The Significance of Hewlett Packard's Palm Acquisition

The significance of Hewlett Packard (HPQ) buying Palm, Inc. (PALM) is expected to be its capacity to gain market share in specific areas of Mobile Communications and Technology such as cellular phones and hand held computing devices. Hewlett Packard's acquisition of Palm, Inc. is scheduled to occur on July 31, 2010. The company will then have improved access to a larger and fast growing market with its new Palm assisted horizontally integrated product line.

Palm is a company that's specialty is hand held computing devices be they phones or mini-computing devices. The company débuted in the late 1990's with its first Palm hardware and has since seen its share prices decline from $100's to around $5.76 in April of 2010. Hewlett Packard has taken advantage of  Palm's low share prices to acquire it  for the price of $1.2 billion or $5.70 per share according to an April 28, 2010 HP press release. (2)
A key to Hewlett Packard's acquisition of Palm, Inc. according to HP and Business World.com (2&1), is Palm's mobile operating system named Palm WebOS. This mobile operating system will allow Hewlett Packard to compete with other mobile operating systems such as Symbian,  iPhone, and Linux. The mobile phone market is forecasted to grow into 2014 according to the Chief Analyst of Mobile and Wireless Communications at Frost and Sullivan, a business growth consulting firm. (3) Such being the case, if Hewlett Packard effectively taps into its own access to capital and distribution network, the development of Palm, Inc.'s product could yield sizable revenue.

Some questions that arise out of such an acquisition are 1)  How long will it take for HP to earn what it paid in cost for Palm Inc.,?, 2) Is the acquisition intended to supplement a decline in HP's existing market? And 3) How much and how capable is HP in increasing its total revenue and net income. The answers to these questions rest in Hewlett Packard's access to financing, its development of the Palm Web OS, and its ability to position itself as a new competitor in the mobile device market. Given HP's experience in the computer hardware industry, its size and its existing know how, this doesn't seem like too much of a leap for HP.

Hewlett Packard is a fairly strong company if existing product market share, financial statements and statistics, and business strategy are any indicator. Hewlett Packard has a current ratio of 1.27, positive profit margin of 6.98% and high return on Equity (ROE) of 19.83% as per May, 2010 Yahoo finance data.(4) Moreover,  according to 1000ventures.com, Hewlett Packard has a division organizational structure allowing critical areas of large the company to be run semi-independently to facilitate focused management, goal setting and benchmark performance.(5) Hewlett Packard is also an old company, that's endurance through multiple business cycles and the dot.com era, points to its strategic success.

The HP acquisition of Palm, Inc. does not seem to be a flippant one as HP is already horizontally integrated in the computer hardware market. It has a product line of printers for which HP is most known, laptops, desktops, calculators,  scanners, and faxes. Hewlett Packard also has a hand-held product line including the HP iPAQ cell phone series. The significance of Hewlett Packard buying Palm, Inc. seems to be one of market share and growth within the parameters of existing horizontal integration and market know how.

Sources:

1. http://www.bworldonline.com/main/content.php?id=10361
2. http://www.hp.com/hpinfo/newsroom/press/2010/100428xa.html
3. http://bit.ly/6dipQk (Frost and Sullivan)
4. http://finance.yahoo.com/q/ks?s=HPQ+Key+Statistics
5. http://www.1000ventures.com/business_guide/organization_flat.html

Reasons for the Quest Merger with CenturyTel

Reasons for the Qwest Communications International Inc.(Q) merger with CenturyTel, Inc. (CTL) aka CenturyLink, are ultimately financial. Both companies are involved with telecommunications making the merger an expansion of existing services and infrastructure. 

Qwest assets come at a used prices, and its financial statements reveal potential improvements to cash flow in addition to gaining a new revenue base. CenturyTel's merger with Qwest Communications International Limited would also better qualify the newly formed company for 'broadband stimulus subsidies' according to Karl Bode in an April 23. 2010 report at http://www.dslreports.com.
• Billions of Federal grant funds

The American Recovery and Reinvestment Act of 2009 has apportioned $7.2 Billion dollars for Broadband services across the U.S. This part of the act is contained within Title VI and called the Broadband Technology Opportunities Program.(4) For a company like CenturyLink that's already in the telecommunications business, the Federal (taxpayers) money is  a source of investment capital that apart from debt and equity has lower cost than both these other options.

