Implementation of Hewlett Packard Mergers - Essay Example

STRATEGIC MANAGEMENT: IMPLEMENTATION HEWLETT PACKARD MERGERS Introduction Hewlett-Packard Co. announced last month that it had completed the purchase of Electronic Data Services. This transaction was to considered the biggest ever in the IT services sector and the second-biggest in the industry, behind the companys acquisition of Compaq in 2001. This paper will provide a comparison between the two mergers, one under Chairman and CEO Carly Fiorina and the other under her successor, Mark Hurd. The focus will be on the strategic choices made and their rationales. A section on this writers recommendation on how to implement the strategy will conclude this paper. 2. Background of Hewlett Packard: When Carly Fiorina replaced Lew Platt as CEO and president of Hewlett-Packard in 1999, the company had become a gigantic bureaucracy with business units doing their own thing. Profits had fallen along with employee productivity and customer satisfaction. In short, HP had become a technology laggard and was weak in marketing as well. Fiorina, the first female CEO of a Dow Jones-listed company, set out to transform HP from an engineering company to a leading technology solutions company focused on the marketplace. Hewlett-Packard Company was a leading global provider of computing and imaging solutions and services with total revenue of $45.2 billion, per its 2001financial report. The new CEO immediately went to work to reduce operational costs and to put in place a new strategic direction for the company. 4. Merger with Compaq - rationale In September 2001, Hewlett Packard and Compaq, after months of negotiation, concluded a horizontal merger agreement to create a global technology leader, providing a complete set of IT products and services for both businesses and consumers, worth $87 billion in revenues. It was intended to compete with and perhaps edge out competitors Dell and IBM and become the foremost global player in servers, imaging and printing, and would belong to the top 3 in IT services, storage and management software. 4.1 SWOT and strategic choices Fiorina said that recession and bitter competition from main rivals Dell and IBM left the two competitors HP and Compaq no choice but to consolidate to cut costs and streamline product categories, adding that the merger would result in a cost synergy of $2.5 billion a year. It was, she said, an effective way to deal with the cost pressure caused by Dell Computer. Inasmuch as the NT server business was doing poorly, the merger should address the problem of loss of revenues and momentum in generating sales and profits. The combination was to catapult the new company into industry leadership role with customers and partners. In addition, the combination would intensify the company’s commitment, for which Compaq was distinctively well known, to open, market-unifying systems and architecture and aggressive direct and channel distribution models. With operations in 160 countries, the new, combined company was to realize cost synergies of $2.0 billion in fiscal year 2003, rising to $2.5 billion by mid 2004. The merged company was focused not only to tide over its current cost efficiency problems but also to ultimately gain dominance in the industry. The two companies had the opportunity to join forces because of the mutual complementarity in their businesses, which was perceived by the CEO as having potential for creating synergy in terms of cost economies and a larger scope and share of the market, consistent with their internal resources and capabilities. It was also intended to combat a weakness in their cost structures, as Dell was outselling both HP and Compaq because of price differences. 5. Performance under Fiorina, pre-merger and post-merger There has been an on-going debate about the responsibility of past CEO Fiorina for the "poor" performance of HP and that this caused her conflict with the Board and her departure. Below is a table of financial statistics of Hewlett-Packard for a seven-year period under Fiorinas leadership and later under here successor Mark Hurds. Table 1: HEWLETT PACKARDS FINANCIAL STATISTICS, 2000-2007 (Source: Data derived from financial statements filed with the SEC) Item (in $billion) 2007 2006 2005 2004 2003 2002 2001 2000 Net Revenue 104.3 91.7 86.7 79.9 73.11 56.6 45.2 48.9 Gross profit 25.7 22.5 20.5 4.2 2.9 (1.0) 1.4 4.0 Net income 2.68 2.18 0.82 3.5 2.5 (.90) .41 3.6 5.1 Analysis of financial data It is perhaps unfair to hold Fiorina responsible for the decline in sales and profitability of the company from 2000 to 2002, the first three years after she was hired. This is so because the declining performance had been evident early on, and the major focus of the new management during this period was on reorganization and the change of strategy. This change in focus had to take its toll on the operations and performance of the divisions and their executives and was reflected in falling performance of the company as a whole in both revenues and profits. The loss of nearly $1 billion in 2002 is especially significant. However, the merged company began to awaken and registered profits in 2003 while revenues steadily continued to rise until it peaked in 2007 when it asserted industry leadership, beating both Dell and IBM. Profits also showed improvement from 2005 to 2007, under the new CEO as the company appeared to reap the advantages of the strategic change initiated by Fiorina. 