Hewlett-Packard-Compaq The Merger Decision Case Solution
• Better Sales Channel
HP believed that by merging the company will be able to get access to a sales and distribution channel of Compaq,which could allow HP to get access to new customers through a easier channel.
• Reduced Costs
The management believes that by operating together, the companies can gain from synergies as there administrative cost will decrease, these cost savings will result in increased profitability.Also, they can benefit from the improved cost structure due to large scale economies.
• Leadership in Key Markets
The management believes that by combining both companies’ products, they will be able to respond to customers’ need and likely to become leaders of their respective market. Also, this would provide the company with better showcase of products.
• Value to Shareholders
The company believes that by improved profitability performance and better financial position, the company will provide better value to its shareholders.
Opposition of Merger
The merger of HP and Compaq was strongly opposed by Walter Hewlett, as he believed that the merger would result in the dilution of the shareholders’ value. Following are the reasons that Mr. Walter believed will damage shareholder’s value;
• Effect on Products with Good Earnings
It was believed that printing business of HP that was performing well and contributing to profitability of the company would be affected by the merger. Also, the computing business that was not performing well and was the most competitive business in the market was considered by Walter as low earning business and where HP could not get a stable position.
• Lack of Integration among Product Lines
The product lines of both the companies were believed to be different and to integrate them together was another challenge for the company, which if failed could result in substantial losses.
• Strategic Position of HP
The shareholders believe that the strategic position will not improve much even after a merger with Compaq. The analyst believe as both companies were struggling and had a very low market share in such a competitive market, therefore very few benefits will be gained from this merger.
As an independent shareholder, it can be viewed that both the companies need to do a merger as both are struggling to perform in the market and the benefits of synergies may help in cost cutting, which is a necessity in the competitive market and it is the only way the businesses can survive in the long term. It is also viewed that the merger will likely result in a loss of share value as the strategic rationale of the merger does not seem attractive to investors and therefore the companies are more likely to fail.
Therefore, an independent shareholder will likely vote against the merger as he will not see any value addition to his wealth by this acquisition…………………
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