CompuCo

M&A Case Example

June 1998
Copyright© 2001 Bain & Company, Inc.

This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
CompuCo case example

 Multi-billion dollar manufacturer of enterprise-level

computer systems ("CompuCo”)
- Company: Tandem
- Office: San Francisco
- Time: 1997
- Partner: Russ Hagey

 Example of successful divestment strategy

 Driven off sound understanding of industry dynamics

and data-driven quantification of potential synergies

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CompuCo - Summary
Company
Key Findings Actions Taken Results
Situation

• Multi-billion dollar • CompuCo and • Strategic vision for • Merger rapidly

manufacturer of Abacus skills and NewCo documented approved by
enterprise-level assets highly and communicated both Boards
computer systems complementary to Abacus, • CompuCo
("CompuCo”) - merger likely to yield highlighting shareholders
significant revenue
• Well-positioned in positive impact on receive nearly
and cost synergies
defensible niche their stock price 50% premium,
market • Attractive second largest
• Negotiations over
opportunity for for any major
• Lackluster revenue acquisition price
combined company computer
and earnings conducted using
(“NewCo”) to industry deal
performance over CompuCo full
dominate fast-
last 2-3 years potential valuation • Formation of
growing enterprise
• Limited growth NT computing • Detailed, market- NewCo receives
opportunities going market driven business broad approval
forward plans developed from Wall
• “Full potential” Street
giving CompuCo
• Discussing possible valuation of
management a • CompuCo
merger with major CompuCo as part of
proprietary insight management
PC manufacturer NewCo far exceeds
into NewCo positioned to
(“Abacus”) standalone value
opportunities play key role in
• Deal projected to be NewCo future
accretive within first
year
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CompuCo - Worldwide IT market
With CompuCo’s strength in high-end servers and Primary Target Market
Abacus’ position in PC servers, the combined entity (Servers)
could attack a large portion of the hardware market

Percent of Total
CompuCo Abacus
$650B $210B  Unix  >30% of
100% High-End Systems and Servers
 NT Servers PC servers
Midrange Systems and Servers  Clustered
$54B
LAN Servers NT
80% Services  Proprietary
PC Servers
Workstations
O/S

60%
Software

40% Peripherals
PCs

20%
System Hardware

0%
Overall IT Market Hardware Detail

Note: PC Servers are defined as Intel-based servers which cost less than $100,000
Source: IDC MACompuCo
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CompuCo - Vision for combined entity
The decision to merge CompuCo and Abacus was grounded in a
clear strategic and operating vision for the future

NewCo vision

Become the world’s number one PC, server, and enterprise

solutions company:

• Partner of choice for full-range of business systems and services

• World-class technology differentiation

• Best-in-class service, support and distribution

• Global in reach, local in service

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CompuCo - Growth plans
Merging with Abacus would allow CompuCo to increase penetration of
existing verticals and expand into adjacent verticals and application areas

CompuCo Today CompuCo 2000

CIO
Penetrate Current
CompuCo Verticals:
Telco, Finance

Mission- High High Mission-

Critical availability Expand New Verticals: availability Critical
Applications Manufacturing, Retail Applications
Mainframe Mainframe
computing Expand Applications:
computing
Decision Support
Systems,
Enterprise Other Enterprise computing Business-
computing
Critical
Applications
Departmental Departmental computing
computing

File/print servers File/print servers

PCs PCs

Purchasing

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CompuCo – Synergy opportunities
Complementary skills and assets were identified that would enable
NewCo to quickly create a strategic advantage in the enterprise
computing market

CompuCo
• Large, dedicated enterprise solutions salesforce
• Strong presence in key vertical markets
• High-ticket, blue-chip customer base
• Highly differentiated "best-in-class" technology
Abacus
• Strong indirect channel presence
• Leading products and share in “low end” market
• Financial stability and “deep pockets”
• Excellent brand recognition

NewCo
• Largest enterprise computing salesforce in industry
• Enhanced and expanded indirect channel capability
• Broad complimentary product lines allowing full range
and scalability of solutions
• Lower cost base
• Cross pollination of technologies and customers
creating time-to-market and momentum benefits

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CompuCo - Synergy value
Opportunities to dramatically improve revenue, operating income
and EPS through merging were identified

14-20% increase 40-50% increase in 40-50% increase in EPS

in revenue operating income
EPS (indexed)
Revenue (Indexed) Operating income (indexed)

175 175 175

151 151
150 150 150
139 140

125 120 125 125

114
100 100 100
100 100 100

75 75 75

50 50 50

25 25 25

0 0 0
Base Low High Base Low High Base Low High
case synergy synergy case synergy synergy case synergy synergy
impact impact value value value value

Note: Data indexed to base case = 100 MACompuCo

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CompuCo - Negotiating the synergy value
CompuCo’s clear identification of potential synergies allowed
negotiation of a final exchange ratio well above the original offer, but
which Abacus believed would still be non-dilutive

0.250

Final Exchange
Ratio Negotiated 0.230
Synergy
Value
Premium
Non-dilutive
threshold with 0.194
no synergies

Original
offer 0.182

Original 0.156
CompuCo
market value
relative to
Abacus
Operating
Income
Improvement
Required

0.00
0.00 1.20 1.42 1.55

CompuCo FY97 EPS

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CompuCo - Computer industry
CompuCo shareholders received a premium of nearly 50%, the second
largest premium of recent major deals in the computer industry

Premium paid

100% 96.9%

80

60

48.4% 49.6%

41.0%
40
33.4%
28.3%

20

0
Deal A Deal B Deal C Deal D Abacus/CompuCo Deal E

Deals over $2B (92-97)

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CompuCo - External reaction
The merger was highly praised by analysts and the press

“…this union makes perfect sense for the vendors involved.”

Network World

“The transaction bodes well for both companies.”

Software Magazine

“Before the merger announcement, CS First Boston...had upped [their]

12-month price target [by 20%]. After the deal was announced, [they]
increased it again [by an additional 10%].”
Barron’s

“…the deal will allow them to really challenge the big

companies like IBM and Hewlett-Packard...”
Bear Stearns Analyst

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