Compaq's Digital Acquisition Creates New IT Giant

Compaq Computer's Corp.'s planned acquisition of Digital Equipment Corp., announced today, creates a new computer industry behemoth with a combined US$37.5 billion in revenue and the scope to be a worldwide leader in corporate computing, challenging Hewlett-Packard Co. and IBM Corp., according to industry observers.

Compaq Computer's Corp.'s planned acquisition of Digital Equipment Corp., announced today, creates a new computer industry behemoth with a combined US$37.5 billion in revenue and the scope to be a worldwide leader in corporate computing, challenging Hewlett-Packard Co. and IBM Corp., according to industry observers.

The transaction, if approved by shareholders and regulatory authorities, will be the largest acquisition in the history of the computer industry, valued at $9.6 billion based on the Jan. 23, 1998 closing price of Compaq common stock. The deal beats the $3.52 billion IBM paid for Lotus Development Corp. in 1995, which was then the largest software deal in history.

Under terms of the transaction in which Digital will become a wholly-owned subsidiary of Compaq, shareholders of Digital will receive $30 in cash and approximately 0.945 shares of Compaq common stock for each share of Digital stock. Compaq will issue approximately 150 million shares of Compaq common stock and $4.8 billion of cash.

The acquisition, which officials expect to close in the second quarter, gives Compaq a strengthened relationship with software giant Microsoft Corp., as well as Digital's Alpha processing technology, mid-range and high-end Unix and OpenVMS operating system software, storage technology, and a world-class service organization, said Compaq executives. Analysts agreed, applauding the acquisition today as investors boosted Digital shares. With Compaq paying a $30 premium for Digital stock, Digital shares rose 9-13/16 to close at 55-1/4 today, as Compaq's shares declined by 2-3/4 to 29.

The combined company will create an IT giant that can offer the complete spectrum of computers, from sub-$1,000 home PCs to high-end, enterprise systems based on 64-bit Alpha architecture. But at a press conference today, executives from both companies stressed benefits to their large-company strategy.

"We want to become the strategic partner to customers worldwide, working to enable their competitive advantage," said Eckhard Pfeiffer, Compaq president and CEO at news conference here. "The successful completion of Compaq's acquisition of Tandem [Computers Inc.] put us on the fast track toward achieving these goals. This [Digital] acquisition represents the next step in Compaq's transformation into a full scale enterprise computing company and strengthens our customer focus as a strategic partner to customers of all sizes."

The acquisition will give Compaq 1,600 Microsoft-certified service professionals, more than 3,000 Unix-trained service people, and 25,000 service professionals. In addition, with the acquisition, the combined entity will have the largest channel organization in the world, with 40,000 locations, Pfeiffer said.

Digital also will provide Compaq with a strong vertical market presence in the communications, financial services and manufacturing areas, Pfeiffer said.

After faltering for a number of years, Digital has reported improved financials for the last few quarters, though observers have not been convinced that the company has left its troubles behind. [See "Digital's Financials Impress, But Staying Power Uncertain," July 24, 1997. ] Digital's strategy to get back to profitability has included the October sell-off of its Alpha microprocessor manufacturing facility to Intel Corp. and the jettisoning of its networking division, which Digital sold to Cabletron Systems Inc. for approximately $430 million in November.

The combined revenue of Compaq and Digital would be $37.5 billion. This, according to Compaq, would make it the second largest computer company in the world second only to IBM, with 1997 revenue of $78.5 billion. Hewlett-Packard Co. has revenue of $42.9 billion, but only about 80 percent of that is from its computer operations.

Despite the hefty premium Compaq is offering Digital shareholders, the price was not seen as being too high by analysts.

"Digital's expensive, but that tends to be how an acquisition like this goes -- you have to bid over market," said Rob Enderle, an analyst with Giga Information Group in Santa Clara, California. "It's a sensible price for Compaq to pay."

Other analysts agreed.

"I'd say Compaq got a pretty good deal," said Terry Shannon, editor of Shannon Knows DEC, a newsletter based in Ashland, Massachusetts.

