The merger had a huge impact on HP and Compaq’s shareholders. As soon as the merger was announced, stock prices in HP decreased by 21. 5% and in Compaq decreased by 15. 7%. Since then the stock prices still have not returned to their original levels even after 3rd May, 2002 when the merged company was officially launched. The largest stakeholders; Walter Hewlett and the David and Lucile Packard Foundation, will have found that both their stakes were worth a great deal less after the merger was announced and they both opposed the merger and so will have been very disappointed.
In the last year, shareholder value has increased slightly, indicating that the company is becoming more stable. By looking at the most recent annual reports, it is clear that the printer industry at HP is booming. They announced that they have shipped 43 million printers in 2003, (this is equivalent to having shipped one printer every second! ) This is impressive, but the printer industry is a low profit sector and so will not make too large a difference in the overall profits of the business.They have also been successful in saving $3. 5 billion in costs since the merger took place which exceeded their goal by $1 billion. The price/earnings ratio is a good way of checking how a company is expected to perform. I calculated HP’s price/earnings ratio for 2002 and for 2003.
(PE ratio=share price/earnings per share; these figures were taken from the annual reports. ) In 2002, the PE ratio is 15. 8 divided by -0. 31, which gives -50. 97 and in 2003, the PE ratio is 22. 31 divided by 0.
83, which gives 26. 88.The negative PE ratio for 2002 is particularly bad, but in 2003, this had improved dramatically and was more in line with the rest of the industry.
(The latest PE ratio for Dell is 35. 21. ) This is also shown by the slight increase in the share price in 2003. I have also looked at the gross profit margins of 2002 and 2003. In 2002, this figure was 25. 3% and in 2003, this figure was 25. 5%.
Not only this, HP managed to return all their major business segments to profitability.The figures are both good profit margins compared to the industry which was reported to be 24. 49% in January 2001. In 2003, HP managed to win large contracts with Proctor and Gamble, Bank of Ireland and Telecom Italia.
These will be very profitable for the future. To summarise, the stakeholders in HP will have found that after the merger was announced they noticed a dramatic loss in value, and then in 2002 after the merger had taken place, the share prices took a further dip in value as the company got accustomed to the new changes.In 2003, HP started to introduce new products and improve profit margins again and they now have a much better outlook for the future. It is difficult to say whether shareholders would have had greater value if the merger had not gone ahead as we do not know what would have happened, but they would have had to pay the break up fee and had other problems to contend. It seems that HP made the best of a bad situation.