as much as 2
and a half billion dollars of annual synergy.
• Ability to Execute: As there would be integration in the planning procedures of
the company, the chances of value creation would also be huge. Along with that
the experience of leading a diversified employee structure would also be there.

Opposition to the Merger

In fact, it was only CEO Fiorina who was in favor of going with the merger. This is a
practical application of Agency problem that arises because of change in financial

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strategies of the company owners and the management. Fiorina was certain to lose her job
if the merger didn't take effect. The reason was that HP was not able to meet the demand
targets under her leadership. But the owners were against the merger due to the following
beliefs of the owners:

• The new portfolio would be less preferable: The position of the company as a
larger supplier of PCs would certainly increase the amount of risk and involve a
lot of investment as well. Another important reason in this context is that HP's
prime interest in Imaging and Printing would not exist anymore as a result
diluting the interest of the stockholders. In fact the company owners also feel that
there would be a lower margin and ROI (return on investment).
• Strategic Problems would remain Unsolved: The market position in high-end
servers and services would still remain in spite of the merger. The price of the
PCS would not come down to be affordable by all. The requisite change in
material for imaging and printing also would not exist. This merger would have
no effect on the low end servers as Dell would be there in the lead and high-end
servers either where IBM and Sun would have the lead. The company would also
be eluded from the advantages of outsourcing because of the surplus labor it
would have. So, the quality is not guaranteed to improve. Finally, the merger
would not equal IBM under any condition as thought by Fiorina.
• Huge Integrated Risks: There have been no examples of success with such huge
mergers. Generally when the market doesn't support such mergers, don't do well
as is the case here. When HP could not manage its organization properly,
integration would only add on to the difficulties. It would be even more difficult
under the conditions because of the existing competitions between HP and
Compaq. Being prone to such risky conditions, the company would also have to
vary its costs causing greater trouble for the owner. The biggest factor of all is that
to integrate the culture existing in the two companies would be a very difficult
job.
• Financial Impact: This is mostly because the market reactions are negative. On
the other hand, the position of Compaq was totally different from HP. As the

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 company would have a greater contribution to the revenue and HP being diluted at
the same time, the problems are bound to develop. This would mean that drawing
money from the equity market would also be difficult for HP. In fact this might
not seem to be a very profitable merger for Compaq as well in the future.

The basic problem that the owners of the company had with this merger was that it would
hamper the core values of HP. They felt that it is better to preserve wealth rather than to
risk it with extravagant risk taking. This high risk profile of Fiorina was a little
unacceptable for the owners of the company in light of its prospects.

So, as far as this merger between HP and Compaq is concerned, on side there was this
strong determination of the CEO, Fiorina and on the other side was the strong opposition
from the company owners. This opposition continued from the market including all the
investors of the company. So, this practical Agency problem was very famous
considering the fact that it contained two of the most powerful hardware companies in the
world. There were a number of options like Change Management, Economic wise
Management, and Organizational Management which could be considered to analyze the
issue.

Expectations From Merger Of HP And Compaq

• The merger of HP with Compaq will create superior customer value by expanding
its product range and together HP and Compaq can focus on R & D in a greater
extend.
• The second best benefit that the merger will emerge is cost benefit by generating
cost synergies reaching approximately $2.5 bn annually.
• Drive a significantly improved cost structure, approximate assets of $56.4 billion,
annual revenues of $87.4 billion and annual operating earnings of $3.9 billion.
• Adds up to world-class innovation and quality through the merger of two of the
leading IT companies of the world.
• Larger PC position resulting from the merger likely to increase risk and dilute
shareholders interest.

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 • Operations in more than 160 countries and over 1,45,000 employees.
• Expand the numbers of the company’s service professionals.
• Improves access to the market with Compaq’s direct capability and low cost
structure.
• Work force reduction by around 15,000 employees saving around $1.5 billion per
year.
• Improve HP’s market share.

Strength of Compaq

Compaq –No 2 in the PC business and stronger on the commercial side than HP. HP
was stronger on the consumer side. Together they would be No 1 in market share in 2001.
Compaq was strong in low-end industry standard (Intel) servers. Compaq: best known for
its PCs, also had enterprise businesses that it had built up through earlier acquisitions of
its own.

The above are some of the driving forces that resulted into the merger of HP and
Compaq into HPQ. It can be seen that the motives that made these companies to agree for
merger is for same product line and shareholder value addition. Apart from these reasons
value creation and improved cost structure is also motives behind this merger.

