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Compaq: The next IBM?

Acquiring Tandem may let Compaq fulfill its ambition to compete with IBM and HP on the high end of the computing spectrum.

Compaq Computer (CPQ) wants to play with the big boys.

And now it can, if the merger announced today with Tandem Computers goes through.

Tandem will give Compaq what it needs to compete on equal footing with computer titans such as IBM (IBM) and Hewlett-Packard (HWP).

In the last decade, Compaq has been one of a powerful handful of companies driving the incredible growth in the personal computer market. It is also the single largest vendor of PC servers, a newer but also fast-growing market. But its greatest strength, the PC, has also been its Achilles heel.

Compaq is so identified with the PC that it has had a hard time trying to sell anything else. Compaq is simply not on the list of companies that corporate customers would look to when buying the highest-end computers, namely the "parallel" servers and mainframe-class computers used for critical business uses.

Acquiring a company that sells exactly this kind of system is calculated to change this. The Tandem buyout, coupled with the fruition of several years of its own high-end computing research and development, may place Compaq among the ranks of the full-fledged computing companies, such as IBM, HP, and Japan's Fujitsu.

"This is a huge step for Compaq. They have been telling everybody for years that they want to be a full-system vendor. This may get them there," said Amir Ahari, an analyst at a marketing research firm International Data Corporation.

Compaq has not kept its ambitions secret. "Compaq has articulated a clear strategy to grow the company from $20 billion to $40 billion. They had a choice to build or acquire," said Eugene Glazer, technology analyst for Fortis Advisers in New York.

One particular technology is key to that plan.

Compaq has been investing money and labor over the past few years into developing "clustering," a technology that allows servers to communicate with each other so that they can cooperate on processing tasks and work together to prevent a system crash if one computer goes into distress.

This happens to be one of the technologies that Tandem specializes in. In fact, Compaq already licenses some key technologies from Tandem in this area.

By buying the source of this high-end technology, Compaq for the first time will be able to sell large-scale--and very expensive--computers to the largest corporations, the so-called "glass houses" where corporations make their most valuable computing investments.

"[Compaq] never had a fighting chance to get into the glass house [previously]," Ahari said.

The Tandem acquisition will even let Compaq compete with the biggest computer company in the world, IBM.

"With Tandem, Compaq can make a stiff run at IBM. It gives customers the chance to get the best [high-end] product with Compaq desktops," said Rob Enderle, area director at research firm Giga Information Group.

Along with high-end servers and technology, Tandem brings a large direct sales force, an established customer base in big corporations, and thousands of field engineers to the table. Eckhard Pfeiffer, Compaq's chief executive officer, in fact, said one of reasons Compaq was interested in Tandem was to avoid the cost of building all these things for itself.

Tandem's direct sales force, Pfeiffer added, will sell the entire Compaq product. Compaq distributor eventually will gain access to Tandem's products as well.

The deal also infuses Tandem with new lifeblood. "Tandem never had a small-end and medium server. You couldn't do it all with Tandem," Enderle said. These are the kinds of servers that Compaq has been selling and can now provide to Tandem.

The companies have in fact been moving toward each other technologically for a while.

Tandem's systems have mainly been used to handle databases by financial companies, companies where Unix still dominates. But Tandem started moving its Himalaya fault-tolerant technology to Windows NT in 1996, after forming an alliance with Microsoft to promote NT as an operating system suitable for large corporate customers. Tandem has also already ported to NT one of its most coveted technologies, ServerNet.

Compaq has likewise worked with Microsoft to popularize Windows NT in the high-end corporate environment. The two partners have particularly targeted this effort at the financial sector, which is a strong Tandem market.

But not all aspects of the relationship are perfect. Although the Tandem acquisition gives Compaq high-end servers and a sales force trained to sell to the Fortune 100, Tandem has had its own problems.

"Their sales have not grown for years. Their earnings have been all over the place," Glazer said.

Moreover, Tandem's NT sales have grown quickly, but are actually still quite small. In fact, only 15 percent of the company's product revenue is related to NT purchases, according to Roel Pieper, Tandem chief executive officer, speaking during a conference call with financial analysts today.