HP vs. Compaq: the 100,000 foot financial view

HP vs. Compaq: the 100,000 foot financial view

Summary: The merger effectively destroyed every cent of HP shareholder value outside the imaging division.

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TOPICS: Hewlett-Packard
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Here are three extracts from a September 4th, 2001 New York Times story about HP's plan to acquire Compaq:

Investors in both Compaq and Hewlett-Packard have suffered in the current decline in technology stocks, although Compaq's woes have taken a greater toll. That stock is down 76 percent from its peak, reached in early 1999, while Hewlett-Packard is off 66 percent from its peak, reached last summer.

Combined, the company will have about 145,000 employees, after layoffs announced earlier this year are completed -- 8,500 jobs at Compaq and 9,000 jobs at Hewlett-Packard. Further reductions seem likely, as the companies said that they expected annual cost savings of $2.5 billion by the middle of their fiscal year in 2004.

In its most recent 12 months, Hewlett-Packard reported revenues of $47 billion, while Compaq had revenues of $40 billion. The combined $87 billion is close to the $90 billion reported by I.B.M., and far above the $33 billion for Dell Computer, which now ranks fourth and would move to third if the merger is completed.

In its latest financial report, for the nine months through July, Hewlett-Packard said its net income fell 82 percent, to $506 million. Compaq, reporting on the six months through June, said it suffered a net loss of $201 million for the period.

Compaq had hoped that Digital Equipment technology would provide a competitive edge in the new generations of computer servers. But it recently chose to not use that technology, known by the Alpha name, and instead go with the technology developed by Hewlett-Packard and Intel in its new servers.

In reality Compaq bought DEC's service organization as a favor to Microsoft, but that's another story - what's important here is that when the deal finally closed in May of 2002, HP's shares had fallen to the point that the total value received by Compaq's shareholders was only $19 billion instead of the promised 25.

But what's happened since?

The answer is simple: HP's imaging division grew its revenue by more than $7 billion between 2001 and 2006 while HP's consolidated revenues rose by only about $5 billion over the period - meaning that the non imaging businesses are smaller now than they were at the time of the merger.

The printing business also became more profitable: sending 14.9% of its revenues to earnings from operations in 2006 versus only 10.2% in 2001 while the other businesses have yet to recover to their year 2000 levels.

For 2000, the last full year before the merger announcement, HP was slowing but Compaq reported year over year revenue growth in the 10% range. Here's a bit from the press release:

Revenue for the year ended December 31, 2000, totalled $42.4 billion, an increase of 10 percent over the prior year, or 15 percent in constant currency.

Net income from operations was $1.7 billion, up more than three-fold over the prior year. Including non-recurring items, net income for the full year was flat with last year at $569 million, or $0.33 per diluted common share.

"While market conditions will be difficult in the first half of the year, we will continue to differentiate ourselves by developing innovative products, integrating them into solutions and serving the global market," Capellas continued. "The importance of information technology continues to grow, and customer acceptance of our offerings is high.

"For the full year 2001, we are comfortable with analyst estimates of earnings per share growth in the 20 to 25 percent range," he said.

Of course most of that preceded the dot dumb burst, but if they'd recovered to that growth rate after the 2001 setbacks, Compaq today would be just about exactly where HP, stripped of its imaging and printing division, is.

What these numbers suggest to me therefore is that the merger effectively destroyed every cent of HP shareholder value outside the imaging division -a bottom line every shareholder and manager affected by Wall Street's expectations should be concerned about as merger mania continues to drive consolidation in our industry.

Oh, and if you're into the wildly speculative: if HP had IPO'd its imaging division instead of acquiring Compaq: total shareholder value would probably be four to six times what it is now, HP would still be a viable PA-RISC/HP-UX based competitor to Sun, the imaging company would be the size of Dell, and what you see as HP today would still be operating under its real name: Compaq.

Topic: Hewlett-Packard

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16 comments
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  • Carly's Folly

    We all knew this at the time - everyone except Carly and her cronies. She wanted to grab Compaq's customers, and in the end she did. HP now outsells Dell on both x86 clients and servers. So in an era where PC sales are flat or falling, HP has gained market share on Dell. Not too bad of an outcome, but not worth the billions invested.
    Roger Ramjet
    • Is Compaq succeeding? or is Dell failing?

      I think the key issue with HP's PC business is that it isn't really HP's at all - it's as if Compaq has done a reverse
      take-over because pretty much everything I see HP doing to sell PCs now, is what Compaq was doing in the 90s.