• Qwest financial statements:

Another reason for the  Qwest merger with CenturyTel is that Qwest is a profitable company, or has been one since 2007. Its 2009 Net income was $662 million and Q1 2010 net income was $38 million.(5) Also, recent operating margin as of May 2010 was 16.99% indicating a lean operation, operating cash flows were high, and profit margin was 4.08% for the same. This is not to say Qwest doesn't need work, it does with negative revenue growth, and a current ratio reflective of too much company liability.

• Increased free cash flow earnings per share

Qwest communication's April 22, 2010 press release pertaining to the prospective merger states "The parties expect to be accretive to CenturyLink's free cash flow per share". (1) An increase to free cash flow per share, if realized, would essentially mean the newly merged corporation would have greater access to cash which allows more potential for the company at less cost.

• Marketing return on investment

CenturyTel's merge with Qwest would also be sweetened by Qwest's existing customer base comprised of millions of active broadband lines that would otherwise be somewhat inaccessible. This affords CenturyTel potentially greater marketing returns. In other words, an increased market share affords higher cross selling opportunities, and an occasion to improve service for existing CenturyTel clients with the financial and strategic leveraging made possible through the merger.

•  Telecommunications infrastructure

A fifth reason for CenturyLink's merger with Qwest Communications International  Inc. is the telecommunications infrastructure that the new company would have access to. After depreciation, and assuming a life after depreciated assets, this infrastructure is coming used, but more affordably for CenturyTel, a price $25 billion cheaper than original purchase price according to Karl Bode of http://www.dslreports.com. (3)

As of May 2010, the CenturyTel merger with Qwest has yet to occur. The merger agreement itself allows cancellation of the merger agreement if said agreement is not entered into by April 2011, and both Federal Communications Commission (FCC) and shareholder approval is needed for the merger according to the Qwest's April 22, 2010 press release. If the merger between CenturyTel and Qwest Communications does take place it would make CenturyTel the 3rd largest landline phone service provider in the U.S.(2)

Sources:

1. http://news.qwest.com/centurylinkqwestmerger
2. http://bit.ly/9fJe6B (MarketWatch)
3. http://bit.ly/9wxpX5 (DSLReports)
4. http://bit.ly/abFVn8 (Library of Congress)
5. http://finance.yahoo.com/q?s=Q (Yahoo Finance)

Advantages and Disadvantages of Acquisitions and Mergers

Advantages and disadvantages of mergers and acquisitions (M&A) are determined by the short-term and long-term company strategic outlook of the new and acquiring companies. This is due to a host of factors including market conditions, differences in business culture, acquisition costs and changes to financial strength surrounding the corporate takeover.

A well known example of mergers gone bad was the September 15, 2008 merger between Bank of America and Merrill Lynch. This merger was surrounded by complications ranging from employee bonuses, added debt and forced hands as evident in the April 13, 2009 U.S. Senate Committee on Banking investigation of the merger. (7)

In the case where short-term financial benefits are not realized, long-term advantages may be seen as a valid and probable reason for the merger or acquisition. This article will discuss advantages and disadvantages of mergers and acquisitions in four parts consisting of pros and cons of M&A decision making, operational and financial advantages, costs, and consumer benefits and drawbacks.

• Pros and cons of mergers and acquisitions

A number of reasons provide sanction for a corporate merger and acquisition, not all of which are necessarily financial in nature. Moreover, M&A is within the scope of the Board of Directors to pursue (1) and the company executives to initiate and execute. Since board members may also be subject to political, social, and personal interests, decisions seemingly in favor of the shareholders may also become quagmired with additional factors.

According to Investopedia.com, an estimated 66% of mergers and acquisitions are not successful because of M&A intent. Of the 33% that are considered successful, the mergers and acquisitions achieved a net gain from the M&A with our without bad M&A intent. A number of reasons for the majority of failures exist in addition to the failures themselves indicating a potential disadvantage of M&A activity is a relatively high risk of failure.

