Hewlett Packard: The Merger With the Compaq Corporation


A merger is one of the strategies used is gaining market share increase a company’s competitive advantage. Mergers have been a common strategy, especially in the wake of globalization. Many organizations believe that mergers would enable them to gain the necessary capital base and other resources and enable them to be more competitive in the increasingly competitive business environment. In September, Hewlett- Packard Company (HP) and Compaq Computer Corporation (Compaq) declared that they intended to merge. The announcement followed increased competition in the computer industry where players were trying to increase their marketplace. HP intended to buy Compaq at US$24 billion. The merger with such magnitude was the first in the computer industry.

The resulting company was to be among the biggest players in the computer industry with operations in over 16o countries. The merger was also to bring about a company that would offer some of the most inclusive products and services in the computer industry. The merger was faced with controversy as key shareholders of HP, Bill Herwlett and David Packard, opposed the move. The then HP chief executive officer Carly Fiorina, however, was determined to close the deal as she believed that the move would enable the company to be more competitive in the computer industry. Apart from the opposition, it was feared that the technological merger would lead to failure. The case study analyses how the merger has impacted on HP’s performance in Computer industry.

Background study

Hewlett- Packard Company was created in 1938 by Bill Hewlett and David Packard. The company initially dealt with electronic instruments. The company’s instruments were able to gain acceptance from the market and in 1940’s it got its major initial growth. The company was able to develop rapidly and was able to take advantage of fast growing electronic market. In 1957, the company offered its shares to the public for the first time. In 1960’s HP diversified to medical equipments by purchasing Sanborn Company.

The company continued to come up with innovative trend in subsequent years. It entered to computer industry in 1974 by developing its initial minicomputer. In 1980’s, HP was a major competitor in computer industry and offered wide range of products. It was also in 1980’s that the company came up with successful product such as LaserJet and Inkjet printers. Before merger, HP mainly dealt with printing equipments while Compaq dealt with personal computers (Luthans, Doh and Hodgetts 198)..

Rationale for Merger

High competition in personal computers industry was the main motivating factor to the merger. 1990’s was a hard economic period for players in personal computer as there was increase in competition and drop in profitability margin. Small players in the industry were especially at risk of loosing market giant players. Analyst in the industry anticipated small companies to merge in order to remain competitive. Before merger Hewlett-Packard’s products included Unix server, electronic commerce applications, printers, ink cartridges, PC’s, network management and hosted services (Lohr 3). On the other hand Compaq’s products included personal computers, storage, servers and pocket competitors. The major competitors for HP included IBM, Dell, Compaq and Canon. On the other hand major competitors for Compaq included IBM, Dell, Sun Microsystems, HP and Palm.


The merger suggestion was received with mixed reactions by the founders’ family, the investors, the analysts and the employees. Walter Hewlett was one of the major stakeholders who were very negative about the merger. He openly rejected the merger. As a trustee of the William R. Hewlett and a board member, he vowed to use his influence to have the stakeholders reject the merger.

He sought the backing of his sisters and the William and Flora Hewlett Foundation to reject the deal. He wanted to use their influence of their 5% combined stake to vote against the deal. Rejection by stake holders was one of the ways of rejecting the merger and the easiest way for the founders’ families of rejecting the deal. The board had to convince Hewlett on the need for the proposed merger and control the damages already done by him. The Hewlett family had a large stake as shareholders and so their decision to refuse to disapprove the merger had a very serious repercussion to the deal and also to the future of Carly Fiorina as the chief executive officer of the company. Hewlett argued that Carly Fiorina had acted beyond her powers. She had exaggerated the benefits of scale in the business.

He believed that the proposed merger would not make the business more competitive and that the merger could result in brutality of the low profit PC business. He also believed by merging with Compaq Company, the value of the company’s lucrative printing business would be greatly diluted. The merging deal would lead to a worse business portfolio than the existing Hewlett Packard Portfolio. The resulting larger PC position would lead to increased risks and cash drains, the merger would therefore not lead to higher profit margin and few commodity-like businesses which would be contrary to the professed strategy (Lohr 1).

Challenges to the merger

Mergers are always associated with integration difficulties. Joining the two companies will result to unprecedented complexities which lead to offsetting of cost synergies resulting to revenue risks. Both companies have different unique cultures. Merging them will cause conflict on how to mesh the cultures of the two companies. Merging the two companies will result to unattractive financial impact on stakeholders of the HP. The market reaction to the merger is very negative. Royal customers of HP products may lack trust with the products from the merged company. The relative contribution of earnings after the merger will favor Compaq better than the HP.

