The Merger of Hewlett-Packard and Compaq: Strategy and Value
The Merger of HP and Compaq: Strategy.
When a major merger is announced, like the one between HP and Compaq, investors try to understand where the stock value is going to come from and whether the companies have a plan to achieve that value. Deals are often brought to market with one big synergy number and a statement that the deal will be accretive to earnings.
Many acquisitions and some large strategic investments are often justified with the argument that they will create synergy. In this paper, it is considered the pros and cons of synergy. Also there is an examination of how can be value the synergy of HP and Compaq and how sensitive this value is to different assumptions. Finally a conclusion with an empirical examination of how much synergy was actually created in this corporate merge, and how much was gained or lost.
The term synergy is used mostly in the context of mergers and acquisitions. For example, if Company A has an excellent product but lousy distribution whereas Company B has a great distribution system but poor products, the companies could create synergy with a merger. In our case, Hewlett-Packard Company, a global provider of computers and imaging solutions, was focused on making computers and imaging technology. Compaq Computer Corporation was a leading provider of enterprise technology and solutions. Compaq designed developed and manufactured hardware, software, solutions and services, computers and communication equipments. The basic idea was: value and performance of the two companies combined would be greater than the sum of the separate individual parts, complementing in both cases the weaknesses of the other company. As a result, the objective of creating a stronger firm was reached; this company is now capable of beating the competition in the technology area.
Back in 2001, when the CEO of HP argued for the acquisition of Compaq, she offered a number of reasons that will make sense for the deal. She noted that the combined company
When a major merger is announced, like the one between HP and Compaq, investors try to understand where the stock value is going to come from and whether the companies have a plan to achieve that value. Deals are often brought to market with one big synergy number and a statement that the deal will be accretive to earnings.
Many acquisitions and some large strategic investments are often justified with the argument that they will create synergy. In this paper, it is considered the pros and cons of synergy. Also there is an examination of how can be value the synergy of HP and Compaq and how sensitive this value is to different assumptions. Finally a conclusion with an empirical examination of how much synergy was actually created in this corporate merge, and how much was gained or lost.
The term synergy is used mostly in the context of mergers and acquisitions. For example, if Company A has an excellent product but lousy distribution whereas Company B has a great distribution system but poor products, the companies could create synergy with a merger. In our case, Hewlett-Packard Company, a global provider of computers and imaging solutions, was focused on making computers and imaging technology. Compaq Computer Corporation was a leading provider of enterprise technology and solutions. Compaq designed developed and manufactured hardware, software, solutions and services, computers and communication equipments. The basic idea was: value and performance of the two companies combined would be greater than the sum of the separate individual parts, complementing in both cases the weaknesses of the other company. As a result, the objective of creating a stronger firm was reached; this company is now capable of beating the competition in the technology area.
Back in 2001, when the CEO of HP argued for the acquisition of Compaq, she offered a number of reasons that will make sense for the deal. She noted that the combined company