The HP-Compaq Merger Story

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Case Details:

Case Code : BSTR027
Case Length : 16 Pages
Period : 2001
Organization : Hewlett-Packard Company, Compaq Computer Corporation
Pub Date : 2002
Teaching Note : Available
Countries : USA
Industry : Computers

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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"They are two pathetic companies just trying to survive."

- Sanjay Jhaveri, a technology analyst at Zurich-based Vontobel Asset Management.1

"This will be the biggest hardware company in the world, and that gives them tremendous market power."

- Lawrence J. Ellison, CEO, Oracle in 2001.

A Setback

On September 4, 2001, leading global computer industry players Hewlett-Packard Company (HP) and Compaq Computer Corporation (Compaq) announced their merger. HP was to buy Compaq for $25 billion in stock in the biggest ever deal in the history of the computer industry.

The merged entity was to have operations in more than 160 countries with over 145,000 employees, offering the industry's most complete set of products and services. Surprisingly, the stock markets reacted negatively to the announcement with shares of both companies collapsing - in just two days, HP and Compaq share prices declined by 21.5% and 15.7% respectively (See Exhibit V and VI). Together the pair lost $13 billion in market capitalization. In spite of this, HP's Chairman and CEO, Carly Fiorina (Fiorina) was confident about the merger. In an interview2 she said, "This is a very tight agreement. You don't make this kind of move and judge its success by the short-term stock price."

However, in the next two weeks, HP's stock went down by another 17%, amidst a lot of negative publicity. HP's competitors felt that the proposed merger would not work for the company and the combined entity would lose market share. Sun Microsystems President Edward J. Zander said, "When two sick companies combine, I'm not sure what you get.

This is a great opportunity for us, IBM, and others to go after market share." Dell CEO Michael S. Dell added that the merger would only confuse customers and benefit HP's competitors. On November 6, 2001, the merger faced another hurdle in the form of Walter B. Hewlett (Walter), the eldest son of Hewlett-Packard co-founder William R. Hewlett. Though Walter had initially approved the bid, he decided to use his 5.2% stake to oppose the merger. Soon, another relative of HP's founders, David Woodley Packard (David) and The David and Lucile Packard Foundation, HP's largest shareholder, with a 10.4% stake, also decided to oppose the merger. By January 2002, with so much going against the merger, industry observers seemed to have written it off - even though the shareholder meeting for the proposal's approval was yet to be held.

The HP-Compaq Merger Story - Next Page>>

1] In an interview with Business Week, September 2001.

2] In an interview with Business Week, September 5, 2001.


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