      And if it's really Compaq.. what value did HP's shareholders get? at the institutional level there's virtually a 100% overlap between major HP holders now and major Compaq holders then - so overall the name the on the Compaq share changed and nothing else did for Compaq's owners - mean while HP's shareholders lost all of the value those shares held - and the market lost the value offered by HP: high quality products, HP-UX, PA-RISC, good, solid engineering.
      murph_z
      • HP going down

        HP's exit from the UNIX workstation (and reliance on x86 Windoze boxes) market exemplifies this. Company 'F' benchmarked UNIX workstations (for CAD/CAM/CAE use) for many years. HP would always come out on top or 2nd place out of 4 (Sun, HP, SGI, IBM). Their reliance on "banging the kernel" - or rewriting OS code (like NFS) to utilize kernel-speed access - made their lower megahertz machines run 20%-30% faster than comparable Sun equipment. This was probably unsustainable in the long run, as Sun was introducing ONC 4 (NFS v4), while HP's version was ONC 1.2. HP just fell too far behind.

        HP is just so late to the "party". Their HP-UX is not open-sourced, and Linux barely runs on PA-RISC chips (funky graphics designs keep Linux from doing graphics). They sold their future to InHell with the Itanic, and now they are in perpetual wait-and-see mode. Good thing they have their imaging division . . .
        Roger Ramjet
  • Not so sure

    "HP would still be a viable PA-RISC/HP-UX based competitor to Sun"

    I'm not so sure about that. HP started working on EPIC and then collaborated with Intel to develop Itanium way back in 1994 (I think it was called Merced back then). So I think they planned on dumping PA-RISC well before they merged with Compaq. I don't think HP (or even Intel) anticipated how popular and long-lived the x86 architecture would be. In a lot of respects, I think HP merged with Compaq simply because they wanted to get their foot in the door for low end 2 socket x86 server sales. Say what you will about Compaq, but their servers were always pretty reliable, and more importantly, their sales staff were well connected. I think HP was in the position where sales of PA-RISC were drying up, Itanium was a bust, and they had no viable low end x86 servers or people who had the relationships necessary to sell them if they did try to come out with their own offering.

    As far as HP-UX goes, I've always gotten the impression that it was the Unix that nobody wanted to work with. Most people I've met wanted to work with Solaris, then AIX (not due to technical superiority, but due to IBM in general), then HP-UX. With the popularity of Linux in the server space, I think it was just a matter of time before HP dumped HP-UX in favor of Linux regardless of a merger with Compaq.
    t_mohajir
    • Personal Preferance

      [As far as HP-UX goes, I've always gotten the impression that it was the Unix that nobody wanted to work with. Most people I've met wanted to work with Solaris, then AIX (not due to technical superiority]

      HP-UX is the most mature and most stable UNIX around. It predates Solaris and AIX by many years. I found that HP-UX is just as easy to work with as other UNIXes, and the wealth of tools (like SAM, IgniteUX, etc.) make it "better" than Solaris. I find AIX very difficult to work with as their directory structure, file naming and AIX-only commands don't match other UNIXes.

      As for Linux, I have stated that it doesn't run on PA-RISC. It may run on Itanic, but HP has been slow to adopt that CPU. If HP could port their administration tools (like SAM, IgniteUX) to Linux, then maybe they could sell a few Itanics . . .
      Roger Ramjet
    • I agree - but weight things a bit differently

      As a long time HP-UX user I can testify that it was a pain I really didn't want to work with - but also that it worked quite well (ok: after 10.2 at least :) ).

      As for merced/epic - yes HP started that as a co-project with Intel but the goal at the time was to create a 64bit x86 successor that AMD couldn't copy. Throwing in the end of PA-RISC became an internal political target after NT became popular and some people at the top in HP saw it as the end of Unix - and therefore of their Unix CPU.


      Now about Linux: I thought (away back in 1998!) that HP-UX 13 would be Linux - but I was wrong. IBM is taking the route, HP is simply abandoning ship.
      murph_z
      • A slightly different perspective

        I never had problems with HP-UX, although neither the 900 or 9000 series ever impressed me. OTOH their PCs were rubbish. Compaq's were better than HP machines. Even now, I see people having problems with HP PCs and there always seem to be HP-added knobbles and bumps, lousy performance, crap recovery mechanisms etc.

        I certainly never recommend HP PCs to anyone and their laser printers are, IMO, overpriced compared to the competition. I do not see what HP has to offer. They do not seem to be good at anything. At one time the *owned* the printer market and they set the standards. All laser printer manufacturers wanted to be HP compatible. Now they are just another bunch making printers.

        Just my 2p worth.
        bportlock
  • You left out the most significant factor...

    ... in HP's profit growth as justification for the merger.

    Quoting a Motley Fool article from August 2006:

    If there's any cloud hanging over HP's stock, it's that analysts are beginning to question how the company's stock will continue to grow once Hurd is done squeezing out cost savings. In short, they're wondering where the new organic sales growth will come from.

