Home
Help

Plugged In: Technology

Related coverage

Compaq to buy Digital in a record $9.6b deal

David Warsh
What goes away, and what stays

The war long lost, Digital surrenders

Compaq caught wave to top of industry

'Surgeon' Palmer lost patient

Founder Olsen uncritical; others say he's saddened

Real cost of deal actually lower than $9.15 billion

In Maynard, hope flickers amid doubts

Prior coverage

What people are saying about the merger

Analysis
Digital, an early pioneer, floundered as PCs rose

Resources

Statement released by Digital and Compaq to announce the merger

Market Watch

Latest stock quotes
Digital Equipment
Compaq Computer

Links

For the investor

  • Compaq financial information
  • Digital investor relations
  • www.dec.com
    www.compaq.com

    Related features

    Join an on-line discussion about
    the merger


    Click here for a table of contents and a list of special online features

    Search/Archives

    Search the Globe:

    Today
    Yesterday


    Sections Boston Globe Online: Page One Nation | World Metro | Region Business Sports Living | Arts Editorials Columnists Calendar Discussion Forums Classifieds Latest news Extranet Archives

    Low-graphics version

  • The Boston Globe OnlineBoston.com Boston Globe Online / Business
    Compaq logo DEC logo

    Compaq will buy Digital in a
    record $9.6b deal

    By Joann Muller, 01/27/98

    HISTORY

    1957 - Digital Equipment Corporation was founded by Ken Olsen. It had three employees and was based in a converted woolen mill in the town of Maynard.

    1960 - Introduced the world's first small, interactive computer. Five years later, it introduced the world's first mass-produced mini-computer.

    1974 - Digital became a Fortune 500 company.

    1988 - Digital was the nation's second-largest computer company, with $11.5 billion in revenues, and more than 121,000 employees worldwide.

    Late 1980s - Hard times started for Digital in part because the company was slow to catch the wave when the revolution in personal computers began. Many of Digital's own products became outdated.

    1990 - Digital posted its first quarterly loss and announced its first layoffs. Over the next 10 years, the company would cut its workforce in half.

    1992 - Olsen retired as chief executive and was replaced by Robert Palmer, who had overseen development of the company's Alpha Chip.

    1997 - Digital settled patent infringement suit with Intel Corporation when Intel paid $1.5 billion to buy Digital's computer chip manufacturing operations.

    Recent months - The company reported improved financial results. In the quarter ending December 27, net income rose $74.8 million, or 44 cents per diluted share. The earnings were more than double that of the same three-month period in the previous year.

    Jan. 26, 1998 - Digital announced it was being sold for $9.6 billion to Compaq Computer of Houston.

    SOURCE: Associated Press

    nding a painful, failed effort to once again play a commanding role in the computer world, Digital Equipment Corp. of Maynard yesterday agreed to be bought by personal-computer giant Compaq Computer Corp. for $9.15 billion.

    The surprise cash-and-stock deal, the most expensive ever in the industry, will vault Houston-based Compaq to the top tier of computer vendors, with a product line ranging from $1,000 home computers to multimillion-dollar systems for big corporations. Founded just 16 years ago, Compaq grew rapidly to become the world's biggest seller of personal computers. When combined with Digital, it will be the second-largest computer supplier overall, after International Business Machines Corp.

    For Digital, once the world's number two computer company and Massachusetts' largest employer, the acquisition provides a graceful exit after slipping badly for nearly a decade. Executives of both companies would not rule out the possibility of layoffs.

    It is perhaps fitting that Compaq, the most successful start-up of the PC era, is coming to the rescue of Digital, the most successful start-up of the preceding minicomputer era. Digital's long slide began when it missed the exploding demand for desktop computers in the mid-1980s and then saw its sales eroded by Compaq and others.

    After losing billions of dollars in the early 1990s and cutting more than half its work force, Digital had been trying to regroup in recent years, and there were tentative signs that its new strategy - installing and servicing Internet-based computer systems for large business customers - might work.

    In the last three months of 1997, Digital's profits doubled and its revenue began growing again, albeit slightly.

    But Digital chairman and chief executive Robert B. Palmer said yesterday that while Digital could have survived on its own, it would be a stronger company in the Compaq fold.

    ''The real question is not survival,'' Palmer said in an interview. ''The question is winning - winning against the other competitors in the enterprise market. That's more fun and it's better for our people and our customers.''

    It was unclear whether the acquisition would lead to job losses. Both Palmer and Compaq's chief executive, Eckhard Pfeiffer, speaking at a midday news conference at New York's elegant Pierre Hotel, said it was too early to talk about cost cutting.

