Managing a successful integration With Organizational Change: lessons learned from the HP/Compaq merger

2003 Hewlett-Packard Development Company, L.P. The information contained herein is subject to change without

Agenda

The opportunity Achieving success: doing our homework Managing a rigorous pre-close process Preparing for launch day Creating the post-close integration structure and processes Where HP stands today Any open questions

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The Opportunity

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Merger overview

Merger created a $70 billion global technology leader with the industry's most complete set of IT products and services for both businesses and consumers New HP is the #1 global player in servers, imaging & printing, and access devices (PCs & hand-helds), as well as Top 3 player in IT services, storage and management software Combination furthers each company's commitment to open, market-unifying systems and architectures and aggressive direct and channel distribution models Combined company is creating substantial shareowner value through significant cost structure improvements and access to new growth opportunities New HP has operations in more than 160 countries and over 140,000 employees
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HPs challenge

Largest merger in technology history Skeptical market Heated proxy battle Weak IT market

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Achieving success: doing our homework

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Attributes of successful mergers

Bring like businesses together, arent forays into new businesses Help achieve clear market leadership Are stock only and provide a stronger post-merger balance sheet Result in significant cost savings Use a strong, central planning effort

Indeed, we found the market apparently prefers deals that are part of an expansionist program, in which a company seeks to boost its market share by consolidating, by moving into new geographic regions, or by adding new distribution channels for existing products and services. The market seems to be less tolerant of transformative deals, those that seek to move companies into new lines of business or to remove a chunk of an otherwise healthy business portfolio.
Deals that Create Value McKinsey Quarterly 2001 Number 1

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10 critical success factors in execution

Critical success factors*
1. Well-defined acquisition strategy 2. Clear product roadmap 3. Unyielding focus on customers

Sample elements

Reasons for merger explained Degree of integration defined Criticisms addressed Communication of offerings to marketplace Re-alignment of internal efforts Branding strategy Clear points of contact Uninterrupted attention/support Maintained relationships with partners/channel Plans in place for all functions, businesses, and geographies Effective transition from plan to action

4. Day one readiness

5. Synergies and path to realization specifically identified

Both cost and revenue synergies included Plans, accountabilities, and clear metrics/targets assigned to project level Strong program management processes to track/drive results

*sources: Lessons From the M&A Front: The Morning After Deloitte Consulting Report (1999); Why Mergers Fail McKinsey Quarterly (2001); Not All M&As Are Created Equal and That Matters Harvard Business Review (2001)
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10 critical success factors in execution

Critical success factors*
6. Clearly defined new co. governance 7. Effective communications to stakeholders 8. Focus on employee retention

Sample elements

Board/executive roles agreed to Organization structure defined Line management roles determined Communication early and often Reaches all stakeholders (employees, shareholders, analysts, customers, partners, et al.) Clear, consistent messages Key employees identified and targeted Employee morale issues addressed Incentives utilized where appropriate Nature of cultural differences identified Proactive steps taken to bridge gaps Rules of the road for interaction defined Minimize periods of uncertainty Complete the planning prior to close Attack synergies from day one

9. Recognition of cultural differences 10. Speed/decisiveness

*sources: Lessons From the M&A Front: The Morning After Deloitte Consulting Report (1999); Why Mergers Fail McKinsey Quarterly (2001); Not All M&As Are Created Equal and That Matters Harvard Business Review (2001)
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Managing a rigorous pre-close process

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Building the integration planning team

Post-merger integration (PMI) leadership and group management named at time of announcement on September 4, 2001 Additional new HP senior leaders announced October 12, 2001 Dedicated, full-time PMI leads from both HP and Compaq directing planning for businesses, functions and horizontal processes since September

Linked to new HP senior management team

World-class advisors engaged

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New HP vision and merger integration team purpose

New HP vision
We create a great new company that is a leader in our chosen fields and is positioned to be the leading overall IT solutions provider

Merger integration team purpose:

Provide effective overall leadership for the planning and execution of the integration of HP and Compaq Assure effective linkages with the business line managers, functions, regions, the integration steering committee and HPs Executive Council Assure that the value captured is maximized and exceeds public expectations Assure the new HP is set up to achieve long-term growth objectives
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Guiding principles for the merger integration team

Start with the customer experience, retain the highest level of customer satisfaction Name executive leaders early and link tightly into planning Ensure that structure follows strategy Make decisions quick and make them stick Adopt and go Clarify roles and ensure shared accountability Create dedicated integration teams Address cultural similarities and differences Rigorously measure, manage and communicate integration progress, wins, issues and opportunities
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Sharply focus on value creation

