The Hewlett-Packard and Compaq Merger Analysis

1200 Words Jun 21st, 2013 5 Pages
The Hewlett-Packard and Compaq Merger Analysis
The Proposed Merger with Compaq
HP entered into an agreement with Compaq Computer Corporation in September 2001. In this definitive agreement, HP is going to purchase all of Compaq’s common shares outstanding, and pay a total price of 0.6325 shares of its common stock for each share of Compaq’s common stock.
To evaluate this transaction for the benefits of HP’s shareholders, we use the excess earnings model to forecast HP’s stock price if it standalone, CPQ’s stock price as a separate company and the stock price after the merger. Then we make a comparison between HP’s stock price when it operates alone and the stock price after the merger to make the decision of merger.
HP as Standalone
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Based on the above considerations, the Ke ratio of the merger company will be 11.54%. Furthermore, for the revenue growth and ROE of the merger company, there are more risks than benefits. HP’s revenue may have a recession curve in the short term. Although the merger will bring cost savings of $2.5 billion, HP cannot realize these expected benefits immediately. Other than this, there were questions on the organization culture as well. If HP could not manage its organization properly, integration would only add on to the difficulties. The biggest factor of all is that to integrate the culture existing in the two companies would be a very difficult job. Based on all the considerations, we assume that the revenue growth rate after the merger would be 3.5% and the ROE would be 11%. And as a result, the combined stock price would be 9.0. (See Exhibit 3).
Based on the results of the valuation model, we made the assumption to project the financial performance for HP, CPQ and the combined company, which is reflected in the stock price. As shown in Exhibit 4, the shareholders of HP will have the loss of 1.85 which is negative. In the contrary, the shareholders of Compaq will earn the benefits of 2.52 from the merger. In the view of what have analyzed above, as an advisor for HP’s shareholders, I don’t recommend that HP go ahead with this merger acquisition of Compaq.

Exhibit 1
HP standalone Estimated Stock Price Assumptions | "Live"
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