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Compaq poised to take on IBM, HP

Analysts say Compaq's decision to buy Digital Equipment makes sense if the PC maker is to take on Big Blue and Hewlett-Packard.

Compaq Computer's (CPQ) decision to buy Digital Equipment (DEC) for $9.6 billion makes perfect sense if the PC maker is to become a serious threat to IBM and Hewlett-Packard (HWP) in the corporate enterprise market, analysts said today.

Compaq has long said that it wanted a bigger chunk of the high-end corporate "enterprise" computing business, but the company lacked some of the technologies and service support it needed to compete with Big Blue (IBM) and HP in the one-stop-shopping arena. Analysts said today's acquisition will help narrow the gap in this race but noted that Compaq still has a ways to go.

"This deal makes perfect sense," said Lou Mazzucchelli, an analyst with Gerard Klauer Mattison. "Compaq wants to be a major-league enterprise supplier, and this helps propel them into the big leagues."

Unix had also been missing from Compaq's stable, but Digital brings that to the table as well, Mazzucchelli said, noting that many high-end computer customers don't yet trust Windows NT. "Now Compaq has a solution for those customers."

Another victory for Compaq is Digital's 30-year-old customer base. Mazzucchelli explained that older companies like Digital already have a brand loyalty that Compaq can now share.

Charles Wolf, an analyst with CS First Boston, said Compaq still won't be on a par with IBM or HP, but he added that today's deal has closed a major gap between itself and competitors. For Compaq to compete on a level playing field, it has to align its offerings to match those of existing major players.

Wolf said that, while Compaq has been building its presence in the enterprise area, it remains weak in Unix servers, at least in the medium-end server space. He said Compaq's acquisition of Tandem addressed the high-end server area, but he noted that the company still lacks midrange products. Today's deal fills in some of those blanks.

The idea of Compaq gaining a large service organization is a shrewd one, but Stephen S. Smith, managing director at Broadview Associates, a merger and acquisition investment bank that focuses on information technology, said he is not sure the computer maker picked the right one to acquire.

"This service organization has been more like a predominately proprietary service organization, and it has been struggling to find its path in an open computing environment," Smith said.

The two companies also may face a clash of corporate culture: Boston vs. Houston. DEC was born in a proprietary computing business, whereas Compaq flourished in an open computing one.

"I am always concerned when big companies try and get together," Smith said. "Cultures are difficult to meld, and the bigger the two companies are, the more issues that arise when they become one."

There are also a number of nuts-and-bolts issues the two companies must resolve, such as determining which products are redundant and what the fate of sales forces with senior management and middle management will be.

Smith said it is important for companies to take action right away, in order to not draw out the inevitable. "Otherwise, you have a lot of people standing around wondering if it is going to be me [that gets the axe]," he said. "That makes for unproductive employees."

The deal, however, has some cost-saving opportunities built in for Compaq. Economies of scale are vital for computer companies, and Compaq and Digital combined ought to have more scale together than they did separately.

Smith said the new Compaq can increase its dominance by expanding in a variety of ways. In particular, he said he envisions a company that would concentrate more on data communications, peripherals, systems software, and applications. Moving to the next step to incorporate such business opportunities, Compaq likely will engage in more acquisitions and strategic partnerships, as well as more internal development. Digital, for its part, has a strong international presence, which will lead to more worldwide opportunities for Compaq.

At this point, however, few are willing to dismiss Compaq's goals. When asked about its stated desire to be No. 1 in the enterprise area, Mazzucchelli said: "Everyone laughed when Compaq said it wanted to be No. 1 in the consumer area."

Big Blue and HP will not have to reposition themselves any time soon, Wolf said, but the titans may face increasing competition down the road, in 1999 or in the year 2000. For now, the impact on the market will be minimal because HP and IBM have been competing, in one area or another, with both Digital and Compaq all along.

"Now it will be one company," Wolf said. "Chances are, that one company will be stronger, but we won't be seeing that until deal is complete and the companies are fully merged."

The loss of Rick Belluzzo to Silicon Graphics (SGI) is a much bigger issue for HP than Compaq's deal with Digital, Smith added. Last week, SGI named Belluzzo chairman and chief executive. Formerly, he was general manager of Hewlett-Packard's computer products organization