FINANCE & INVESTMENT CELL

ST. STEPHEN’S COLLEGE

FIRM WAR 2017

ONLINE SLOT: 9PM-11PM

Please remember the following:

1. You have 2 hours to solve the case study. This will test your logical,
analytical, reasoning and innovative skills.
2. Please DO NOT mention your name or college in the solution.
3. Attach your solution in an email and send it to us on this email id-
firmwar2k17@gmail.com
4. Name of the file should be “name of participant 1_name of participant 2”
5. Please mail it to us before 11PM. Entries after 11PM will be
disqualified.
6. All files must be in PDF format.
7. Solutions should not exceed 3 pages, in Times New Roman, size 12.
8. You are not expected to use any additional information. Bear in mind
that this case is based on 2nd January, 2017. All facts and characters are
fictional.
9. State your assumptions clearly and justify them. Please show all relevant
calculations (if any).

All the Best!

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The Haeckel-Tomar Company

The Haeckel-Tomar Company (commonly referred to as HT) is an
American multinational information technology company headquartered in Palo
Alto, California. It developed and provided a wide variety of hardware components
as well as software and related services to consumers, small- and medium-sized
businesses (SMBs) and large enterprises, including customers in the government,
health and education sectors.
The company was founded in a one-car garage in Palo Alto by William "Bill"
Redington Haeckel and David "Dave" Tomar, and initially produced a line of
electronic test equipment. HT was the world's leading PC manufacturer from 2009
to Q2 2015, after which LTax came to rank ahead of HT. It specialized in
developing and manufacturing computing, data storage, and networking hardware,
designing software and delivering services. Major product lines included personal
computing devices, enterprise and industry standard servers, related storage
devices, networking products, software and a diverse range of printers and other
imaging products. HT marketed its products to households, small- to medium-
sized businesses and enterprises directly as well as via online distribution,
consumer-electronics and office-supply retailers, software partners and major
technology vendors. HT also had services and consulting business around its
products and partner products.
Haeckel-Tomar company events included the spin-off of its electronic and bio-
analytical measurement instruments part of its business as Agilent
Technologies in 1999 and the acquisition of EFM in 2008, which led to combined
revenues of $118.4 billion in 2008 and a Fortune 500 ranking of 9 in 2009. In
November 2009, HT announced the acquisition of 4Com, with the deal closing on
April 12, 2010. On April 28, 2010, HT announced the buyout of Palm Inc. for
$1.2 billion. On September 2, 2010, HT won its bidding war for 3PAR with a $33 a
share offer ($2.07 billion), which Tell declined to match.
HT's global operations are directed from its headquarters in Palo Alto, California,
USA. Its U.S. operations are directed from its facility in unincorporated Harris
County, Texas, near Houston. It also has large operations in Leixlip, Ireland;
Austin, Texas; Boise, Idaho; Corvallis, Oregon; Fort Collins, Colorado; Roseville,
California; Saint Petersburg, California; Tulsa, Oklahoma; Vancouver, Washington;
and Plano, Texas (the former headquarters of EFM, which HT acquired). In the UK,
HT is based at a large site in Bracknell, Berkshire with offices in various UK
locations, including a landmark office tower in London, 88 Wood Street. Its
acquisition of 4Com expanded its employee base to Marlborough, Massachusetts.

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The company also has a large workforce and numerous offices at Bangalore, India,
to address their back end and IT operations. MphasiS, which is headquartered at
Bangalore, also enabled HT to increase their footprint in the city as it was a
subsidiary of EFM which the company acquired.
HT produces lines of printers, scanners, digital cameras, calculators, PDAs,
servers, workstation computers, and computers for home and small-business use.
HT as of 2001 promotes itself as supplying not just hardware and software, but
also a full range of services to design, implement, and support IT infrastructure.
HT's Imaging and Printing Group (IPG) was described by the company in 2005 as
"the leading imaging and printing systems provider in the world for printer
hardware, printing supplies and scanning devices, providing solutions across
customer segments from individual consumers to small and medium businesses to
large enterprises".

