Merger of HP and Compaq

HP Found in 1939 by William R. Hewlett and David Packard Carly Fiorina, joined HP in July 1999, is chairman and CEO of HP. Global provider of computing and imaging solutions and services to consumers and business.

HP's four core business groups Enterprise systems group, Emaging and printing group, HP services Personal systems group

Compaq Founded by Rod Canion, Bill Murto and Jim Harris Michael Capellas is the CEO since 1999 manufacture of servers, workstations, networking products, desktop PCs, and portable PCs

Timeline of the HP and Compaq merger 2001/06/22 Carly Fiotina visits Michael Capellas for licensing HP software issue, but wound up a merger talking. 2001/09/03 Hewlett-Packard announces it will buy Compaq Computer in a deal worth $25 billion. 2001/11/07 The Compaq Board of Directors meets and reaffirms its strong support for the proposed merger. 2002/01/17 Compaq shareowners vote on the merger proposal. 2002/03/05 The proposed merger gets a positive recommendation from Institutional Shareholder Services report. 2002/03/19 HP shareholders vote on the merger; HP declares victory in Compaq merger base on preliminary vote. 2002/03/28 Walter Hewlett files a lawsuit asking the Delaware Chancery Court to overturn the vote by HP shareholders to approve the deal. 2002/04/30 Walter Hewlett abandons his opposition after a Delaware judge rules that Hewlett-Packard's shareholder vote was legal 2002/05/01 HP announces final results of vote count; 838,401,376 HP shares were voted in favor of the deal, compared with 793,094,105 shares voted against the proposal. 2002/05/03 HP completed merger by acquiring Compaq Computer, valued at an estimated $19 billion.

Reasons for Merger Generate cost synergies reaching $2.5 billion annually improved cost structure. Expected annual revenue of $87.4 billion Neck and neck with IBM in Tech company Cross selling to both companies’ customers Build better internet systems with Compaq’s Technology.

Reasons for Merger Top market share in printers, PCs, and storage Second-largest server business and third-largest tech-services organization

Hypothesis There should be a large and positive abnormal return on the announcement date of the HP and Compaq merger.

Measurement of Cumulative Abnormal Returns Mean Adjusted Return Method Market Adjusted Return Method

Mean Adjusted Return Method Decide event period Calculate daily stock return in event day Calculate 200 day average stock return from the “clean” window Find residual Find cumulative abnormal return (CAR)

Market Adjusted Return Method Predicted return is the daily stock price return of S&P500 in the event period Find Residual Find CAR

Absolute Gain and Loss Absolute loss for Compaq on day +1 is $24.48 million and on day +40 is -26.85 million. HP on day +1 is -$38.93 million and on day +40 is -$33.68 million.

Result and Conclusion It is a bad news. Compaq CAR decreases to -13.50%. HP CAR decreases to -20.54%. Successful merger need a right synergy created Horizontal merger make them big, not rich. “Overestimate likely cost savings and synergies, setting themselves up for poor performance and shareholder disappointments in the future.”