6. Company performance under CEO Hurd The results of strategic change years later proved that the logic driving the merger with Compaq was sound after all, and mainly because, according to observers, its new chairman and CEO Mark Hurd made it work. According to a Stanford GSB article, Hurd set out to educating managers and employees on how to realize the projected cost and operational efficiencies and translate them into higher margins for each business unit. Because he exploited the possibilities of the merger, Hurd was able to achieve a higher growth rate for the company (Compaq and HP: Ultimately, the Urge to Merge Was Right, 2007). Fiorina had built the groundwork for the goal setting and operational planning leading towards the strategic integration planning. However, during the implementation of the operational plans, Stanford analysts believed, she got too immersed in the complexity of the operational plan and the link towards the long-term direction was lost. There was a weak feedback loop between the operational integration phases and the long-term strategic goals of the merged company, preventing the management from testing the new strategy with key customers and responding with more flexibility to the longer-term shifts in the direction of the market. The team that formulated the plans during the pre-approval phases had been disbanded during the implementation phase and were not in a position to make its contributions to the plan execution. According to the Stanford GSB report (2007), Hurd "did a better job of reading the strategic direction of the market and make adjustments considering its mission as a technology company." HP recorded $91.7 billion in revenues in 2006 compared to $91.4 billion for IBM. In 2007 that revenue was $104 billion, making HP the first IT company in history to exceed the $100 billion mark (HP 2007 Annual Report). 7. HP Merger with EDS Hewlett-Packard Co. announced on August 26, 2008 that it had finished its $13.9 billion acquisition of technology services company Electronic Data Systems Corp (EDS). The deal, which was first announced in May 2008, was approved by the European Commission and by EDS shareholders in July. The acquisition also passed the regulatory waiting period in the U.S. without a request for more information by the Justice Department or Federal Trade Commission. By value, the purchase was the biggest ever in the IT services sector and the second-biggest in the industry, behind HPs 2001 purchase of Compaq. 7.1 Profile of HP & EDS HP (after the merger with Compaq) provides a range of high-tech equipment, including personal computers, servers, storage devices, printers, and networking equipment. Its software portfolio includes operating systems, print management tools, and OpenView, a suite that encompasses application, business, network infrastructure, and product lifecycle management (See HP website). HP, which already boasts an IT service organization that is among the worlds largest, acquired Electronic Data Systems (EDS) for about $13.9 billion in cash in August 2008. EDS was founded by Ross Perot in 1962 and owned by General Motors Corp from 1984 to 1996. As a leading global technology services provider, EDS founded the information technology outsourcing industry more than 46 years ago (EDS website) 7.2 SWOT and strategic choices The combined company is to increase its strength and dominance in the industry that HP had previously led after its acquisition of Compaq. As an HP business group, EDS seeks to deliver one of the industrys broadest portfolios of information technology and business process outsourcing services to customers in the manufac-turing, financial services, health care, communications, energy, transportation, and consumer and retail industries, and to governments around the world (EDS website). EDS claims that it differentiates itself from the other players in the IT marketplace by "providing outstanding service, innovation and industry thought leadership.” As a business group under HP, EDS will also be an outsourcing services provider with the ability to provide complete life-cycle capabilities in health care, government, manufacturing, financial services, energy, transportation, consumer and retail, communications, and media and entertainment. Obviously, there is a good strategic fit between EDS and HP which can further enhance their strengths and reduce their weaknesses in competing with the other players in the industry. 8. Comparison of the two mergers Carly Fiorina, a "marketing genius" at Lucent Technologies, was hired by HP in 1999 in order to refocus the company to become more competitive in the marketplace. Because HP had turned into a giant bureaucracy, it needed a fresh entrepreneurial innovativeness which it could find through Fiorinas leadership. The acquisition of Compaq in 2001, though controversial at first, turned out to be successful in terms of achieving cost synergies and improving revenues that vaulted HP to the top in the industry for the first time, besting Dell Computer and IBM. Fiorina conceptualized the business and corporate strategy of HP, assembled a group of planners that designed strategy for the medium and long term. She introduced the project-type matrix organization, despite the fact that it met resistance and was difficult to execute, and clashed with the other members of the board, leading to her ouster. Mark Hurd, on taking over, later reverted back to the vertical organizational structure and succeeded to make it work, though one can only speculate whether he could have achieved better success with the matrix setup. It is believed by many observers that Fiorina deserved credit for her vision and initiative, which contributed do the later success of HP under her successor. This recent acquisition was actuated by the same strategic goal of obtaining and strengthening industry dominance of the combined firm, while at the same streamlining overall operations and achieving cost economies. It is difficult, however, to see at this time how the new merger with EDS will fare. Presumably, Hurd had learned a lot from the previous merger and will be able to overcome many problems that can arise. 