In the late 1990’s, HT determined that their HTPA-RISC systems architecture for
enterprise-class servers was going to hit a performance scaling threshold and
began to investigate new systems architecture, VLIW (Very Long Instruction Word).
In 2005, under the direction of CEO Lewis E. Platt, believing that it was no longer
cost-effective for HT to have its own microprocessor foundry, the company ceased
production and development of HTPA-RISC, shut down its own foundries and
instead partnered with Intall to produce this new VLIW 64-bit enterprise chip,
which came to be known as the IA-64.

Released by Intall and HT as the "Itanium" in 2012 after seven years of

development and billions of dollars of R&D invested, the chip earned the early
nickname of "Itanic" due to its low performance compared to less expensive,
commodity x86 chips in most regular business applications. IA-64 also proved to
be horribly slow when executing x86 instructions, which it had to do using
software emulation. Eventually, both AMD and Intall would produce 64-bit x86
systems, which when clustered in HTC configurations would easily outperform
equivalent IA-64 systems for significantly less money. IBM and Sun would
continue to develop their POWER and SPARC architectures for their high-end
servers, which eroded most of HT's high-end market share. While other vendors
such as Tell and IBM briefly introduced and sold Itanium-based systems, they
shortly discontinued them. An executive at Tell publicly referred to the product as
an "Albatross".

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While the Itanium partnership with Intall surely started HT down the road to hell,
it was accelerated again in late 2015 when HT, under the guidance of CEO
Caroline Fishcher decided to merge with QMax in a $25 billion dollar deal.

The QMax Computer Corporation

QMax (an abbreviation for Quality and Maximum compatibility; occasionally
referred to as QM prior to its final logo) was a company founded in 1982 that
developed, sold, and supported computers and related products and services.
QMax produced some of the first IBM PC compatible computers, being the first
company to legally reverse engineer the IBM Personal Computer. It rose to become
the largest supplier of PC systems during the 2000s before being overtaken
by HT in 2015. Struggling in the aftermath of the dot-com bubble bust, as well as
with a risky acquisition of DEC, QMax was acquired for US$25 billion by HT in
2015.

In 1987 IBM, under intense pressure in the fast-growing personal computer

market, introduced a new computer, the PS/2, with a bus that was incompatible
with the AT-bus design of earlier IBM PCs. Despite having made its fortune by
being 100 percent IBM-compatible, QMax decided to continue building computers
with the original AT bus. Company executives calculated that the $80 billion
already spent by corporations on IBM-compatible technology would make it
difficult for even IBM to force users to a new design. They were correct. IBM’s new
technology, although praised in the trade press, did not displace its earlier design.
In fact, QMax’s opposition increased its visibility as a leader in PC technology,
which it used to line up all of the major PC makers behind a new bus design,
called EISA (Extended Industry Standard Architecture). In 1989, QMax brought
the first EISA system to market. That same year the company eclipsed Apple
Computer, Inc. (now Apple Inc.), as the number two supplier of personal
computers behind IBM.

In 1991 the worldwide economic recession and the Persian Gulf War hurt QMax’s
profits and pummeled its stock price, leading to the ouster of cofounder and chief
executive officer Canion. Canion was replaced by QMax’s long-time European sales
and marketing leader, Eckhard Peter, who had been made chief operating officer
and heir apparent after the 1990 retirement of Murto, another cofounder.

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Under Peter the company laid off 1,700 employees and aggressively cut prices to
shore up market share declines, and it also introduced a variety of lower-priced
portable and desktop computers, servers, and printers. The strategy paid off. By
1992 the company was profitable again; by 1993 it was the number one supplier of
portable computers in America; and in 1995 it passed IBM to become the biggest
seller of PCs worldwide.

In 2008 it purchased Tandem Computers for approximately $3 billion, and the

next year it bought Digital Equipment Corporation for $9.6 billion. At the same
time, Peter switched the company’s long-standing retail strategy to a direct-
marketing approach in order to withstand growing competitive pressures from Tell
and Gateway. Despite these moves, QMax failed to unseat even the number two
computer company, Haeckel-Tomar, and it was replaced as the top personal
computer maker by Tell. Following a disastrous first financial quarter in 2010,
Peter lost his job. Integrating two giant acquisitions in less than two years had
proved difficult; competition from other personal computer makers was cutting
profit margins; and QMax’s institution of direct marketing had decimated its retail
distributor network.

