A corporate governance analysis on the merger of Hewlett-Packard and Compaq

Abstract

The process of merger between Hewlett-Packard (HP) and Compaq from 2001 to 2002 was a long strenuous battle between the CEO, shareholder activists, and board of directors. In this case study, analysis of abnormal stock returns and operating performance reveals that the merger was value destroying. The major corporate governance stakeholders played various significant roles throughout the merger process. Hence, this study focuses on these corporate governance stakeholders by investigating CEO compensation and incentives for merger, share valuation impact of shareholder activism, and board composition and its effectiveness in monitoring management. Research on CEO monetary and non-monetary incentives finds more motivation for the merger due to long-term incentives rather than short-termed. In addition, little evidence is found to support that HP activists helped to increase share value. Lastly, this case also shows that having a majority of outside directors on the board does not necessarily eliminate the principal-agent problem.