The merger will increase HP dilution risks and weaken its credit. All these problems will result to increased equity risks and higher cost of capital. Hewlett argued that merging the two companies would result in drastic job losses, a factor that was against the HP Way. He accused Fiorina of high handed management and her efforts to change the culture of the company were against the company’s core values that were developed by the founders. He singled out the massive lay-offs of the employees as against the principles of the founders. He pointed out that the proposed merger would resort in job loss for 15000 employees and more job losses were likely to occur.

This was against the company objectives to ‘provide employment opportunities that include the chance to share in the company’s success and maintain an organizational environment that fosters individual motivation, initiative and creativity”. He argued that family shareholders often dislike risking their large wealth in family companies as compared to small holders. The desire by the founders families to preserve the acquire wealth was stronger than the desire to create more (Luthans Doh and Hodgetts 254-264).

The two families were major holders and hence any move that could risk their large investment in the company could not be met without resistance. The two companies have been having problems between their direct and indirect sales channels. The have been struggling to solve these problems without success. The HP culture has been pegged on consensus wile that of Compaq has been founded on rapid decision making. The company analysts had warned of conflict in the first years of the merger as it could take sometime to integrate and harmonize the cultures. Opponents to the merger scheme pointed out that the merger would result to infighting within the new company which would cause the new company not only loose direction but also skilled employees.

The infighting within the new company would pose an advantage to the competitors especially the IBM Company By the time the new company stabilizes and solves the internal fighting the IBM will have picked off the market. It is evident that the architect of the merger, Carly Fiorina did not posses the required skills to manage the merger. Although she carried it through, the merger proved to be difficult than she thought. Her high hardness management and the refusal to heed advice from the founding families and other large shareholders resulted in open accusations between her and Hewlett, a scene that eroded much of the investors’ confidence in the success of the merger. The first three years after the merger proved to be very difficult for Fiorina.

The merger failed to provide the potential that was expected after combining the resources of the two companies. By 2005, the merger was on the verge of collapse. As it was reported on the fortune magazine, the merger was a big bet that never paid off. To a large extent, it did not near to attaining what it was supposed to attain (Luthans et al 254-264).

Anticipated result from the merger

The merger would result to improvement of the HP hardware market share and increase the size of the HP service unit. This would give HP an advantage over its competitors such as IBM and Dell. The merger would result in formation of a full-service technology company which will be capable of selling PCs and printers as well as setting up complex networks. The merger would reduce unnecessary costs in marketing practices such as advertising and shipping as well as preserving much of both companies income.

The HP-Compaq merger would increase the competitive positioning of the resulting firm. To overrule the held conception by the founders’ families that mergers for IT firms do not succeed, Fiorina provided that the distinguishing this merger is that it will be paying attention on consolidation as opposed to diversification. She pointed out that proposed change to the HP way is always about innovation and bold moves. She observed that the HP way had changed to a kind of bureaucracy of entitlement and consensus.

She highlighted that the important values of the company such as creativity, change and innovation were the values that necessitated the merger. She argued that the proposed merger would create considerable value for HP shareowners by providing unique opportunity that is capable of bolstering enterprise position. The merger would result to creation of new value, provide end to end leadership and increase employees’ capabilities and en large the sales force, enhance strategic differentiation of its products from their competitors. To the Compaq Company, the merger would increase the rate of improvement of its access with direct capabilities as well as its lower cost structure which in turn would lead to higher model benefits, admission to new enterprise accounts and increase its capacity to reinvest for development. The resultant company would be stronger than either of them and it will be able to out do its competitors in sales and command of the market share.

Fiorina argued that the merged firm will significantly increase profitability and raise its operating margins as well as access and services. The growth of the enterprise was estimated to grow from 3% to 9%; Access was estimated to reduce from 4% to 3%, while service delivery was projected to grow from 5% to 14%. The mergers would provide a broad improvement in projected financials to give an EBIT margin 9% from 5%. Due to combined assets the balance sheet would be strengthened with $8.2 billion in pro forma cash as well as $724million cash net of debt. The proposed merger would resort in substantial accumulation of earnings equivalent to 13% in financial year 2003 which would be the first full year of operation of the merged company. Annual synergies would increase to $2.5 billion (Anders 234-238).

