Compaq to Join Forces With Digital
Creating a colossal company with tentacles reaching into every corner of the computer industry, Compaq Computer Corp. on Monday agreed to acquire Digital Equipment Corp. for $9.6 billion in cash and stock.
The proposed deal is the largest in computer industry history and could trigger a wave of additional mergers as rivals confront the combined might of two industry legends.
The move is part of a bold effort by Houston-based Compaq to move beyond its position atop the personal computer industry to compete for the corporate computing accounts dominated by IBM, Hewlett-Packard and others.
The timing of the deal caught many industry observers off-guard. But rumors of a merger between the two companies have circulated for several years, mainly because of the obvious contrast between Compaq’s ambitions and Digital’s troubles.
“Compaq has been pulling away from competitors in the PC business, and this makes them even more formidable,” said Roger Kay, an analyst at International Data Corp. in Framingham, Mass. “For Digital, it salvages what remains of the good in that company.”
The transaction is expected to have minimal impact on the consumer market, where Compaq is strong but Digital has little presence. But Kay and other analysts said consumers may soon see the broader significance of this deal, if it turns out to be the first in a series that thins the crowded PC field until it looks more like the auto industry.
If approved by stockholders and regulators, the acquisition would make Compaq the No. 2 computer manufacturer in the world, with 87,000 employees and $37 billion in annual sales.
IBM Corp., with sales of about $76 billion, is still much bigger. But for the first time, Compaq could compete toe-to-toe with Big Blue because it would have an army of service technicians and products ranging from sub-$1,000 PCs to the million-dollar machines that run banks.
“We’re covering the entire spectrum of computing,” said Eckhard Pfeiffer, chief executive of Compaq. “The goal has always been to move up to the No. 2 position. We’re there.”
According to the terms of the acquisition, Compaq will pay $4.8 billion in cash and will issue 150 million new shares of stock. Digital shareholders will receive $30 and 0.945 of a share of Compaq common stock for each share of Digital stock. Digital will become a wholly owned subsidiary of Compaq.
Digital shares rocketed $10 to $55.44, while Compaq fell $2.75 to $29. Both trade on the New York Stock Exchange. Digital stock remains far below its all-time high of $199.50, reached in the late 1980s.
Executives from both companies declined to discuss the possibility of layoffs, and stressed that Maynard, Mass.-based Digital’s highly trained work force is one of the company’s most valued assets.
But analysts said there are likely to be extensive layoffs because the companies have overlapping products and departments. Digital, for instance, has its own line of PCs that many expect to be folded into the Compaq brand.
Pfeiffer will be chief executive of the combined company. But it was unclear what would become of Robert Palmer, the chief executive of Digital, whose five-year tenure has involved restructurings, layoffs and sales that many saw as preparation for a deal. Palmer brushed aside questions about his role in the new company during a conference call Monday.
In many ways, the deal symbolizes an inexorable trend in computing over the last decade--the withering assault of ever-faster and cheaper PCs on high-priced, high-performance machines in lucrative corporate markets. In that dynamic, Compaq has been a leader of the surging PC forces, and Digital a giant in retreat.
Compaq began as a maker of cheaper clones to IBM’s PC in the early 1980s. Today, Compaq outsells IBM and every other manufacturer in the PC business, holding nearly 14% of the worldwide market, according to International Data Corp.
In recent years, Compaq has been looking for a way to move beyond what is increasingly a business of commodity products and razor-thin margins. Last year, Compaq spent $3 billion to buy Tandem Computers Inc., a maker of high-priced systems that handle critical computing functions of the corporate world, such as automated teller machines and credit card transactions.
For Digital, Monday’s deal marks a fade-out for a once luminous star founded in 1957 by Kenneth Olsen, a former MIT computer engineer.
The company’s breakthrough came during the 1960s, when it introduced small, high-speed mini-computers that were far cheaper than the million-dollar mainframes built by IBM. By 1970, Digital’s revenues were $142 million, and by 1980 they topped $2 billion.
Along the way, the company played a big role in the creation of everything from modern computer networks to advanced microprocessors to, more recently with its AltaVista group, Internet search engines.
But beset by missed opportunities and declining profits in the early 1990s, Digital wilted, resorting to lawsuits and sales of divisions to protect its dwindling turf. The company sold its disk drive business and network products division in the last two years.
Last year, the company accused Intel Corp. of stealing microprocessor secrets, then settled the suit by selling its chip-making facilities to Intel for $700 million.
But even after all the restructuring, Digital held on to assets that remained attractive to Compaq. Chief among them is a line of powerful server and workstation computers that fill a gap at Compaq between its PCs and the high-end Tandem line.
Digital also has a legion of 23,000 computer service professionals, who outnumber Compaq’s staff 12 to 1. These technicians collect handsome fees from large companies for helping them plan, construct and maintain their computer systems.
Finally, Compaq would gain control of enviable Digital accounts to supply computer equipment to some of the largest corporations in the world.
It remains unclear what Compaq would do with other assets, including Digital’s impressive research department and its Alpha microprocessor technology, which outperforms Intel’s but has struggled to find broad markets.