This is further illustrated in an article from a 2005 article in the Journal of Global Business on M&A preparation. (6) Moreover, the article that refers to numerous M&A case studies and research sources states the reasons for M&A failures include 1) bad basis for decision making on the part of the company leadership, 2) failure to consider and/or incorporate the new company, 3) bad management and 4) overestimating the valuation of the acquired corporation.

Despite the reasons some M&A's fail, mergers and acquisitions, regulations of such and their circumstances may harness the characteristics of the decision makers for the net economic advantage despite possible conflicts of interest, short-term financial and consumer disadvantages. In other words, in theory, mergers and acquisitions may be economically beneficial in terms of reducing complexity of regulatory oversight, increasing global corporate competitiveness, and adding to shareholders net wroth. This is verified by the M&A activity that is successful through increases in equity valuations, larger market share, improved operational efficiency, higher industrial capacity etc.

• Operational and financial advantages of mergers and acquisitions

The operational and financial advantages of mergers and acquisitions are widely documented and may also present the face of M&A activity to shareholders, the public, corporate appeals to legislators etc. These advantages can include increased market share, lower cost of production, higher competitiveness, acquired research and development know how and patents. These and other advantages (2) of M&A are listed below:

• Increased market share
• Lower cost of operation and/or production
• Higher competitiveness
• Industry know how and positioning
• Financial leverage
• Improved profitability and EPS

Not all the above advantages of mergers and acquisitions may be realized, but are often included among the reasons for engaging in the corporate activity. When a company is able to benefit from all these advantages it can lead to more stability as a corporate entity and cold also provide for higher political influence and industry leadership.

• Costs of mergers and acquisitions

Mergers and acquisitions can be costly due to the high legal expenses, and the cost of acquiring a new company that may not be profitable in the short run. This is why a merger or acquisition may be more of strategic corporate decision than a tactical maneuver. Moreover, if a poison pill unknowingly emerges after a sudden acquisition of another company's shares, this could render the acquisition approach very expensive and/or redundant. (4)

• Legal expenses
• Short-term opportunity cost
• Cost of takeover
• Potential devaluation of equity
• Intangible costs

M&A activity can also be exacerbated by the short-term cost of opportunity or opportunity cost. This is the cost incurred when the same amount of investment could be placed elsewhere for a higher financial return. Sometimes this cost does not prevent or deter the merger or acquisition because projected long-term financial benefits outweigh that of the short-term cost.

• Consumer and shareholder drawbacks

In some cases, mergers and acquisitions may not only disadvantage the shareholders but consumers as well. In both cases, this may happen when the newly formed company becomes a large oligopoly or monopoly. Moreover, when higher pricing power emerges from reduced competition, consumers may be financially disadvantaged. Some of the potential disadvantages facing consumers in regard to mergers are the following. (3)

• Increase in cost to consumers
• Decreased corporate performance and/or services
• Potentially lowered industry innovation
• Suppression of competing businesses
• Decline in equity pricing and investment value

Shareholders may also be disadvantaged by corporate leadership if it becomes too content or complacent with its market positioning. In other words, when M&A activity reduces industry competition and produces a powerful and influential corporate entity, that company may suffer from non-competitive stimulus and lowered share prices. Lower share prices and equity valuations may also arise from the merger itself being a short-term disadvantage to the company.

Sources:

1. http://www.nvca.org/index.php?option=com_docman&task=doc_download&gid=368&Itemid=93
2. http://www.economicshelp.org/microessays/competition/benefits-mergers.html
3. http://www.economicshelp.org/microessays/competition/uk-mergers.html
4. http://www.investopedia.com/university/mergers/mergers5.asp
5. http://legal-dictionary.thefreedictionary.com/Mergers+and+Acquisitions
6. http://www.gbata.com/docs/jgbat/v1n2/v1n2p1.pdf
7. http://www.oag.state.ny.us/media_center/2009/apr/pdfs/BofAmergLetter.pdf

8. Jarrod McDonald, Max Coulhard, and Paul De Lange.(Fall, 2005) 'Planning for a Successful Merger: A Lesson form an Australian Case Study.' Journal of Global Business and Technology, Volume 1, Number 2.