Posted: February 4th, 2020

Compaq Proposal: Pros and Cons

(1) Do you help Fiorina’s proposal to amass Compaq? What are the professionals and cons? Will you the merger with Compaq carry HP nearer to Dell, or IBM?

Assuming that the merged new HP can overcome some factors, we’d help Fiorina’s proposal to amass Compaq on account of the following benefits would outweigh the negatives.


  • The merger would create a full-service know-how agency capable of doing all of the items from selling PCs and printer to organising superior networks in whole lessons.
  • PCs: The merger would improve the economics and innovation of their PC enterprise to compete with commerce chief Dell.
  • Server and Storage: On account of the acquisition, their blended server and storage product traces would give new HP a giant enhance as a consequence of completely coated product lessons and utilized sciences to compete with IBM.
  • IT service: The blended company would have 65,000 IT architects working in 160 worldwide areas. The model new HP might be foremost place in every mission-critical service and multivendor help.
  • Financial Revenue: The merged company would possibly take away redundant product groups and value in promoting, selling, and transport. In accordance with the plan, the merger would generate $2.5bn in annual value monetary financial savings by mid-2004.


  • HP’s enterprise portfolio shall be worse as a consequence of rising publicity to an unprofitable PC enterprise.
  • listed beneath are many overlapping fashions that have no complementary revenue.
  • HP’s administration has no experience with giant merger.
  • The merged steadiness sheet might be worse than that of a stand-alone HP.

The acquisition would make a company with full earnings solely barely decrease than that of IBM. The merged company would develop to be a stronger competitor for IBM throughout the server market, and Dell throughout the PCs enterprise. In conclusion, the model new HP might be able to compete with IBM and Dell all through its whole product line.

(2) Why was the board so divided on this topic? What grade would you give HP’s board in the way in which wherein they take care of this troublesome strategic topic?

The precept motive that the board was so divided on this topic is the conflicts throughout the pursuits between the administration and shareholders of HP.

For the administration crew, as talked about in question 1, CEO Fiorina was employed to execute an “e- service” method which could help HP to meld the neutral corporations into a robust and worthwhile full. Nevertheless the effectivity of the enterprise turned out to be irritating. The product sales progress saved declining and the share price trailed significantly notably in yr 2001 when the states met with large recession and 911 assault. The administration crew ought to take some actions to point out the state of affairs spherical. On this case, merger with Compaq turned important for HP to reverse the tide.

Nevertheless then once more, the shareholders of HP led by Walter Hewlett, the director, oppose to this acquisition. They thought-about the merger would destroy shareholders benefits. “From the date the proposed merger was launched, Hewlett-Packard stockholders have misplaced $ billion relative to an index of comparable companies.[1]” Moreover, the dramatic low cost throughout the earnings forecast for Compaq as a result of the announcement signifies that HP stockholders are getting too little of the merged agency relative to HP’s contribution to earnings. Furthermore, when as compared with a stand-alone HP, the blended company represents a lower credit score standing with increased equity hazard and the following value of capital.

On this case, considering the big conflicts between the board members on this merger, we’d grade C to HP’s board in the way in which wherein they handled this troublesome strategic topic.

(Three) Why did Walter Hewlett vote for the deal throughout the board room, and vote in opposition to it as an inventor?

Walter Hewlett had not choice and wanted to do like this.

As an investor, he believed that the merger would destroy the share holder price. He believed that 1) the merger would dilute HP shareholders’ curiosity throughout the worthwhile printing and imaging enterprise and enhance their publicity to an unprofitable PC enterprise and as a result of this truth the HP enterprise portfolio might be worse; 2) the blending hazard was pretty substantial; Three) There might be adversarial and 4) There acquired’t be a giant improve of the company place. He personally opposes this transaction and had voiced his opinion for lots of cases.

No matter Walter’s opposition, the CEO insisted to pursue the deal. Actually, if Walter vote in opposition to throughout the board room, the settlement could not be signed with out renegotiation, which may finish in HP’s having to pay the following price. Given that merger might be accredited even with out his vote and he felt that it was his duty to barter the underside potential price. He was compelled to vote for the deal throughout the board room.

That is the rationale Walter Hewlett voted for the deal throughout the board room, and voted in opposition to it as an investor

(4) What’s your analysis of the place carried out by third occasions – consultants, funding bankers, analysts, and institutional patrons – on this deal?

The third occasions carried out essential roles on this deal by each advising for or in opposition to it. There are the following third occasions:

  • Consultants (McKinsey and Accenture) who evaluated method and operations due diligence of H-P and Compaq, respectively. With out optimistic findings from these consultants, the merger course of will not have occurred.
  • Funding banks (Goldman Sachs and Salomon) who advised merger for H-P and Compaq, respectively. The funding banks equipped financial aspects akin to commerce ratios. With the financial analyses, every boards have been able to approve the merger.
  • Completely different funding advisors have been employed (Laurence Hoagland, FFL, Booz-Allen) to independently evaluated merger for Hewlett Foundations, the Perception, Packard Foundation. The findings from these advisors have been used to fight in opposition to the mergers.