Pre-close merger integration team structure
Businesse s
Central program management office (cPMO) Imaging and printing systems group Personal systems group Enterprise systems group Services

go-to-market

go-to-market

go-to-market

go-to-market

Supply chain Customer to cash team (CRM, OM, PDM) Information technology Finance Human resources (includes organizational design and selection) Brand architecture Communications organization HP labs Real estate CTO e-inclusion and community engagement .com/e-commerce Government affairs Culture Closing/antitrust (legal) Global functions infrastructure Communications merger communications & messaging Shared go-to-market

Program specific

Horizontal processes

Value capture
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Integration planning framework

Strategy
Strategic priorities Go to market strategy Portfolio Channel strategy

Measures
Customer satisfaction Financial Employee satisfaction Operational excellence Recognition and reward systems

Structure & process

Organization structure Systems & processes Information flows and decision making process Financial & information systems architecture

People & culture

One common culture Retention of top talent New competencies for our people Roles and responsibilities

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Integration team focus before completing the merger

Organization & GTM structure

Product roadmaps

Level 1-3 leadership Top 100 accounts Contingency plan Organizing principles Go-to-market structure and planning Supply chain partners

Base model revenue, market share Product lines as they exist today Go-forward product lines and subbrands Phase-out set of products Hand-off to master brand team

Financial plan

Launch plan

Historical model Base case and target model Headcount, restructuring, discretionary spending targets Accountability and operational metrics

Touch programs Advertising/brand launch Web launch Account plan process Training

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Workstream spotlight: Cultural Integration

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Cultural integration goals

To build a strong, new culture that: Is clearly defined and broadly understood Reflects the business strategy and brand Supports best-in-class performance with customers, partners, shareowners and employees Produces alignment, commitment and excitement Establishes a competitive advantage Is reflected in the communications and actions of core leaders

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Culture integration planning framework

Sample input
Newco exec culture session HP historical CPQ historical New HP brand Competitive environment Customer

Strategies

Structure & process

Corporate objectives

Behaviors

Values

Metrics & rewards

Sample output
Vision & governance for new company Balanced scorecard & pay metrics Leadership selection Formation & start-up of new teams Customer (quality) initiatives FastStart program
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Policies & practices

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Preparing for launch

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Day 1 preparation

Focus solely on launch day Gain agreement on day 1 requirements across functions/activities Make adopt-and-go decisions Develop conceptual/ physical models Prepare Test Review readiness Establish command centers

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Measuring success at launch

We were ready

>170 client business managers, 25 partner business managers and 30 retail account managers trained and announced >800 senior managers named, including region and country leads Product roadmaps and transition plans available Customer and partner outreach and training programs initiated

>1100 customers contacted to date 23 top US/EMEA retail accounts contacted on day 1 All partners given access to on-line sales training

Sales readiness training website received 40,000 hits in the first hour of launch and 100,000 hits by end of day >20,000 presales and sales call center agents and 8000 consumer support users trained and ready day 1 Channel strategy in place and communicated Work force restructuring initiated
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Launch report: Infrastructure delivers

hp.com (online store) open for business @hp employee portal accessible to all employees Company networks connected at key strategic locations Active directory and enterprise directory synchronized E-mail systems interconnected All external call centers with HP greeting on day 1 Employee names with hp.com suffix for external email (both in-bound and out-bound) Day 1 infrastructure management environment

Monitoring and reporting process Escalation and incident management process Command center for 30 days
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The new world of HP IT

Weekly email volume 24 million Number of desktops 220,000 Sites networked 1193 Applications >7000 IT professionals 10,000

Mailboxes 229,000

Number of countries >160 Accounts 232,632 # of network devices 39,000

Hits/day on @hp employee portal >2 million

# of daily calls (IT help centers) 8000

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Post-close integration structure and processes

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Integration plan of record

Managing integration progress through a rigorous process Tracking all projects and their milestones to ensure we meet synergy goals on schedule Ensuring tie off with value capture, restructuring and financial planning targets Determining accountability owner for each project Driving results through merger integration office focus on cross-organizational dependencies, pan-HP view

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Remain sharply focused on value creation

Post-close merger integration team structure

Steering committee

Central merger integration office Groups PMI Regions/ countries PMI Worldwide operations PMI Corporate functions PMI

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Value capture planning framework

Integration planning
Value capture team

Implementation post-closing
Corporate planning Monitors and tracks revenue, cost and synergy capture over time Groups Responsible for revenue, owned cost and synergy targets Execute on synergy capture for day-to-day operations Functions Execute on synergy capture on owned costs for day-to-day operations Management compensation tied to achieving value capture goals

Drive overall top-down corporate planning process to achieve full value of the merger by 2004

Provides top-down baseline, forecasts, synergy targets Consolidates integration team submissions Verify and refine top-down baseline, forecasts and synergy targets with bottom-up data

Integration teams

Kick-off of group and functional teams Time Deal close

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Integration starts

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EMEA High Level Integration Structure Implemented

