Managing the strategic dynamics of acquisition integration: Lessons from HP and Compaq

California Management Review

Volumn 48, Issue 3, 2006, Pages

  Burgelman, Robert A ^a   McKinney, Webb ^b  

^a STANFORD UNIVERSITY   (United States)

^b HEWLETT PACKARD COMPANY   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 33744772586     PISSN: 00081256     EISSN: None     Source Type: Journal    
DOI: 10.2307/41166347     Document Type: Article

References (28)

1. It is, however, interesting to note that Mark Hurd, HP's new CEO since April 2005, has so far not changed the strategic logic that drove the Compaq acquisition. Instead, he has announced and implemented plans to cut expenses back to competitive levels. He has also reorganized HP back to a much more decentralized model, which is more consistent with HP's original culture. He seems to be refocusing HP on its strengths as a technology and product company, with services in more of a supporting role, which is also more consistent with HP's original culture. Since his arrival, HP's PC and Enterprise hardware profit performance have continued to improve, and the HP stock price was up 33 percent by late October 2005.
2. There exists a large literature on the management of acquisitions. Michael E. Porter's classical article "From Competitive Advantage to Corporate Strategy" [Harvard Business Review, 65/3 (May/June 1987): 43-59]
3. offers evidence of the low probability of success of value creation (profitable growth) through acquisitions. He nevertheless offers several guidelines for increasing the chances of value creation. Since Porter's article, a number of HBR articles have offered further analysis and advice. Recent articles include: Jeffrey A. Krug, "Why Do They Keep Leaving?" Harvard Business Review, 81/2 (February 2003): 14-15;
4. Randy Croyle and Patrick Kager, "Giving Mergers a Head Start," Harvard Business Review, 80/10 (October 2002): 20-21;
5. Joseph L. Bower, "Not All M&As Are Alike - and that Matters," Harvard Business Review, 79/3 (March 2001 ): 92-101;
6. Robert J. Aiello and Michael D. Watkins, "The Fine Art of Friendly Acquisition," Harvard Business Review, 78/6 (November-December 2000): 100-107;
7. Ronald N. Ashkenas and Suzanne C. Francis, "Integration Managers: Special Leaders for Special Times," Harvard Business Review, 78/6 (November/December 2000): 108-116;
8. Dennis Carey, "Making Mergers Succeed," Harvard Business Review, 78/3 (May/June 2000): 145-154;
9. Saikat Chaudhuri and Benham Tabrizi, "Capturing the Real Value in High-Tech Acquisitions," Harvard Business Review, 77/5 (September/October 1999): 123-130;
10. Ronald N. Ashkenas, Lawrence J. DeMonaco, and Suzanne C. Francis, "Making the Deal Real: How GE Capital Integrates Acquisitions," Harvard Business Review, 6/1 (January/February 1998): 165-178.
11. The HP-Compaq acquisition involves what Haspeslagh and Jemison call an "Absorption Acquisition," in which the acquired company becomes fully integrated with the acquiring one. See P.C. Haspeslagh and D.B. Jemison, Managing Acquisitions: Creating Value Through Corporate Renewal (New York, NY: Free Press, 1991), pp. 189-208. These authors examine various stages in the acquisition integration process: blueprint for integration; manage the combination; move to best practice; and harness original complementarity. Their blueprint stage is similar to our integration planning process, and their other three stages are mostly encompassed by our operational integration process. They pay less attention to the strategic dynamics of acquisition integration (the feed-back loops) and to what we call the strategic integration process, perhaps because the companies they studied operated in less dynamic environments.
12. The Fiorina and Robison quotes are taken from R.A. Burgelman and P.E. Meza, "HP and Compaq Combined: In Search of Scale and Scope," Stanford Business School Case SM-130, 2004. pp. 5-6.
13. This analysis is available from the authors upon request.
14. B.G. Alendander and B. Gruendyke, "Hewlett-Packard," Raymond James report, April 14, 2005, p. 76.
15. Nevertheless, increasing value for HP's shareholders would be difficult. HP had issued roughly 1.1 billion new shares to Compaq's shareholders, to be added to HP's existing 1.9 billion shares. This implied that HP had sold about 37% of its assets to Compaq shareholders. As a result, the old HP shareholders owned 100 percent of the highly profitable printer business; after the merger they owned only 63%. See C.J. Loomis, "Why Carly's Big Bet is Failing," Fortune, February 7, 2005, p. 53.
16. See "Michael Dell on How the Board Can Help," Corporate Board Member Magazine, 5/1 (January/February 2002).
17. This assessment of the relative profitability of services was inaccurate. High-level IT consulting has higher margins than IT support services or IT outsourcing. However, support services are actually quite profitable, more so than the outsourcing business, which is low margin and risky because the vendor has to sign up for aggressive cost reductions over time and then must make them happen or else the deal may not be profitable. Outsourcing, however, is a growing market and it provides account control and an ability to gain more product business.
18. I. Fried, "HP Declares Victory in Compaq Merger," CNET.com, March 12, 2002.
19. HP's spinoff of the instruments business - now called Agilent - in 1999 provided several useful approaches that turned out to be useful for the acquisition integration process. Compaq had learned important lessons from its previous acquisitions (Tandem and DEC in particular), including the importance of selecting the key executives of the integrated company early on and to let them guide the integration planning, the development of clear product roadmaps and customer relationship ownership by day one of the integration, and how to use and not use consultants in the process. Beyond these home grown experiences, the Chevron-Texaco and Boeing-McDonnell Douglas mergers, among a few others, were studied, and the HP integration team kept in touch with the integration leaders of those mergers at multiple times during the integration planning and execution to benchmark how the process was going and to get further advice.
20. This was a tactic used by the second author.
21. Communication between Fiorina and the second author.
22. This quote is taken from R.A. Burgelman and P.E. Meza, "The New New HP: Leading Strategic Integration," SM-125A, Stanford Graduate School of Business, July 2004, p. 12.
23. Such a big change to a large and complex company takes years to fully implement at a high level of operational effectiveness. Lou Gerstner, for instance, moved IBM from a geography-based model to a customer-based model and it took years to get it to work at a high level of effectiveness. See L.V. Gerstner, Jr., Who Says Elephants Can't Dance? (New York, NY: Harper-Business, 2002).
24. Lou Gerstner also points out that cultural change takes the longest to accomplish. See Gerstner, Who Says Elephants Can't Dance?, op. cit.
25. A.S. Grove, Only the Paranoid Survive (New York, NY: Doubleday, 1996).
26. This analysis is available from the authors upon request.
27. The new company's stock price performance reflected this. In April 2005, a P/E ratio of 25 would have yielded an implied share price of $29.25, and a P/E of 20 a share price of $23.40. At that time, however, the company's share price was $21.48 and its P/E ratio around 15.
28. We thank an anonymous reviewer for informing us that Walter Hewlett told him 12 months after the merger that even he was impressed by the success of the integration process.