The Merger of Hewlett-Packard and Compaq (a): Strategy and Valuation

Abstract

In 2002, a money manager is considering how to vote her shares in Hewlett-Packard on the proposal to merge with Compaq. The (A) case presents information about the strategic and financial motivations of the merger. Included are completed valuations of both HP and Compaq and detailed summaries of the leading advocate (Carly Fiorina) and critic (Walter Hewlett). The tasks for the student are to value the prospective synergies in the deal and critically assess the strategic arguments (pro and con). The (B) case affords a detailed examination of the terms of the proposed merger. The tasks for the student are to critically assess the specific design of the deal and its impact on shareholders. Of particular interest are the impact on earnings per share (that is, EPS dilution), the governance of the new firm and whether this is, indeed, a merger of equals. The (C) case describes the outcome of the proxy contest. Here the task for the student is to evaluate the strategies of each side in communicating with shareholders and presenting arguments. The objectives of the case module are to expose students to the mechanics of proxy contests, exercise skills in valuation and strategic analysis, and critically evaluate deal terms. The (A) and (B) cases can be taught in sequential classes, or in one class. The (C) case is typically distributed at the end followed by a brief discussion.

Excerpt

UVA-F-1450

Rev. Nov. 19, 2009

THE MERGER OF HEWLETT-PACKARD AND COMPAQ (A):

STRATEGY AND VALUATION

No large-scale high-tech merger has ever worked—ever…Melding two large and fiercely competitive organizations is a formidable challenge in any industry. The benefits of scale and scope in mature industries, like oil or financial services, can sometimes outweigh the time and energy squandered in the long integration process. But in high technology, no company has ever attempted this trade-off and come out ahead. In fast-moving industries, while the acquirer sorts out its product portfolio and redraws organizational lines, unencumbered rivals seize their chance to race ahead.

—David B. Yoffie

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Keywords: merger, acquisition, post-merger, integration, valuation