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PGP/015/211 PGP/015/251 PGP/015/293 PGP/015/301 PGP/015/307 PGP/015/313 AVNEESH GOEL SHRIKANT BHIMRAO GAJBHIYE MUJTABA KHALIL PRAGYANANDA MISHRA RAHUL MAHESHWARI RITHIKA BARUAH
1/24/2013

 Why should HP acquire firms? Is the industry structure attractive? What are the trends affecting the industry structure? HP should acquire firms because there was a need to adapt to the substantial transformation during the 1990s. There was a need to do something to counter the slimming margin and HP cant go long way by being only a component manufacturer. Although, HP was the market leader in the Imaging and printing group, it did not rank among the top three in the PCs, servers, storage or services. So this was the time to either expand organically or by acquisition. Yes the industry structure was attractive because HP had an opportunity to acquire firms as the market was down by 30%. So the prices for the shares of the target firms were relatively lower. Secondly the D/E ratio of HP was only 0.27 which was much less than the average of 0.55. So there was a good chance for raising debt to acquire other firms. PC industry dynamics were demanding lower cost structure and it favored the direct distribution model. The success in Imaging and printing required continued investment for growth and tighter linkages with enterprise IT. Although there a trend of rapidly changing industry dynamics. There was a desire for end to end solutions, shift to industry standard architectures and need to narrowing down the number of strategic vendors. Market position remains weak in key attractive sub- segments like high end user. There was also a high degree of cultural differences among target and acquiring companies.

Was the merger strategy sound? Although the share prices dropped when the merger was announced, the merger strategy was sound. Management projected cost saving was $5 to $9 per share. The management expected a substantial improvement in the in the operating margins which was projected to be of 8% to 10%. The merger would bolster the enterprise position. It would accelerate improvement of access with Compaqs direct capabilities and lower cost structure. It would deliver key benefits for Imaging and printing. Besides the above benefits the merger with Compaq would do the following: Significantly improved profitability and operating margins Complementary R & D capabilities Broad improvement in projected financials Substantial accretion to HP earnings Favorable Synergies impact

What is the value of the projected synergies? The value of the projected synergies was worth $5-$9 per HP share including the net revenue loss impact.

 What is the appropriate valuation range for Compaq? Triangulating the valuation ranges calculated by the 5 methodologies in Exhibit 7 of case A, we get the appropriate range for Compaq as $16.16 $31.62 (average).

Is this a merger of equals? Does one side seem to emerge with more power than the other? As per theory, Merger of equals combines two firms that have equal power. The board of directors and senior management of the old companies get absorbed and hold positions in the new company. Also the shareholders of the old companies share the prospective synergies equally. In this sense yes, this deal is a merger of the equals. But HP has also paid a significant acquisition premium to Compaq of 18.9% which goes against that theory.

Is this a good deal? For whom? Yes this is a good deal, especially for HP. The situation of HP pre-merger was direr than that of Compaq. It was not adapting to technological innovation fast enough. Margins were going down. The Imaging and printing group was the leader in its market segment but did not rank anywhere among the top 3 in servers, storage or services. Printing line was facing stiff competition from Lexmark and Epson which were selling lower quality inexpensive printers. The share price had dropped drastically. There was a need to build strong complementary business lines and turn the company around. This merger will help HP in becoming an end-to-end leader and a full service technology firm capable of doing everything from selling PCs and printers to setting up complex networks. Apart from providing scale and scope advantages, and improved access to market with Compaqs direct capability and low cost structure, it will also eliminate redundant product groups and costs. The success of the merger, however, will depend on whether the proposed synergies can be realized or not by HP.

Is the exchange ratio appropriate? For whom? The final exchange ratio of 0.6325 is fair and appropriate to HP as per the opinion of Goldman Sachs as well as Salomon Smith Barney in exhibit 4 of case B.

How should Kathryn vote her shares? Considering the deal terms, the fairness of exchange ratio, the accretion/dilution impact on HP shareholders, observation of the integration impact and evaluation of the proposed integration plan, we believe the merger is ideal and Kathryn should vote in favor of it.