Strategic issues related to merger
1. What will be the impact of merger in Shareholders’ value in long-run?
Right after the acquisition has announced market has reacted negatively leading to reduction in HP’s and Compaq stock by 19% and 10% respectively. The credit agencies such as Moody’s and standard and Poor’s downgraded HP’s long-term debt as HP acquire lower-rated company with similar-size revenue base. Acquiring Compaq may dilute value of shareholders from highly profitable printing business to less profitable PCs that ultimately lower the value of shareholders for short term. However, if merger is successful HP will gain market position in PCs and server segment. If HP is able to create a maximum synergy with Compaq then it will be a market leader in PC business segment that may give HP another cash cow which may play vital role in contributing significant value in shareholders wealth. HP has top position in printing and imaging segment already. That may enable HP to be profitable in future. Therefore in long-run shareholders’ value may increase.
2. The major objective of merger is to establish HP as a market leader in PCs, and Servers. But the issue is that can the HP-Compaq be able to retain their existing market share after merger.
According to HP 2000-2001 market share estimates by business segment, before merger HP is operated in 120 countries with 4th rank position in PCs and Servers while Compaq is operated in 152 countries with second position in PCs and third position in servers. HP is market leader in printer business segment holding first rank position in worldwide market. After merger HP is suppose to be business leader in Personal computers and Servers. However after merger HP and Compaq may not be able to retain their individual market share and they may not get perfect synergy effect of merger in-terms of retaining and gaining market share in PCs and servers. Further, industry leader Dell and IBM may steal their market share. Therefore, if the merger is successful then the toughest job of management is to retain market share of these business unit.
3. Imaging and printing business segment is HP’s attractive and most profitable business segment. If merger is successful HP will exposé itself in the market of PCs and servers business which is consider as unattractive lower end commodity business segment. Is it a perfect strategic choice for HP?
It could be the perfect move of the HP but it depends upon whether or not they can achieve synergy of merger. If HP and Compaq together can create global technology powerhouse then they could provide end-to-end product and services offerings which is highly demanded by the business organization and corporation.
Without merger, neither HP nor Compaq is in such competitive position that they can challenge the industry leader Dell. However, if the merger is successful, then in some extent, they can duplicate the Dell’s model and become market leader in three different business areas and enjoy the second largest position in server market and third largest position in tech-services industry.
One of the biggest advantages or the benefit of the merger is that it will give HP economies of scale in personal computer business. Further, after merger HP will be able to manage full-line technology service in which it will be able to sell PCs, printers and also be able to provide services relating to networking. Finally, it is unanimously true that achieving successful merger output and result also depends upon the HP’s ability to keep pace with changing market environment, its competitive ability of the business and how HP manages its macro environmental factors managing cultural, structural and managerial challenges that it will face after acquiring the Compaq.
One of the biggest threats of HP-Compaq merger is that HP could focus their attention from their core capability and highly profitable imaging and printing business segment to less attractive and lower profit margin PCs business segment unit. It means core competencies of HP lies in printing business segments and due to merger HP may lose focus on such a highly profitable business segment which may tremendously increase their opportunity cost. Therefore rather than merging with Compaq, HP can break down its business units and make different individual business entity under the single corporate umbrella of HP. The reason why it could be an attractive option is that different business segment of HP are in the different phase of business life cycle and they need unique strategies and tactics to manage them and to remain focus on what they are doing.
In some extent HP-Compaq merger is a strategic misfit. The market leadership that the HP will acquire after merging with Compaq is risky move that not only expose HP into huge risk and less profit possibilities but also it debase stakeholder’s interest from profitable and attractive business to unattractive and low profit business and the most important reason why HP wanted to acquire Compaq is to be a leader in global market of PCs and servers by providing customers full-line end-to-end hardware and services. However, HP could provide these services by further enhancing its consultancy services. The cost that HP has to pay to acquire Compaq is lower than to pay consultancy. By doing so, HP can enjoy the profit margin by itself. Beside this, HP can add its own service line and product offerings in lower cost with lower equity risk. If acquiring another company is necessary for HP to be successful then HP could acquire smaller company with similar kinds of products offering and services. The benefit of doing so is that HP can achieve its merger objectives with Compaq in less investment with less corporate, cultural and structural risk.