    Palmer tried to reassure Digital employees by saying he is ''personally confident that their long-term future is substantially enhanced by this agreement,'' but he didn't rule out the possibility of layoffs.

    ''I think it's inappropriate to speculate at this time. The last three days, we have been rather intensely meeting with the issues around the transaction, and I think it's going to take some time for us to do a thorough analysis of what's most appropriate going forward.''

    Palmer acknowledged that Digital has gone through wrenching changes in recent years and repeatedly praised company employees for their work. ''I have the highest respect for our employees and their perse verance in some very difficult times,'' he said.

    Palmer said he would remain at Digital to ease the transition, although analysts predicted he will leave the company after the deal is completed.

    ''My focus is going to be on ensuring the best possible outcome of this complex transaction,'' Palmer said when asked about what his role at Compaq would be.

    Under terms of the deal, Digital shareholders would get $30 a share in cash and 0.945 Compaq shares for each Digital share. Compaq will issue about 150 million shares of common stock and pay $4.8 billion in cash.

    Digital's stock soared on the news, gaining 10, or 22 percent, to close at 557/16. Investors, worried that the deal would dilute Compaq's earnings and slow its torrid growth, pushed its shares down 2 3/4, or 8.7 percent, to 29.

    That gave the acquisition a per-share value to Digital shareholders of about $57.40. That more than doubles the company's 52-week low of 25, reached in April, but is a far cry from the nearly 200 it fetched at Digital's peak in 1987.

    Digital will become a wholly owned subsidiary as part of the transaction. The deal is subject to approval by shareholders and government antitrust regulators.

    The talks between Compaq and Digital began about two weeks ago, and the deal was hammered out over the weekend. But it was not the first time the two companies had discussed a buyout.

    In 1995, shortly after Digital signed an alliance to begin providing service and support for Compaq customers, Pfeiffer and Palmer talked about making a deal, but they couldn't agree on the terms.

    ''The timing wasn't right then,'' said Pfeiffer. ''It is now. '' Compaq has grown quickly in the past two years and its strategy now is to broaden its focus so that it can be a one-stop-shopping source for everyone from individual consumers to businesses.

    ''We were looking at our road map, ... and the best and fastest way to get there is to look for the right acquisition target, and that was clearly Digital,'' he said.

    ''What we really value in this is the [Digital] customer base, the service and support capability and the enterprise computing products and solutions, and the people behind it,'' Pfeiffer said.

    The purchase of Digital boosts Compaq to its goal of being one of the world's top three computer makers. Last year Compaq expanded by snapping up Tandem Computers, a maker of computers that continue to work even when key parts fail, for $2.8 billion.

    Based on last year's results, the revenues of Compaq-Digital were $37.5 billion, putting Compaq just ahead of Hewlett-Packard Co., which had computer revenue last year of about $35 billion. But it remains less than half the size of IBM, which reported 1997 revenue of $78.5 billion.

    ''There's a certain credibility that Compaq now gets as a player that offers end-to-end products and services,'' said Gopi Bala, director of management strategies research at Boston-based Yankee Group.

    But not all analysts believe the acquisition of Digital will help Compaq.

    ''Bigger is not necessarily better.... I think Compaq is plenty big in the customer's mind,'' said David Vellante, a senior vice president at International Data Corp., a research company based in Framingham.

    ''In this business, you're either growing or you're dying. Digital is not a high-growth company these days.

    ''I just don't see how Compaq taking over Digital is going to make Digital suddenly grow.''

    Vellante added that Digital could become vulnerable as rivals try to steal customers while the transaction is being completed.

    ''If you're Sun [Microsystems Inc.] or IBM, you're knocking these people's doors down.''

    Digital became increasingly attractive as a takeover candidate in 1997 by selling off non-core businesses, including its network products business, which it sold to Cabletron Systems Co. for $430 million. In October, Digital also sold its microchip manufacturing business to Intel Corp. as part of a $1.5 billion settlement of its patent infringement lawsuit against the giant chip maker. The Intel settlement has not yet received government approval.

    Digital chief Palmer had been under increasing pressure from the board of directors and shareholders to find the right strategy. In the end, he will likely be remembered for dismantling the company.

    ''I think that this is very proactive on his part,'' said Bala. ''He had positioned the company for such an acquisition.... It's very much proactive. I don't think this is someone who easily gives up on things.''

    Hiawatha Bray and Peter G. Gosselin of the Globe staff contributed to this story.

    This story ran on page A01 of the Boston Globe on 01/27/98.
    © Copyright 1998 Globe Newspaper Company.


    Click here for advertiser information

    © Copyright 1998 Globe Newspaper Company
    Boston Globe Extranet
    Extending our newspaper services to the web
    Return to the home page
    of The Globe Online