Compaq to buy Digital for $9.6 billion

The PC giant takes a major step toward its stated goal of becoming the No. 1 computer power in the world by announcing it will acquire Digital Equipment for $9.6 billion.

Michael Kanellos Staff Writer, CNET News.com
Michael Kanellos is editor at large at CNET News.com, where he covers hardware, research and development, start-ups and the tech industry overseas.
Michael Kanellos
5 min read
Compaq (CPQ) took a major step toward its stated goal of becoming the No. 1 computer power in the world by announcing it would acquire Digital Equipment (DEC) for $9.6 billion.

The acquisition, which has been the subject of high-level, on-again, off-again negotiations for at least two years, essentially will provide Compaq with the high-end hardware technology and the worldwide corps of consulting engineers it has needed to act as a global technology provider.

"The reason for reaching this agreement was really very simple. Together, we are a much stronger competitor than we were as separate companies," Digital chairman Robert Palmer said in a conference call today.

Under terms of the deal, Digital shareholders See special coverage: Compaq's conquest will receive $30 in cash and an estimated 0.945 shares of Compaq stock for each Digital share. Compaq will issue about 150 million shares of its stock and pay $4.8 billion in cash for Digital.

The deal, which is expected to close sometime in the company's second quarter, comes at a time when Digital is moving away from its losses and into the black. In fiscal 1996 Digital reported a $111.8 million loss on $14.6 billion in revenues. But during fiscal 1997 the company has posted a profit of $140.9 million on revenues of $13 billion.

Compaq has performed strongly over the years, with 1997 revenues rising more than 30 percent, to $24.6 billion, and profits climbing more than 36 percent, to $1.9 billion.

Compaq has been the world leader in PCs for some time, but it has not had the high-end corporate "enterprise"

Compaq CEO Eckhard Pfeiffer on acquisition of Digital
technology necessary to take on hardware heavyweights IBM (IBM) and Hewlett Packard (HWP). Industry analysts also say the merger could affect rival Dell Computer (DELL), because Dell outsources much of its service work to Digital.

Through Digital, Compaq gains 1,600 certified Windows NT technicians and 3,000 Unix professionals, as well as a full line of Unix-based servers and workstations.

"The combined revenues of the two companies for 1997 was $37.5 billion. That makes us the No. 2 computing company," Compaq CEO Eckhard Pfeiffer said during a conference call that emphasized Digital's service capabilities. "Digital brings a world-class workforce to the Compaq family."

A Digital acquisition also brings Compaq a good deal of hardware technology it will not need. Once the merger is completed, expect Compaq to terminate Digital's PC and notebook business, though the company's workstation and midrange server lines should survive, analysts say.

Among some of the initial changes Compaq likely will make after the acquisition, the computer maker Deal by the numberslikely will begin to rid itself of Digital's PC line as well as its computer-manufacturing capabilities. Many of Digital's employees may be relocated to Texas, as well. In addition, upper management from Digital likely will leave the company within a short period of time, much as upper management at Tandem left the company shortly after it was acquired by Compaq.

"It really is a huge system play," said Scott Miller, an analyst at Dataquest. "There is no leverage to the Digital name in PCs."

Under terms of the deal, Digital shareholders will receive $30 in cash and an estimated 0.945 shares of Compaq stock for each share of Digital stock. Compaq will issue about 150 million shares of its stock and pay $4.8 billion in cash for Digital.

The deal is expected to close sometime in the company's second quarter. Roger Kay, an analyst at International Data Corporation, said initial changes likely will begin soon after. Other changes, Kay added, will take place gradually. Compaq likely will continue to sell Digital's Alpha and Intel-based workstations and only incrementally merge product lines.

Like many other analysts, Kay sees the Digital Multivendor

Pfeiffer on what Compaq gets out of the deal
Customer Service (MCS) division, Digital Equipment's consulting and support arm, as one of the crown jewels of the deal. The unit accounted for roughly $1.5 billion in sales last quarter. Moreover, much of the work performed by the unit lay in high-level consulting rather than in the more pedestrian--and less lucrative--area of maintenance. MCS's reputation ranks with those of IBM and HP, making its addition to Compaq's fold a coup for the company.

But Kay said that, while the Compaq-Digital deal looks good on paper, it has the potential to founder on cultural issues, a point Pfeiffer himself brought up during today's conference call.

"Digital tends to focus on technology. They will build a better technology and wonder why people never came," Kay said, noting that Compaq has the opposite emphasis, focusing more on practical application.

Interestingly, while cultural issues loom in the acquisition, analyst Chip Christiansen of IDC Research pointed out that many Compaq executives came from Digital. Tandem president Enrico Pesatori, senior vice president John Rose, and CFO Earl Mason all came from Digital's ranks.

Many pointed out also that the deal could spell the end of the Digital's Alpha technology, though not immediately. The 64-bit computing platform--which does not exist on Windows-Intel technology--accounts for a large portion of Digital's revenue.

Still, over time, commitment to Alpha may fade. Digital earlier this year said it would support Intel's upcoming Merced chip, which rivals Alpha.

"Sixty-four-bit NT [for Merced] is a way off. Compaq will need to turn [Alpha] into revenue growth,"

Digital CEO Robert Palmer on merger
Ashok Kumar, an analyst for Loewenbaum & Company, said in reference to Microsoft's next-generation Windows NT operating system and Intel's next-generation processor. "Will they be able to grow revenues on [Alpha server lines]? Probably not. Momentum will shift to the Wintel camp with the appearance of Merced."

Kumar added further that the transfer of Digital's chip foundry to Intel in a recent legal settlement likely will not hold up the current deal. He said he had no doubt that Compaq did its due diligence surrounding the issue.

Pfeiffer, for his part, pledged commitment to Alpha. "We are committed to...investing in Digital's strategic assets, particularly its worldwide service organization, as well as its 64-bit leadership with Alpha microprocessors, OpenVMS, Digital Unix, and Windows NT enterprise systems, open storage, and software products," he said.

Compaq/Digital earnings

The deal, which Christiansen said has been discussed for two years, probably became a reality because of Digital's concerted effort to shed itself of business units over the past two years. Since 1996, Digital has been able to rid itself of its disk drive operations, printer business, networking unit and, more recently, its chip fabrication plant.

"Compaq did not want to be in the chip business and did not want to compete against its largest partner Intel," he said.