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HP Acquires Compaq—The Importance of Preplanning Integration
The proposed marriage between Hewlett-Packard (HP) and Compaq Computer got off to a rocky start when the sons of the founders came out against the transaction. The resulting long, drawn-out proxy battle threatened to divert management's attention from planning for the postclosing integration effort. The complexity of the pending integration effort appeared daunting. The two companies would need to meld employees in 160 countries and assimilate a large array of products ranging from personal computers to consulting services. When the transaction closed on May 7, 2002, critics predicted that the combined businesses, like so many tech mergers over the years, would become stalled in a mess of technical and personal entanglements.
Instead, HP's then CEO Carly Fiorina methodically began to plan for integration prior to the deal closing. She formed an elite team that studied past tech mergers, mapped out the merger's most important tasks, and checked regularly whether key projects were on schedule. A month before the deal was even announced on September 4, 2001, Carly Fiorina and Compaq CEO Michael Capellas each tapped a top manager to tackle the integration effort. The integration managers immediately moved to form a 30-person integration team. The team learned, for example, that during Compaq's merger with Digital some server computers slated for elimination were never eliminated. In contrast, HP executives quickly decided what to jettison. Every week they pored over progress charts to review how each product exit was proceeding. By early 2003, HP had eliminated 33 product lines it had inherited from the two companies, thereby reducing the remaining number to 27. Another 6 were phased out in 2004.
After reviewing other recent transactions, the team recommended offering retention bonuses to employees the firms wanted to keep, as Citigroup had done when combining with Travelers. The team also recommended that moves be taken to create a unified culture to avoid the kind of divisions that plagued AOL Time Warner. HP executives learned to move quickly, making tough decisions early with respect to departments, products, and executives. By studying the 1984 merger between Chevron and Gulf Oil, where it had taken months to name new managers, integration was delayed and employee morale suffered. In contrast, after Chevron merged with Texaco in 2001, new managers were appointed in days, contributing to a smooth merger.
Disputes between HP and former Compaq staff sometimes emerged over issues such as the different approaches to compensating sales people. These issues were resolved by setting up a panel of up to six sales managers enlisted from both firms to referee the disagreements. HP also created a team to deal with combining the corporate cultures and hired consultants to document the differences. A series of workshops involving employees from both organizations were established to find ways to bridge actual or perceived differences. Teams of sales personnel from both firms were set up to standardize ways to market to common customers. Schedules were set up to ensure that agreed-upon tactics were actually implemented in a timely manner. The integration managers met with Ms. Fiorina weekly.
The results of this intense preplanning effort were evident by the end of the first year following closing. HP eliminated duplicate product lines and closed dozens of facilities. The firm cut 12,000 jobs, 2,000 more than had been planned at that point in time, from its combined 150,000 employees. HP achieved $3 billion in savings from layoffs, office closures, and consolidating its supply chain. Its original target was for savings of $2.4 billion after the first 18 months.
Despite realizing greater than anticipated cost savings, operating margins by 2004 in the PC business fell far short of expectations. This shortfall was due largely to declining selling prices and a slower than predicted recovery in PC unit sales. The failure to achieve the level of profitability forecast at this time of the acquisition contributed to the termination of Ms. Fiorina in early 2005.
-What did HP learn by studying other mergers? Give examples.
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