Analysis of Company Strategy

Assuming no income upsides and a 10 percent income loss in exposed venture and access segments and the market segments analysis showing 12 percent contribution margin loss of income, the total income based on the market segment analysis would greatly increase. Through combining of the companies the value created would overshadow the premium paid. The merger would provide the joint venture with ability to execute. The success of any company rests on its ability to execute its objectives.

The merger would assist the joint venture on developing better means of executing its duties. The merger would aid in integration planning which would greatly focus ways and means of creating value. This would be well done through maximizing the creation of value for all constituents. The merger would resort in creation of a strong workforce of more than 450 work team headed by premier advisors following a detailed planning. The leaders and managers of the merged company are well equipped with deep experience with multifaceted organizational changes. The merger would result in restructuring the whole organization of HP and Compaq companies. It could resort to consolidation of both companies product lines into four main operating groups.

The resulting company was expected to remain competitive in their original product segments. The merged company was expected to be a full service technology firm that would integrate software and hardware into solutions as well as providing services concurrently. Carly Fiorina defended the merger arguing that the move was in the best interest of the HP investors (Fiorina 69-72).

The merger gave the HP shareholders much ownership of the proposed new company as they were to hold 64 percent of the shares, while those from Compaq were to hold 36 percent of the shares. The merged company’s major growth strategy was to find opportunities to acquire a large command in the profitable field of services and more so in consulting. Fiona argued that merging the two companies would resort in combining their strengths. Compaq Company had succeeded in engineering the whole line while HP had succeeded in producing of consumer products.

Initial Failures

HP-Compaq merger did not bring positive results as anticipated. Both company suffered sharp drop in their market share prices as stock market reacted negatively on the merger. HP share prices dropped with about 21.5% two days after the merger while Compaq shares dropped by about 15.7%. Subsequent weeks experience further drop. HP’s share prices further dropped by about 17%, two weeks after the merger.

This resulted from decreased investors’ confidence. Negative analysts’ comments and damaging comments from competitors contributed highly to decreasing investors’ confidence and dropping share prices. Many analysts were against the technological merger. Many of them expressed their disapproval and could not understand the two companies would benefit from each other.

HP experienced high competition from other companies in the computer industry. The company experienced difficulties in competing with Dell Computers, used use low cost and direct marketing strategies. HP also experienced high competition from IBM in personal computers and consultancy. HP share prices continued to perform poorly in stock market as compared to their performance before the merger.

By June 2005, HP’s shares traded at about US$ 23 per share. This share price was lower it share price before the merger in 2001. Drop in share prices indicated that merger was not able to create shareholder value as anticipated. As compared to other companies in computer industry, HP performed poorly. Lexmark, HP’s major competitor, had a 60 percent rise in its share prices while Dell’s share prices rose by about 90 percent.

Internal Strengths

In merging the two companies, the resultant company would be in a better position to compete favorably with the two largest rival companies, the Dell and IBM. Fiorina asserted that after successful merging, the new company will be a threat to the two competitors. Fiorina argued that the merger would double the size of the company’s maintenance and support business. With the merger, the resulting business would benefit through landing of big contracts with the government and large corporations. The resulting company would enjoy large market share of the PCs, strong back- office servers together with the lucrative printer market.

These were the strengths the merged company would posses to turn the two companies into success. Backed on these strengths, the merged company would influence the Compaq strong market allocation and influence its brand recognition in the PC commercial market. The management developed strategies that would increase the productivity of the merged company and enhance growth of the share holders’ equity. These strategies were accelerated cost savings which would result from leveraging HP’s ability to renegotiate contracts that would enable them supply hard drives and memory chips and a further saving of $1.5 billion that would result from reduction of staff. Fiorina asserted that there redundant administrative functions that required elimination.

Though these cost cutting strategies, the new company savings would reach $3 billion by year 2004. The new company would be able to make use of its market power to solicit for better deals with supplier and be able to negotiate with software developing companies SAP to their own interest. With time, the company would develop consulting and software smarts to assist their customers deliver new offerings (Williams 211-223).

The merged company would deal with HP UNIX servers, Compaq’s corporate PC’s, the iPAQ handhelds, and Compaq’s low-end servers together with HP printers. The outsourcing and consulting departments were to be emphasized to enhance their growth. The company was to grow in the field of PC to outdo Dell while increasing their spending on research and development to out do IBM in the consulting field. With the stiff competition and the poor economy, the new company must seriously execute cost cutting measures in order to effectively compete with their rivals, the Dell and Sun companies (Fiorina, 89-96).