  • Institution patrons in the long term carried out essential roles in willpower of the merger. Strongly opposed the merger, Hewlett lined up a lot of very important institution patrons (the Perception, Foundations, Packard households and so forth) to fight the merger. By going public to announce his opposition and the analyses from funding banks, he had significantly impacted the patrons. Although the merger was accredited by 51.4% of votes, the marginal approval votes confirmed the deeply divided institution patrons on the merger.
  • A key third celebration was ISS – with out favorable evaluation from ISS, the merger might be extraordinarily vulnerable to fail.
  • Analysts’ opinions moreover affected patrons. As soon as extra, analysts have been divided on the merger, with some analysts have been in favor of the deal, others weren’t.

(5) In Exhibit 6, Goldman Sachs carried out a contribution analysis and listed some implied commerce ratios. What are the professionals and cons of this methodology in determining the commerce ratio in a stock-for-stock deal? What regarding the historic commerce ratio analysis in Exhibit 7?

The strategy adopted is a traditional commerce observe the place the following are excluded:

  1. optimistic elements/losses from synergies
  2. acquisition accounting akin to reconciling GAAP, IFRS necessities
  3. financing adjustments akin to tax or debt servicing benefits

Subsequently, the contribution analysis provides a useful side-by-side comparability of each agency’s contribution to quite a few line devices on the blended enterprise’ earnings assertion. Moreover, it helps in buying quite a lot of commerce ratios that ultimately help in finalising the acceptable commerce ratio by way of the exact merger deal offered to the stockholders.

Nonetheless, as a result of the tactic doesn’t subject the premium paid to the stockholders of the acquired agency and misses the payments accrued as a consequence of merger course of, there is a hazard of mis-valuation. Acceptable adjustments need to be carried out throughout the closing price to reflect the an identical. Moreover, forecasted revenues post-merger are matter to the realisation of the assumptions throughout the valuation model used.

Exhibit 7 reveals that the historic implied commerce ratio is closest to zero.6325 when Three-month extreme info is taken into consideration. The desk moreover reveals premium is being paid throughout the fluctuate of 10-18% over and above the truthful price as indicated by the implied commerce ratios.

(6) Large know-how mergers had a historic previous of failure. What are the widespread risks in large know-how deal?

Widespread risks:

  • Frequent changes of the commerce

    The know-how commerce is extraordinarily aggressive and marked by frequent product introductions, regular enchancment in product effectivity traits, and fierce opponents. The companies must shortly tailor their product and restore decisions to meet the model new model of consumers, so that to perform profitably. Nonetheless, merger presents normally take a very very very long time to rearrange until being lastly achieved. It would finish in inappropriate method to beat the objective when presents are carried out.

  • Modifications in enterprise portfolio

    In accordance with the article, “most botched tech mergers involved companies attempting to buy their strategy into new enterprise they knew little about.” Market is altering, with the an increasing number of changes in divergent merchandise demand. The large tech mergers might fail to deal with the worthwhile power and arrange just about pretty much as good mannequin image as sooner than in new acquired areas. Moreover, an extreme period of time and value are spent on acquisition would inevitably delay the evaluation for model new emerged product, which leaves possibilities for rivals to compete for patrons.

  • Cultural conflicts

    Variations in custom between two large tech mergers are moreover accountable for the failure. After the acquisition, each of the two companies would possibly select the “outdated strategy” of working sort and dealing strategies. This would possibly outcome within the conflicts and adversarial influence in implementing plans and actions.

  • Psychological loss

    Intellectuals are a very powerful belongings in know-how companies. Product evaluation and enhancements are carefully relied on the personnel. Extreme turnover cost of employee, which is resulted from the sad working environment and unfair payroll, would even be the hazard for merger failure.


  • Professor Cong Wang (2010), “FIN6170A Mergers & Acquisitions”, The Chinese language language School of Hong Kong, MBA course supplies
  • The New York Events, “Hewlett-Packard in Deal to Buy Compaq for $25 Billion in Stock (”, September 2001
  • CNET info, “HP to buy Compaq for $25 billion (”, September 2001
  • E-Commerce Events, “Analysts Applaud HP-Compaq Merger (”, August 2002
  • Channel Web, “Walter Hewlett: The Penalties of the HP-Compaq Merger (;jsessionid=0JJA0XBMKGC13QE1GHRSKH4ATMY32JVN)”, March 2002

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