The HP-Compaq Merger - A Battle for the Heart and Soul of a Company

The HP-Compaq merger in 2001 gave journalists a lot to write about. Headlines screamed of foul play, dirty dealings and broken promises. Those who took the side of Walter Hewlett, the son of founder William Hewlett, saw the merger as the death of ‘The HP Way’. Those siding with CEO Carly Fiorina saw it as a necessary step forward, a battle between past and future. In this award-winning case study, Professor Randel Carlock and Elizabeth Florent-Treacy deconstruct the merger and reflect on some relevant larger issues: the role of families and heirs in large corporations, how companies balance the ideals and vision of its founders against the realities of the current business environment, and the relationship between boards and company management.

by Randel Carlock, Elizabeth Florent-Treacy, Robin Cooper
Last Updated: 23 Jul 2013

When Carly Fiorina was appointed CEO of Hewlett-Packard in 1999, it marked many firsts: the first outsider, the first woman, the first non-engineer, and the youngest person ever to head HP in its 60-year history. Her mandate from the board: “totally recreate and reinvent HP according to the original HP Way.” In many people’s eyes, she accomplished this, transforming the company from a slow, risk-averse country club into a battle-ready competitor in the ‘new economy’. Others believe she destroyed the very heart and soul of a company that was founded on ideals worthy of a Frank Capra movie.

In this new case, Professor Randel Carlock, Berghmans Lhoist Chaired Professor in Entrepreneurial Leadership and Elizabeth Florent-Treacy, Senior Research Associate, detail the merger, the bitter and very public battle with the Hewlett and Packard families, and the larger issues of corporate governance, the relationship between boards and management, and the role of families that have both financial and emotional stakes in a company.

This EFMD 2004 Case Competition winner begins with Fiorina’s arrival in 1999 at an embattled HP, losing market share and pride to the likes of IBM and Dell. She was to be the saviour, the one to bring HP back to the glory days under its cherished and now deceased founders, William Hewlett and David Packard. After a brief honeymoon, Fiorina shakes things up with talks of a merger with Compaq, launching an ugly battle with the Hewlett and Packard heirs, which seems to catch her completely by surprise.

At stake is the soul of a company that many revere as an icon among technology firms in America. Bill Gates hadn’t even been born when the two founders started tinkering together in a garage in Palo Alto, California. Not long after founding the company, the two draft "The Seven Principles of the HP Way". Included among them are the mandates to “Recognize that profit is the best measure of a company’s contribution to society and the ultimate source of corporate strength,” “Demonstrate good citizenship by making contributions to the community,” and “Maintain an organizational environment that fasters individual motivation, initiative and creativity.”

Now, six decades later, Walter Hewlett, an HP board member, votes “Yes” to the merger but immediately starts a campaign to stop it. With the support of other family members and the Packard Family Foundation, which in total own 18% of HP shares, the normally reserved Hewlett leads a fight that nearly puts an end to the highly publicized merger. In the end Fiorina wins, after receiving last-minute support from Deutsche Bank. What’s left over, say Carlock and Florent, are a series of difficult questions.

Perhaps all would have proceeded smoothly if Fiorina had considered the concerns of the families before proceeding. They did, after-all, have large financial and emotional stakes in the company. And what lessons can be learned about corporate governance? Walter Hewlett says he has learned a lot, telling an audience at a speaking engagement that the board and management should have separate counsel during mergers to ensure unbiased advice and fair representation of shareholders views. In addition, the case asks students to explore the challenge of leadership when attempting to regenerate a highly regarded corporation and the significance of corporate culture in organizational transitions.

Click on 'Carly Fiorina and HP' below to read Randel Carlock's analysis of Fiorina's recent dismissal from HP.

INSEAD 2003

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