Despite the achievements of the merger, the new company is highly rated in the environmental Threat and opportunity profile. The high threat is as a result of the merger. The aggressiveness of the merger has aroused a number of political issues. The mass lay off of the employees has resulted into serious concerns to the social threat of the company. The employees’ morale has been adversely affected which has resulted to loss of good and highly skilled employees. This has been necessitated by low job security and the need by the management to cut on operation costs.

The low level of operations and consecutively drop in the share value for both companies after the merger posed a serious economic threat as more and more investors were pulling out of the company. This weakened its financial base and hence reduced its attractiveness to encourage more investors. The competitive aspect of the Information Technology industry requires continuous innovations brought about by technological changes. These changes have strongly affected the market share of the new company’s products as well as increasing competition for the market share. All these negative factors have greatly increased the vulnerability of the new company to the many challenges it’s facing.

The two architects of the merger, Carly Fiorina and Capellas required to design strategic factors based on sustainability, Uniqueness, Value added, enhancement, flexibility and stability of the new company in order to return the lost glory of the two companies and restore the confidence of the investors especially the founding families of the HP Company. To ensure sustainability, the merged company should increase its market share of its products, for uniqueness, it must adjust itself and grow to become the largest Information Technology company in financially and in production in the world. The merger must be successful in order to add value to the company products as well as the shareholders equity. The merged company should increase its products base and ensure adaptability to the market forces in order to allow flexibility and retention of a large customer base.

By the end of 2005, Carly Fiorina left the running of the company to Mark Hurd. After the change in the management, the value of the company stock began to rise. Mark Hurd brought in the management skills that were critical to the profitability of the new firm. Today the merged firm has acquired the status it was assumed to take as the leading technology company in the world in terms of market share and increased shareholder value. It occurred to the stakeholders that the merger decision was right but the management to execute the merger was the problem (Pui-Wing 115).


  • Further integrate the company’s branding.
  • Diversify product to meet customers’ needs.
  • Further strengthen organizational culture.
  • Reinstate itself as value and quality based company.

Justification for recommendations

Hp and Compaq brands were severely affected controversies that followed the merger. Poor performance in early years of the merger had far-reaching effect on the company’s competitive advantage. Both HP and Compaq brands were affected by the merger. Integration of the two brands was a challenge. Although HPQ has made a significant step in integrating the two brands but further effort is needed to ensure a common image to the company.

The main objective of the merger was to provide customers with valuable full package products. This objective can only be fully achieved by increasing innovation and diversification. Consumers’ needs in computer industry are changing more frequently. There is also increase in interdependence between various computer based products. HPQ can only remain significant in the industry coming up with diverse and innovative products.

Integrating HP and Compaq cultures was identified as the greatest challenge before the process starts. Integrating the cultures has taken more than seven years. HPQ should not relax cultural integration process. Further integrating the culture would reduce internal resistance and enable the company focus on external issues such as competition.

HP and Compaq were initially known for quality products. As competition in computer industry increases, HPQ can use quality products for its competitive advantage. HPQ should invent more on quality. Quality and values will help in strengthening its brand and enable it to regain its market share and take advantage of emerging markets.


Anders, George. Perfect Enough: Carly Fiorina and the Reinvention of Hewlett-Packard. New York: Penguin Group, 2003. Print.

Burrows, Peter. Backfire: Carly Fiorina’s High-Stakes Battle for the Soul of Hewlett-Packard. London: Wiley. n.d.

Fiorina, Carly. Tough Choices: A Memoir. London: Portfolio, 2006. Print.

Lohr, Steve and Gaither, Chris. “A Family Struggle, A Company’s Fate,” The New York Times. 2001. Web.

Luthans, Fred, Doh, Jonathan and Hodgetts, Richard. International ManagementCulture, Strategy, and Behavior, 7th Edition. Boston: McGraw-Hill, 2002. Print.

Pui-Wing Tam. “H-P’s Board Ousts Fiorina as CEO“. The Wall Street Journal. 2005. Web.

Williams, Molly. “Family Affair: HP Deal’s Fate Rests with Skeptical Heirs,” The Wall Street Journal. 2001.

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