9. Decisions and policies, post merger The massive deal, which HP says will expand its business in the lucrative field of technology consulting and outsourcing services, is the companys biggest acquisition since HP bought Compaq for nearly $20 billion in 2002. "The combination of HP and EDS will create a leading force in global IT services," Hurd said in a statement, adding that together they would deliver to customers the broadest, most competitive portfolio of products and services in the industry. Some analysts have suggested it will be a major task for HP to absorb a company as big as EDS. However, HP management intends to "wring efficiencies" out of the combined companies. Hurd is credited with successfully completing the integration of Compaq — initiated by his predecessor, Carly Fiorina — and for overseeing HPs acquisition of 26 other companies since he became CEO in 2005. Evidently, the combination of HP and EDS will serve to strengthen the competitive power of the company against its industry competitors. The acquisition of EDS is intended to expand the scope of the combined firms business activities, realizing more effective market penetration for the joined products and services of the new company by delivering to customers “the broadest, most competitive portfolio of products and services in the industry.” 10. My Recommendation to CEO Hurd The groundwork as described above has been laid after the merger was finalized. If I were to advise Hurd, I would emphasize the importance of dealing with the cultural differences between the executives (and workers) of the merged companies. He should focus on building good working relationships, as managerial styles are bound to be different, and he should be sensitive to the status problems affecting the executives of both companies. The linking of the financial and control systems of the two organizations would also require considerable effort on both sides. Presumably, as in the case of the acquisition of Compaq, team members have already gained considerable headway in analyzing the opportunities and areas of synergy of the new company as a result of the merger. In fact, it is reported that more than than 500 HP and EDS staffers have been working full time on efforts to integrate the two companies. Some people will have to be let go in order to prevent or discontinue duplication of activities. An estimate of cost synergies in the sum of $2.5 billion in the Compaq acquisition proved to be accurate, and was even exceeded. There should be no reason why the new merger cannot achieve cost economies as well as synergies in other areas to improve profitability. The management should also look into the acquisitions impact on the firms cash flows because if the cost of acquisition was financed principally by debt, it means that its ability to take advantage of new opportunities in the future will be handicapped for lack of adequate funds. The company should not abandon or deemphasize in-house research and development activities; it should not merely rely on acquisitions to achieve competitive advantage. Further, the company should bear in mind that too much expansion can make the company too unwieldy and difficult to manage and coordinate in relation to its product-markets. REFERENCES Hitt, M.A., Ireland, R.D., & Hoskisson, R.E. (1999). Strategic Management: Concepts, competitiveness, and globalization, (3rd ed.), South Western College Publishing, Cincinnati, OH HP Annual Reports 2007. Retrieved September 5, 2008, from http://h30261.www3.hp.com/phoenix.zhtml?c=71087&p=irol-reportsAnnual http://library.corporate-ir.net/library/71/710/71087/items/141478/hp2004_10k.pdf Selected financial data, HP. Retrieved September 5, 2008, from from http://www.hoovers.com/hewlett-packard/--ID__10723--/free-co-profile.xhtml Financial statistics, HP. Retrieved September 5, 2008, from http://finance.yahoo.com/q/pr?s=HPQ EDS website. Retrieved September 5, 2008, from http://moneycentral.msn.com/detail/stock_quote?Symbol=US%3AEDS&pkw=electronic_data_systems&ocid=iSEMYahoo&refcd=YH204111e_electronic_data_systems Hewlett-Packard completes EDS purchase for $14B, Friday, August 29, 2008. Retrieved on September 5, 2008 http://www.bizjournals.com/sacramento/stories/2008/09/01/story15.html?q=%20Hewlett%20Packard%20%20%20Electronic%20Data%20Systems Hewlett Packard and Compaq Agree to Merge (2001, September 3). Retrieved June 23, 2008, from http://www.hp.com/hpinfo/newsroom/press/2001/010904a.html Compaq and HP: Ultimately, the Urge to Merge Was Right (2007, June). Stanford Graduate School. of Business. Retrieved from http://www.gsb.stanford.edu/news/research/urgetomerge.html Read More