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Valuation
Deal Valuation:
Structure Stock-for-merger
Exchange ratio 0.6325 ofan HP share per
Compac share
Current value Approx $ 25 bn
Ownership HP shareholders 64%;
Compac 36%
Accounting Purchase
Expected closing First half of 2002
TOTAL SHARES IN HPQ

Financial Highlights:

Particulars HP Compaq HPQ

Total revenues 47.0 40.4 87.4
Assets 32.4 23.9 56.4
Operating 2.1 1.9 4.0
Earnings
Number of 88,500 70,100 1,58,600
Employees
Market 45,109 20,995 66,104
capitalization(as
on 31st
august,2001)

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Relative Historical Stock Price Performance

Historic
Exchange Ratio Based on MPS

Period e
Exchange Ratio (based on = MPS OF TARGET CO+
MPS) MPS OF ACQUIRING CO
$ 12.35+ %18.9
(PREMIUM) =$ 23.21
=$ 14.68/$23.21
SHARES ISSUED TO 10.76bn
COMPAC
TOTAL SHARES IN HPQ 30.23bn

EPS Calculations:

Particulars HP COMPAC
EPS before 0.21 0.33
merger
EPS of HPQ after 0.31

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merger

If we look at the deal valuation, it can be observed that the exchange ratio of HP share
with Compaq is 0.6325 and the current value is about $25 bn, the ownership is distributed
in 64:36 ratios. The total revenue of $47 bn is earned by HP, while Compaq has annual
revenue of $ 40.4 bn and combined firm HPQ has annual revenue of $ 87.4 bn. The
market capitalization of both the companies is 45,109 and 20,995 for HP and Compaq
respectively, whereas the market capitalization of HPQ is about 66,104. The EPS of HP
and Compaq before merger is .21 and .33 and the EPS of HPQ is about .31.

Accepted Method
COST & BENEFIT ANALYSIS
(present value -$bn)

• PVHP
= 19.47 bn shares x $23.21
= $ 451.89 bn

• PVCompaq = 17.02 bn shares x $12.35

= $210.19 bn

•PVHPQ
= 451.89+ 210.19 + 1.5
= $ 664 bn

COST FOR HP
( in $ bn)
• Cost for HP = PVHPQ – PVCompaq
•No. of shares to Compaq Corp. = 10.76 bn
•Total no. of shares after merger =30.23bn

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£= 10.76/30.23 = 0.355
= 0.355 x 664 bn
= 235.72
Cost for HP Ltd. = 235.72 – 210.19
= $ 25.53bn

BENEFIT FOR HP & COMPAQ

Benefit for HP = PVHPQ - (PVHP + PVCompaq)
=$ 664 bn - ($ 451.89 bn + $210.19 bn)
= $ 1.5 bn

Benefit for Compaq = Cost for HP

= $ 25.53bn

From the cost and benefit analysis, it is observed that the present value of HP is about
$495.89 bn. Similarly the present value of Compaq is about $210.19 bn. But when they
merged the present value of merged company HPQ is about $664 bn, which is more than
the cumulative present value of both the companies.

The analysis of the valuation shows

• 8% to 46% over exchange ratios implied by average prices for the 10 trading days
prior to announcement, with a median premium of 23%.
• 7% to 58% over exchange ratios implied by average prices for the 20 trading days
prior to announcement, with a median premium of 23%.
• 12% to 29% over exchange ratios implied by average prices for the 1 trading days
prior to announcement with a median premium of 15%.

Both the companies seem to have pegged their valuation based on the growth of IT
industry. After all, there is no other industry that has a growth prospective that IT
industry has it is obvious that the companies value them at a higher rate. The revolution
in IT industry and increased use of IT and IT-related products can be considered as a

20
factor of such valuation. Secondly, the growth of banking and financial sector and
increased use of IT by them also contribute to the valuation.

Other Methods for valuation

1) Equity Valuation Models
a. Balance Sheet Valuation Models
i. Book Value: the net worth of a company as shown on the balance
sheet.
ii. Liquidation Value: the value that would be derived if the firm’s
assets were liquidated.
iii. Replacement Cost: the replacement cost of its assets less its
liabilities.

