The non-exclusive pact will make Micron the largest supplier of memory chips to the world's largest PC maker. The Boise, Idaho-based company is already the largest memory maker in the United States.
Sources close to Compaq valued the deal at more than $20 billion, although some analysts wondered whether the figure is too high.
Micron representatives told Warburg Dillon Read analyst Dave Bujnowski the deal is worth multiple billions of dollars over its five-year term. It appears to commit Compaq to buying a certain percentage of its memory chips from Micron, not an absolute number of chips, Bujnowski said.
About $20 billion worth of DRAM (dynamic random access memory) is sold each year, 70 percent of which goes to PC makers such as Compaq, said Seth Dickson, another Warburg Dillon Read analyst. Compaq's world leading PC market share totals about 13 percent.
The arrangement comes as recently rising DRAM prices squeeze profits out of PC systems.
Last week, Dell Computer lowered earnings expectations for its third quarter in part because of memory price increases. The Texas company told financial analysts on Monday that rising memory prices would add about $75 extra cost to every computer it sells.
Compaq is trying to combat fluctuations in memory prices by increasing its number of suppliers and aligning with one strong memory partner. The Houston firm also chose Micron because of its global distribution facilities, which it will use as it streamlines its own PC manufacturing operations.
"The agreement provides to our customers the amount of memory they are requesting for their systems. It also gives some stability?with regards to pricing," said Stephen Martson, Compaq's vice president and chief procurement officer.
Price increases have forced PC manufacturers to make hard decisions about the configurations they offer, either raising prices or cutting back on the amount of memory in systems. Dell said last week it has no choice but to pass the component price increases onto customers, who must decide if they want to pay extra for more memory. That means many systems may come with 64MB of memory, instead of the 128MB typical of higher-end computers.
Martson made it clear Compaq "would maintain current memory content across PCs" and that it "was not going to compromise" by giving less memory or charge more for systems.
"Compaq is the world's largest buyer of memory, accounting for 15 percent," said Martson. "This strengthens our position in terms of assuring supply to our customers."
Dell typically negotiates long-term contracts with component suppliers, which normally gives it some protection against price spikes. This has not helped with the recent drive up in DRAM prices.
Dell said it "dealt with a 100 percent DRAM increase in August, 100 percent in September, and 25 percent more recently," said Roger Kay, an analyst with International Data Corporation.
The agreement is obviously good news for Micron and the company's stock might well rally, but the memory maker must still worry about the price of memory, Warburg's Bujnowski said. Micron has posted losses in five of its last six quarters.
"We see it as a positive, but we don't see it as something that should make the stock go crazy," he said. "When I look at what truly should drive Micron's stock price, it's primarily DRAM prices."