It's probably good for Digital too, Shannon said. Digital's brand equity, after its financial woes over the past few years, is quite tarnished. "The employees have had an 'under siege' mentality for quite some time but products and technology have never been Digital's problem."

Digital's problem has been marketing, and "Compaq certainly knows how to market," Shannon said.

Digital and Compaq had had exploratory discussions, mainly of an "informational" nature, in the past, but the definitive acquisition agreement announced today was put together in just two weeks of talks and due diligence, according to Pfeiffer. The acquisition fills in the "missing pieces" of Compaq's enterprise strategy left over from its acquisition of Tandem, announced last June. "Our goal was always to move into the number two position and then do some more strategizing," Pfeiffer said.

"These kinds of transactions are always complex and this one was no exception, but the reason for reaching this agreement was really very simple -- together we are a much stronger competitor than we were as separate companies," said Robert Palmer, Digital's CEO and chairman.

Palmer sidestepped questions about whether there would be layoffs, as well as questions about his status. "My focus is going to be on insuring the best possible outcome," for the acquisition, Palmer said.

During the press conference, Pfeiffer was asked by moderator John Rose, Compaq senior vice president, to answer a question about whether any of Digital's lower-end product lines -- such as laptops -- would be eliminated, but was interrupted by Palmer. Palmer said the "extraordinary growth that the PC industry is enjoying ... creates opportunities for talent."

More generally, Pfeiffer said there are some "obvious" efficiencies to be gained in the deal, notably enhanced purchase power for components. Pfeiffer also said Compaq would support Alpha.

"We are comfortable with supporting Alpha now and in the future."

Aside from the status of the Alpha processor, the biggest issues arising from the deal involve the services and server businesses, said analysts. Compaq stands to be able to challenge HP and IBM in these areas -- at least in the mid-range server sector, analysts said.

"This will make Compaq a serious services player," said Jane Doorly, vice president and director at Dataquest Europe in London. "From the consulting/integration perspective -- this is really quite a massive merger," Doorly said. "We think Compaq will leave DEC's services business intact. We are questioning now how it will merge in with Tandem's services."

The acquisition rounds out Compaq's server strategy, said other observers.

"I think Compaq wants to become the enterprise server supplier of choice," said Laruent Lachal, a consultant with Ovum Ltd. in London. "DEC Is formidable but had lost its way and had lost focus. Compaq gives it focus and that is a good thing," Lachal continued. "It gives the market an alternative to IBM and HP."

The big challenge for Compaq, according to observers, is merging the corporate cultures.

It will be difficult for Compaq to incorporate a company the size of Digital, particularly since it has just finished "digesting" Tandem, said Terry Ernest Jones, an analyst with International Data Corp. in the UK. "Also, the PC market is intensely demanding and a wrong footfall is not forgiven. But Digital has got itself into shape so that it is buyable."

Competitors, meanwhile, hope they will be able to take advantage of any confusion during the merger of the two companies' strategies, staffs and facilities.

"They're two different companies with very different cultures -- NT and proprietary Unix -- and before it's a real opportunity for Compaq it will be a challenge, particularly managing the bringing together of two very different companies," said Hubert Cospain, manager of HP distribution channels in France. "It could be a good opportunity for HP (at least initially) as some Digital customers will feel destabilized."

At least one IBM official, meanwhile, made the point that the acquisition mainly expands Compaq's hardware offerings, rather than adding software.

"I think they are a very large hardware company together, which means they'll need a lot of software," said John M. Thompson, executive vice president of IBM. He said he expects they'll be a good potential software customer for IBM/Lotus and said "I can't wait to call them ... the only thing I worry about is if Eckhard is going to have enough money left for software after spending $9.6 billion for DEC."

Compaq, in Houston, can be reached at +1-281-370-0670, or on the World Wide Web at http://www.compaq.com/. Digital, in Maynard, can be reached at +1-978-493-5111 or on the Web at http://www.digital.com/.

(Additional reporting by Jeanette Borzo and Joanne Taaffe.)

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