2) Dividend Discount Models

D1 D2 D3
V0 = + +2 + 3 .......
1 + k (1
+ k ) + (1 k )

3) The Constant Growth DDM

+) D0 (1
D0 (1 g +g ) 2
V0 = + + ......
1 +k +
(1 )k 2

+)
D0 (1 g D1
V0 = =
k− g −
k g

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4) Price-Earnings Ratio

P0 1 PVGO
= +
1
E1 k  E k/ 


P0 −)
E1 (1 b
=
−
E1 k ROExb

P0 1 −b
=
−
E1 k ROExb

5) Cash Flow Valuation Models

The Entity DCF Model : The entity DCF model values the value of a company as
the value of a company’s operations less the value of debt and other investor
claims, such as preferred stock, that are superior to common equity
. Value of Operations: The value of operations equals the discounted value
of expected future free cash flow.

Continuing Value = (Net Operating Profit – Adjusted Taxes)/ WACC

22
POST MERGER SENARIO AND EVALUATION:
(IMPACT OF MERGER)

HP bought Compaq for US$ 24 billion in stock. This was the largest ever deal in the
history of the computer industry. The deal meant combined operations in more than 160
countries and more than 145,000 employees. HP-Compaq would offer the most complete
set of products and services in the computer industry.
The motivation behind a HP-Compaq merger (whether it made economic sense) and the
problems encountered in merging operations is an interesting discussion as the stock
prices of both HP and Compaq fell within two days of the merger announcement. An
estimated 13 billion dollars was lost (in terms of market capitalization) in this time frame.

Shares fell further as industry analysts failed to understand the benefits HP would derive
by acquiring Compaq. HP was a market leader in the high margin printer’s business and
Compaq, a low-margin personal computer (PC) manufacturer. Moreover, established
players like direct marketer, Dell and leading IT service consulting company like IBM
would give fierce competition even if economies of scale were to be achieved.

With the stock price of HP’s shares stabilising at a level much below than before the
merger and the PC & other hardware businesses not making much profits, the merger was
ruled a failure. Industry experts felt that HP’s printer business should be spun off into a
separate entity.

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Market Reaction

The market has made its view of the transaction clear on two separate occasions: 1) when
the deal was announced, and 2) when the Hewlett Foundation and William R. Hewlett
Revocable Trust announced their opposition to the deal.

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HP’s Earning Multiple has Contracted Post
announcement

Pre-Anoouncement Post Announcement % Change

HP 20.3x 17.7 (12.8)
Comparable company 24.1x 26.7 10.8
Index

EPS Estimates

25
Relative Performance of HP-Compaq

26
Business Mix Post merger

27
 Revenues and earnings from operations

Five years after the mega-merger that saw Compaq climb into bed with HP, IDC
declared the deal as a success.

The analyst firm said at the time of the merger, which was first mooted in September
2001, that the two companies would be "better off together".

IDC has claimed that the firms have successfully completed a "massive integration effort"
and moved the combined company forward to new revenue and profit levels.

According to IDC, an important linchpin to the merger's success was the commitment to
infrastructure software, which helped move the combined company away from
commodity hardware and into the management layer.

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According to IDC estimates, HP grew faster than the worldwide market, increasing global
shipments 6.3 percent from calendar Q2. In its report, IDC stated that HP "has improved
its growth dramatically from the second quarter and appears to be overcoming merger-
related challenges fairly quickly." In a "quarter of behemoths," HP and Dell are leading
the market's overall growth.

The worldwide race for market share was a tie between HP and Dell, also highlighting
HP's overwhelming leadership in key markets such as Europe with a market share of 18.5
percent. In its Oct. 17 report, it was noted HP's sequential improvement as "encouraging"
at that time in the merger process.

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MAJOR HIGHLIGHTS:
 In mid-July 2007, five years after the merger announcement, HP's total
shareholder returns were up 46 percent. Over the same period, the
Standard & Poor's IT index had sunk 9 percent, rival IBM was down 23
percent, and even Dell was up only 2 percent.
 HP’s PC business has steadily improved and is bringing competition to
Dell that Dell has not seen for the past 5 or 10 years
 Dell's PC shipments worldwide share fell to 15.2 % from 18.2 % last year,
a particularly sharp decline given that the overall market grew 10.9 percent
 Hewlett-Packard holds 19.1 percent of the world PC market
 Even in the US, HP and Dell have 24.2 and 26.8 % of the PC market in
2007

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