    It's a good question. My guess is that Hurd believes the company's recent acquisitions of Mercury Interactive Corp. and Peregrine will beef up its software business, but I believe he also has his eyes on some future markets.

    http://www.fool.com/investing/general/2006/08/17/hewlettpackard-detects-a-new-market.aspx?ref=foolwatch

    also

    http://www.fool.com/investing/value/2006/08/18/hps-enviable-reinvention.aspx

    It's not the products, it's how few people can produce them. Now the question is whether those who are left can create the products necessary for future sales. Or, perhaps, HP wants to reduce its innovations to Dell's level.
    Anton Philidor
    • It's not just about cost cutting

      I'm glad to see someone finally talked about Mark Hurd in this whole discussion. I find this whole opinion partly absurd because trying to say that HP is really Compaq in disguise or something to that nature relating to 5+ years ago is crazy. Mark Hurd's efforts weren't just about cost cutting, it was about removing all the political and procedural process blocking that was going to affect the change-effort that is underway. So you fire 14,000 people to clear the path and make the effort go quicker.

      So in reality, this isn't even the same HP that it was 2 years ago, making comparisons to Compaq then just are not valid.

      I predict that the HP flywheel is turning and will pickup more speed and you'll continue to see more and more stockholder return as time goes on.
      Spats30
      • Execution.

        Carly Fiorina left by mutual agreement becauase the Board didn't think she was executing (people) fast enough. Given Mr. Hurd's achievement at NCR, he could reasonably be expected to execute faster.

        A company undertaking massive layoffs could be increasing efficiency by reducing redundant staff, but it could also be eliminating the essentail staff who create the next generation of products. That is not required; Sun has so far avoided laying off the staff making possible continued survival because of their skills at creating or improving products.

        Some time ago I read that the company required that all R&D lead promptle to a sellable product. That kind of impatience is not helpful.

        Mr. Hurd beame noted as someone capabe of reducing stsff at a company, Whether he can do a good job after layoffs seem to me top be open still.
        Anton Philidor
  • you must be blind or a liar (would'nt be suprised if you were both)

    http://www.siliconvalley.com/news/ci_5915941?nclick_check=1

    HP has passed IBM.
    HP is crossing $100 billion (1st IT company to ever do so).
    HP is giving Dell a hard time, so much so that Dell is in a tailspin.


    Lets see the Unix players (IBM is not investing in AIX), SUN is giving it away for free and there are not many takers.
    HP had rightly seen the demise of Unix long before and it was the right call.
    code_Warrior
    • FUD, Glorious FUD.....

      [i]"HP has passed IBM"[/i]

      Just! For 2006 HP posted revenue of $91.66bn and IBM was $91.42bn. However as any businessman will tell you, *revenue* is unimportant, it is *profit* that makes or breaks a business. For profits we have:

      Gross Profit: HP = $22.23bn IBM = $38.30bn
      Profit after tax: HP = $6.2bn IBM = $9.4bn


      [i]"HP is crossing $100 billion"[/i]

      Where did you get this from? IBM's revenue is almost identical - they differ by 0.26% so IBM is crossing $100bn as well is it not?


      [i]"HP is giving Dell a hard time, so much so that Dell is in a tailspin."[/i]

      It is well enough documented that Dell shot themselves in the foot.
      bportlock
      • the title of your post was aptly named

        http://research.money.excite.com/custom/iac-com/html-financials.asp?cobrand=EXCITE&symb=IBM

        http://research.money.excite.com/custom/iac-com/html-financials.asp?symbol_search_text=hpq&cobrand=EXCITE&symb=hpq

        If you look at 2007, every quarter HP revenues are above $25 billion. I hope you can do the math.

        IBM is at $22 billion a quarter.


        Again check net income. The figures are nowhere close to what you say they are.




        "It is well enough documented that Dell shot themselves in the foot."

        So where are the links to the documentation.
        How about listing what their mistakes were.

        A couple of years back when Dell had the best margins by having efficient operations, IBM and HP felt the heat and struggling to compete with Dell.
        However that about the only similarity between IBM and HP. IBM decided to quit the PC business. HP on the other hand focussed on improving their operations and on doing so had better margins than Dell and Dell is feeling the effects of being squeezed by HP.
        code_Warrior
  • tutorials

    http://tutorial.jcwcn.com
    Directory of tutorials for software programs such as MS Excel?Aphotoshop and Macromedia Dreamweaver.
    pczpmail
  • Sun has operating loss of $870 million in '06

    and HP has an operating profit of $6,198 million in '06 (source www.hoovers.com).

    According to Hoovers, Sun has consistenly had 100's of millions in operating losses for the last several years (864 million, 107 million, and 388 million). A very negative trend.

    Which company would you want to bet on? The one making money hand over fist or the one losing it hand over fist?
    __howard__
  • You're not alone in this opinion

    I don't have any skin in the game (though I am an HP printer customer). A few years after the merger, what you're saying was what a lot of people were saying about HP, that besides the printer business, HP was "Compaq". What I remember is this was due to a change in the management team after the merger. A lot of the executives that came in were from Compaq. I haven't worked there, so I don't know the inside baseball. I've just heard bits and pieces in the media and online since the whole thing blew up.
    Mark Miller