The Merger of Hewlett-Packard and Compaq (A): Strategy and Valuation Case Solution
Analysis of the merger strategy to identify its effectiveness
Initially, the merger does not seem like a good decision as it resulted in a decrease in the share price and faced lots of criticism by analysts and opposition by many investors, which meant thatmost of the stakeholders were against the deal, which madethis merger less attractive. In addition to this, there were cultural issues and pricing issues between both companies, and analysts assumed that these issues will goagainst the proposed merger therefore, initially this merger is supposed to be ineffective. However, the managements of both companies werefirm in executing the deal and predicted long term benefits of economic growth and innovation. The objectivesand long term focuses of both companies are very much aligned to facilitate the consumers with high qualityproducts in the technology industry. HP’s management argued as to how it could generate strategic synergies, economies of scale and stronger market position. The managementpredicted annual cost savings of $2.5 billion, and 13% increase in the earnings in the first year after the acquisition. As both companies have significant brand recognition, and are operating inthe same industry and servingthesame customers, therefore by looking at the objective of providing low cost, high quality and complementary products, this merger strategy seems like a good decision, but in order to execute the strategy, the interest of all shareholders and of the key stakeholders must be satisfied as this merger will also provide a competitive advantage over its competitors.
Value of synergies
The value of the expected synergy is calculated by assuming two scenarios such as in the first scenario, the cost savings of 3% are assumed along with the increase in the sales and return. In the second scenario, the value of synergy is calculated by assuming 0% cost savings however, the same revenue growth and return percentage have been taken for fair compression. In both the scenarios, the proposed merger is generating significant synergy and it is expected that the value of synergy will be high and could also cover the diluted earnings of HP’s shareholders along with providing long-term benefits.
Appropriate range of values
In order to identify the different appropriate range of values, the comparable valuation method is used and for that purpose, P/E multiple, Sales Multiple and EBIT multiple have been taken from the competitors’ data and with the help of these multiples, the range of value of the company is identified which justifies that the merger is appropriate.
By performing the calculating and analyzing the current condition of both companies and current market condition, it is recommended that the management of both companies should go for this merger as it will provide benefits in both short and long run by providing return, edge over competitors, strong market presence, increase sales, complementary products and greater market share. However, for the execution of this strategy, the management of both companies should act wisely by resolving the conflicts of shareholders and stakeholders and should maintain the integrity of the shareholders and of the management as well……………………
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