Strong central design management Clean Room & IPORs plus clear targeting There are 2 main elements to the integration structure implemented;

Cross Business Group / Infrastructure

Business Group Specific

PSG

IPG

ESG

HPS

Cross BG Infrastructure
(HR, Fin, IT etc)

The cross Business Group structures focussed on integration elements that touched multiple Business Groups
They are run at regional and country levels
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Where HP stands today

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Ahead of plan on four key areas

Key area of focus Procurement/supply chain

Milestones/targets
$550 million direct procurement synergies
$250 million indirect procurement synergies $125 million manufacturing facilities closure

10,000 by end of 2002

17,900 by 2003 $1.5 billion synergies 21% reduction in total square footage $250 million administrative facilities closure Complete integration of key systems Reduce current application portfolio Transform IT innovation into competitive advantage
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Headcount reduction

Administrative facilities closures

IT integration

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Important lessons learned

Detailed planning is essential

Entails more work than expected Requires sufficient, full-time resources on planning teams Requires balanced teams knowledge and culture Due diligence Values (new) Fast Start Name executives and planning leadership and start planning immediately

Working cultural issues is essential

Must create a sense of urgency and move quickly

Set ambitious goals and measure rigorously Understand and take into account EMEA complexities Additional end to end process focus preferable Use adopt and go decision style Define an end date not too soon & not too late! (12 18 months)
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Merger integration success: It all starts with people

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HPs People Strategy after the merger... Managing Cultural Change

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Managing Cultural Change

The need for a change management strategy HPs People Strategy Stabilize: Building the new HP foundation
Mobilize: Creating a high performance workplace
Energize: Ensuring the best work environment
III.
IV.

I.
II.

Conclusion Q&A

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Quote slide

Change is an opportunity that you can influence, and when managed correctly it will energize an organization

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Why Manage Change?

Significant workplace change can defocus an organization Consistently practiced change management techniques will:

anticipate the phases of emotions address the issues maintain strong communication efforts provide the catalyst to move people through change without losing focus and productivity

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HP-Compaq Merger: The Challenge for HR

Develop a strategy to maintain and surpass the pre-merger standards of both companies while managing massive cultural change

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Five Stages of Change Management

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Stage One: Awareness

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Quote slide

The HP People Strategy is aligned to our corporate objectives and values and designed to keep employee commitment, especially in this time of change.

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HPs People Strategy

HPs People Strategy enabled HR to:

Speed and smooth the process of change Move through the initial change period Set a culture of high performance right from the start

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Overview: HPs People Strategy

Best Place to Work

Energize
High Performance Workplace

Mobilize
New HP Foundation

Stabilize
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Stages Two and Three: Cope, Internalize and Align

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Building the New HP Foundation

Build New HP Foundation Stabilize

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Building the New HP Foundation

org design & selection

total rewards &

benefits design

MRU
Fast Start culture cornerstones workforce reduction

job titles job levels pay/bonus mix structures retirement time-off

organization implementation & effectiveness

benefits

health
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Guidelines for Building the New Foundation

Speed is essential Act early Encourage face-to-face interaction Be pragmatic Choose a cornerstone for the new organization

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Building the New HP Foundation

Speed is essential

Clear, regular and open communication

Act early

Involvement of management and employees from the very beginning Clean Room teams discussed the design and culture of the new organization

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Building the New HP Foundation

Encourage face-to-face interaction

Fast Start sessions

Be pragmatic

Adopt and go methodology

Choose a cornerstone of the new organization

Employee portal: @hp

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Stage Four: Execute

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Creating a High Performance Workplace

High Performance Workplace Mobilize

New HP Foundation

Stabilize
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What is High Performance?

The high performance culture accelerates future growth by:

Maximizing organizational/individual productivity and capability Aligning individual performance with company and business objectives Using rewards as the motivator Developing people through effective coaching, performance feedback and development planning

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The High Performance Model

balanced scorecard, HP values and supporting behaviors

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Stage Five: Reinforce and Arrive

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Ensuring the Best Work Environment

Best Work Environment Energize

High Performance Workplace

Mobilize
New HP Foundation

Stabilize
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Ensuring the Best Work Environment

1. 2. 3. 4. 5. 6.

Re-evaluated personal conduct policies and practices Objectively examined behaviors and actions within HP Created a new set of standards that define what we stand for today, owned by all HP employees. Not an HR programa broad-based, company-wide initiative Long-term solution Personal accountability and ownership

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Quote slide

How we get things done is as important as what we get done.

- Carly Fiorina

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Reinforcing desired behavior

Clearly set expectations for personal conduct Charge each employee with accountability and responsibility for creating the best work environment Provide resources, training and tools Reward those who contribute to and ensure best work environment

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Five Stages of Change Management

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Questions..???????

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