Digital, an early pioneer, floundered
as PCs rose

BOSTON - Digital Equipment Corp., a pioneer in the computer industry, never recovered from the rapid rise of personal computers and finally was forced to seek a merger with the leading maker of PCs, analysts said.

Digital rebuffed a secret bid of $9 billion to $10 billion from Compaq Computer Corp. in 1995. But after years of restructurings, weak profits and management shakeups, it agreed Monday to a $9.6 billion takeover by Compaq, the biggest deal ever in the industry creating one of the largest computer makers behind International Business Machines Corp.

``It really is interesting that one of the computer companies that was really a midget in the early 1980s when Digital was on top of the industry has come back to save Digital,'' said Frank Gens, a senior analyst with research group International Data Corp. Digital was an early pioneer of innovative machines called minicomputers, which began competing in the 1960s with big mainframes sold by IBM.

Maynard, Mass.-based Digital grew into an industry leader in the 1980s through its technological edge in networking computing. Its VAX line of computers offered easy upgrades and virtually limitless amounts of memory.

But Digital's mistake, like some other companies in the industry, was when it misjudged the potential of less costly personal computers, analysts said.

``The PC destroyed the minicomputer business model,'' Gens said. ``They really missed the PC shift in the industry.''

When Chief Executive Robert Palmer came aboard in 1992 to turn Digital around, he bet the company's future on the speedy Alpha microprocessor, the fastest chip in the industry.

But rival chip maker Intel Corp. focused on marketing to makers of PCs and other desktop machines and overwhelmed Alpha by sheer numbers. While Digital was strong in research and development, it lacked the marketing muscle to promote Alpha.

As competitors raced ahead, Digital lost more than $5 billion in the early 1990s and has been barely profitable since.

Digital slashed its work force from more than 127,000 in the late 1980s to just more than 54,000 at the end of 1997, but until Compaq's buyout on Monday, its stock price had been essentially flat since Palmer took the helm.

``I don't think Digital is going to go down as a Harvard Business School case study on how to successfully manage a company,'' said Terry Shannon, editor of a newsletter called Shannon Knows DEC.''

Disgruntled shareholders, who became more restless in 1997 after enduring years of promised turnarounds only to see new problems emerge, applauded Compaq's takeover.

``This is good news,'' said Herbert Dyer, executive director of the Ohio State Teachers Retirement System, which owned 3.7 million shares of Digital at the end of 1997.

``Of course, we've been disappointed now for a couple of years that it hasn't taken off like some (competitors) have.''

Herbert Denton, president of money management firm Providence Capital Inc., last June gathered institutional shareholders who owned a combined 40 percent of Digital's stock to try to push the company in a new direction.

He admitted his meeting produced no noticeable results. But in November, shareholders voted against management's wishes in favor of provisions shortening directors' terms and squashing the ``poison pill'' designed to deter unwanted takeovers.

``It's the only and best way out of their problem,'' Denton said of the Compaq deal. ``The company is not going anywhere in an industry that is very dynamic.''