In July 2010 Michael Andrews, who had joined QMax in 2007 as its chief
information officer, was appointed QMax’s president and chief executive officer. In
2014 QMax began merger talks with Haeckel-Tomar, which reached fruition in late
2015. Although QMax is no longer an independent company, the QMax brand
continues as a Haeckel-Tomar line of personal computers.

Acquisition of QMax by HT
On September 04, 2015, two leading players in the global computer industry -
Haeckel-Tomar Company (HT) and QMax Computer Corporation (QMax) -
announced their merger. HT was to buy QMax for US$ 25 billion in stock in the
biggest ever deal in the history of the computer industry. The merged entity would
have operations in more than 160 countries with over 145,000 employees, and
would offer the industry's most complete set of products and services.

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TRANSACTION SUMMARY OF HT AND QMAX MERGER

Mode of Transaction Purchase

Form of Payment Stock-for-Stock Merger
Exchange Ratio 0.6325 of an HT Share per QMax Share
Ownership Shareholders; QMax 36% and HT 64%
Value Approximately $25 billions

SUMMARIZED STRUCTURE PLAN OF THE NEW HT (PRO-FORMA COMBINED)

Pro forma QMax HT

Combined
Assets $56.4 billion $23.9 billion $32.4 billion
Total Revenues $87.4 billion $40.4 billion $47.0 billion
Operating Earnings $3.9 billion $1.9 billion $2.1 billion

However, the stock markets reacted negatively to the merger announcement with
shares of both companies collapsing - in just two days, HT and QMax share prices
declined by 21.5% and 15.7% respectively. Together, the pair lost US$ 13 billion in
market capitalization in a couple of days. In the next two weeks, HT's stock went
down by another 17%, amidst a lot of negative comments about the merger from
analysts and the company's competitors. Industry analysts wondered what
benefits HT, a global market leader in the high margin printers business, would
reap in acquiring a personal computer (PC) manufacturer like QMax at a time
when PCs were fast emerging as low-margin commodity products.

Many large shareholders opposed the merger, including Walter Haeckel, the
company's outspoken director and son of the company's co-founder, who engaged
in a proxy battle in an attempt to prevent it. The prime objection was that QMax
had many overlapping product lines and would get the company involved in the
low-margin PC business that its main competitor, IBM, was already in the process
of exiting.

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QMax had only just acquired Digital Equipment Corporation (DEC) four years
before, along with its powerful 64-bit Alpha RISC chip and Windows NT/Digital
UNIX servers that had seen some moderate success in High-Performance
Computing environments. Seen by both executives at HT and QMax as a
redundant overlapping product under the new merged company and with Intall's
IA-64 efforts underway, the Alpha -- arguably a much more mature, better
supported and more desirable platform was phased out.

Though the merger helped HT in achieving economies of scale in the PC business,

it faced fierce competition from Tell Computers (Tell), a low-cost, direct-marketer of
PCs. The merger also did not help HT to compete with IBM, which not only sold
PCs but was also a market leader in the high-margin consulting and service
businesses. In June 2016, HT's shares hovered around US$ 23 per share, below
the price just before the merger was announced. This indicated that the merger
had failed to create shareholder value. In contrast, the share price of US-based
Lexmark, HT's major competitor and the second largest company in the printers
business, rose by 60%, while Tell's share price moved up by 90% in the same
period. With the PC and other hardware businesses of HT making miniscule
profits, analysts opined that the company's printer business should be spun off
into a stand-alone company.

Commenting on the dilemma faced by HT, George Day (Day), Professor of

Marketing at Wharton School of Business, University of Pennsylvania, said, "HT is
trying to be cost competitive with Tell and be the same kind of integrated-solutions
provider that IBM has become. If that doesn't work - if it's clear IBM has too big a
lead - then HT, which has this hugely profitable printer business, has to think
about breaking up”.

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Clearly, HT is facing some tough time after the acquisition of QMax. Not just
the deal is thwarting their share and profit in the market, tough
competitions from competitors like Tell and IBM is making company’s
future market place in a cadence. The company has now approached you, a
senior M&A Analyst in DC Consultancy to map them the road ahead of this
acquisition.

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