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FTC expands Compaq-Digital query

The Federal Trade Commission has asked for more details on the proposed $9.6 billion acquisition.

Federal Trade Commission regulators have made a second request for information in Compaq's (CPQ) pending acquisition of Digital Equipment (DEC), as questions loom whether regulators will extend their antitrust investigation to examine DEC's divestiture of its fabrication plant to Intel (INTC).

"The agency may want to review these two transactions together," said Howard Morse, a former assistant director of the FTC's Bureau of Competition, the division responsible for antitrust enforcement in the computer industry.

Morse noted that, last week, the FTC challenged two transactions involving the mergers of four pharmaceutical companies. See special coverage: Compaq's conquest FTC regulators said the agency would file a lawsuit in federal court to block McKesson's acquisition of AmeriSource Health, as well as Cardinal Health's merger of Bergen Brunswig. In looking at these two transactions, the FTC said the net affect would be a reduction in competition.

"Instead of looking at them as independent transactions, they decided to look at them together and challenged them," said Morse, who recently joined the Washington, D.C., law firm of Drinker, Biddle & Reath.

Gail Smart, a spokeswoman for DEC, deferred to the FTC questions on whether the agency is reviewing the two transactions in tandem. An FTC spokeswoman declined to comment on the second request for information, or on whether the two DEC deals were being reviewed together. A Compaq spokeswoman also declined to comment further on the FTC request, which arrived on Friday, or on the potential for the two FTC cases to be bundled together.

Compaq and DEC said they are complying with the second request for information on their $9.6 billion megamerger. The companies noted also that they still expect the deal to close by the end of June.

DEC, meanwhile, is awaiting closure of its deal with Intel, which is expected to happen some time in April or May. Under the $700 million agreement, Digital will sell its chip plants to Intel, cross-license patents, receive Intel and Alpha microprocessors, and develop future systems based on Intel's 64-bit microprocessors. Concerns have emerged over whether this transaction will hinder competition, given Intel's plans to ship its Merced chip, which will compete head-to-head with Digital's Alpha chip currently on the market.

Another key question is whether progress on any one deal will hold up progress for the other deals in which Digital, Compaq, and Intel are involved.

"The [companies] do maintain some control of when the agency has to make a decision," Morse said. After companies comply with the request for additional information, the clock starts ticking on the allotted time during which regulators have to respond or issue a decision on whether to challenge a transaction.

Intel is closer to sealing its pending deal with DEC than Compaq and DEC are to completing their merger.

Chuck Mulloy, an Intel spokesman, said he did not think there were any similarities between the drug makers' cases and those of Intel, Compaq, and Digital.

"We're just purchasing an asset and a few employees," he said. "We maintain there is a level playing field for Alpha. Digital will market, design, and handle the R&D. We just have a foundry agreement with them that is non-exclusionary."

Stephen Dube, an analyst with Wassertein Perella Securities, said that if the FTC challenges the Digital and Intel transaction and the chip plants remain with DEC, the Compaq-Digital merger could be impacted.

"This would be significant enough to where the terms of the acquisition would have to change," Dube said. "I don't think Compaq wants to be in the [chip] fabrication business."

He noted, however, that it is unlikely that anything will happen to derail the Compaq-Digital merger.

Morse said a deeper look into the merger nevertheless can be expected, especially in light of the Intel transaction and the FTC's broader investigation into the chip giant.

"I would be surprised if the agency is looking at the affect of the Compaq-Digital transaction on the PC industry. It is possible the agency is focusing on the server market, which is more concentrated," Morse said. "But I suspect the agency is looking mostly at how Compaq's acquisition of DEC affects the development of Digital's Alpha technology."