Inside the Compaq-Digital deal

The computing industry's largest-ever megamerger was struck in the morning hours yesterday at the St. Regis Hotel in Manhattan.

Dawn Kawamoto Former Staff writer, CNET News
Dawn Kawamoto covered enterprise security and financial news relating to technology for CNET News.
Dawn Kawamoto
2 min read
The computing industry's largest-ever merger deal was struck in the morning hours yesterday at the St. Regis Hotel in midtown Manhattan, capping two weeks of secret negotiations between the companies.

The weekend had been marked by haggling over the price of the deal but, in the end, Compaq (CPQ) and Digital Equipment (DEC) settled on a price of $9.6 billion in cash and stock.

By yesterday afternoon, the boards of both See special coverage: Compaq's conquest companies unanimously had signed off on the deal, which still awaits shareholder approval.

Discussions of a possible merger actually began more than two years ago in the summer of 1995, sources close to the deal said. Those talks lasted about four to six weeks before trailing off with no deal on the horizon.

A price tage between $9 billion and $10 billion had been discussed around that time, according to published reports.

Then in 1996, another round of talks were held at Compaq's prompting, but both sides walked away from the table after questions arose over management and the structure of the deal, according to a report in the Wall Street Journal.

Then, in early June of last year, Compaq and Digital again resumed talks--just before Compaq's acquisition of Tandem--a move aimed at giving the computer maker an edge in the enterprise market. Once again, the two parties weren't able to get it together.

"Compaq was a lot smaller company then, and didn't have the clear [potential ] in the enterprise market that it does now," said one source. "It was more of a desktop company, and Digital was [screwed] up."

In a conference call today, Eckhard Pfeiffer, Compaq's chief executive and president, described the previous discussions between the two companies as informative, even though they went nowhere for so long.

"As we mapped out our enterprise strategy, we were looking for the missing pieces--what else would be built, where else we would partner, where would we have to make acquisitions," Pfeiffer said, adding that the Tandem deal was the first move toward realizing that strategy, even if Tandem couldn't take care of all Compaq's needs.

"We were at the point to start looking and make the next move after the Tandem acquisition was integrated," Pfeiffer said.

It was at that point that the talks with Digital resumed. The things that changed in the course of the six-month hiatus of the talks ultimately clinched today's deal.

"Digital has settled with Intel, and exited networking by selling that business to Cabletron. They've restructured their operations to where they are profitable and have momentum," a source said. "The juxtaposition of those two events let the deal happen easier this time."