HP/Compaq Merger – Harvard Business Case

Below are excerpts from an interesting Harvard Business School Case Study (February 22, 2004) providing insight to the scale and value of the HP/Compaq Merger.  John Bender’s role as Executive Director of Merger Integration gave him a front-row seat to the largest merger in tech history.

“Day-1” of the new HP’s operations are viewed as best-in-class. Successful early integration of two massive IT infrastructures included hp.com (online store) being open for business, @hp employee portal with more than 2 million hits/day accessible to all employees, 1, 193 company networks connected at key strategic locations , active directory and enterprise directory synchronized and all E-mail systems interconnected linking more than 229,000 mailboxes and a quarter million desktops.  More than $3.7B in synergies and 95% of integration milestones were achieved in the first 12 months spanning nearly every aspect of the new HP, and focused on key synergy areas of procurement & supply chain, headcount reduction, administrative facilities closures, and IT integration.  Results easily exceeded Wall Street expectations of $1.4B.

Excerpts from “The New HP: The Clean Room and Beyond,” Harvard Business School Case Study, February 22, 2004.

In fiscal 2001, HP was the second largest computer company, behind IBM, with pre-merger revenue of $45 billion, 19th on the Fortune 500, with over 88,000 employees in more than 120 countries. However, HP was struggling with difficult economic conditions and a technology industry slump.  At the time, Compaq was the third largest computer company, behind IBM and HP, with revenue of $42 billion in fiscal 2001. The company had 66,000 employees in over 200 countries, and was ranked 27th in the Fortune 500. Compaq integration of Tandem and Digital in 1997 and 1998 respectively proved difficult; further pressured by the computer industry’s intense competition, Compaq’s stock took a beating.

When Fiorina approached Capellas about a licensing deal, he suggested a broader relationship between HP and Compaq. Capellas felt that there was too much capacity in the industry and that it made sense to consolidate during an economic downturn.  The idea of a merger excited Fiorina, who saw it as an opportunity to create a highly competitive technology giant that was well positioned in virtually all of its markets.  Historically, mergers within the technology industry had proven difficult, and both HP and Compaq had less than perfect track records with their prior acquisitions. Fiorina, recognizing the multiple obstacles to the merger’s success, had created a dedicated integration team immediately after the merger was announced. The “clean room,” as the integration office came to be known, consisted of pairs of pre-merger HP and pre-merger Compaq employees who were responsible for planning the details of the execution of the merger upon its close.

When the merger between HP and Compaq was first announced in early September of 2001 (eight months before it was approved), Fiorina and Capellas tapped Webb McKinney of HP and Jeff Clarke of Compaq to run the merger integration team.  Together, McKinney and Clarke created a small integration office known as the “clean room” where they could begin planning the details of the merger without violating antitrust laws.  The clean room started with a small group of employees but involved almost 2,500 people by the time of the merger’s close.  The clean room was responsible for developing a master plan to be implemented upon the merger’s closure; this “road map” was to encompass all aspects of the combined company.  The scope of decisions involved in melding the two companies was immense, ranging from larger issues with more strategic impact—such as branding, product lines, and corporate culture—to smaller details, such as cash management systems and financial reporting practices. The integration team was responsible for establishing direction for the newly combined companies, setting priorities, and defining the details of its future operations.

Members of the clean room used an “adopt and go” strategy to manage their decision-making process. Category by category, the team reviewed elements of the approaches used by each premerger company, and then–rather than using a hybrid or redesigning each system–selected the best method to use going forward.  McKinney noted, “Before the close, we were planning just about every aspect of the launch of the new company and how the new company would integrate. In a sense, it was almost like leading a traditional organization. The only unusual thing was that we were spending most of our time on planning. We could do some prototyping, but that was about it. It was like launching an $80 billion start-up except that the only thing we could do was plan.”

Once the merger closed, the clean room couldn’t allow people to think that they could change everything that had been done for the last eight or nine months. It would just slow things down too much.  Instead, as the teams form and you get together, your job is to understand and implement the decisions that have been made because speed is the number one thing.  HP’s cultural integration team rolled out “Fast Start,” a program designed to ease the transition, explain the new business model, and help define the culture of the newly combined companies. The “Fast Start” workshops were conducted in groups—led by team managers and a facilitator—and were designed to be highly interactive. All 155,000 people in the organization were required to complete the program.

Excerpts from “The New HP: The Clean Room and Beyond,” Copyright © 2004 President and Fellows of Harvard College. To order complete copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu.