Compaq acquires Digital for $9.6B

Looking to boost its presence in the enterprise computing environment, Compaq Computer Corp. last week announced it would acquire Digital Equipment Corp. and its extensive portfolio of computer and networking products and services.

With the estimated $9.6 billion deal, in which Compaq will buy all outstanding shares of Digital's stock, Compaq will run Digital as a wholly owned subsidiary. The combined mass of the companies, based on 1997 revenues, is about $36 billion, ranking it with IBM Corp. and Hewlett-Packard Co. in the top tier of computer vendors.

However, more important than revenue, Digital brings Compaq the technical expertise needed to expand its business from commodity desktop PCs and servers to the midrange and high-end systems on which organizations run their business, industry analysts said.

"As you push upscale into an enterprise environment, you absolutely must have the services and expertise to deploy complex systems," said Joe Clabby, vice president of professional services at the Aberdeen Group, a Boston consulting firm.

Digital has a full line of notebooks, PCs, servers and midrange computers,

some of which overlap with Compaq's product line and eventually must be sorted out, observers said. But Digital also has a mature 64-bit Unix operating system as well as a work force with expertise in developing network and messaging solutions, analysts said.

Compaq needed these pieces to move into the enterprise environment, said Eckhard Pfeiffer, Compaq's president and chief executive officer. The company took a step in that direction last year when it acquired Tandem Computers, which makes high-end, highly reliable servers, Pfeiffer said. "This acquisition represents our next step toward that goal."

Digital's business in the federal market— worth about $1 billion last year— is a mix of product sales and integrated solutions. The company holds a number of blanket purchase agreements for PCs and workstations with the Navy and indefinite-delivery, indefinite-quantity contracts with NASA and the Air Force.

Digital also was one of two vendors selected last year by the Department of Veterans Affairs' $1.5 billion Procurement for Computer Hardware and Software program.

The company's services business in the federal market covers sales support, traditional systems integration work and multiple-vendor customer services, said an executive in Digital's government region. "These are very strong components of our federal business,'' the executive said.

In the near future, Digital's midrange and high-end server product line, based on its proprietary 64-bit Alpha processor, will give Compaq an immediate boost, according to analysts.

For example, Digital has a presence in the technical workstation market, where many users prefer Alpha-based Unix systems to workstations based on Intel Corp. processors, said Tom Copeland, director of workstation research at International Data Corp., a Framingham, Mass., research firm. "Digital's presence there helps Compaq move up into the enterprise," he said.

Digital chairman Robert Palmer said Compaq has made a "strong commitment" to investing in Digital's 64-bit processing technology. Given the resources of the combined companies, "the future for Alpha is brighter than ever," he said.

A Viable Alternative

Also, Digital, while investing a lot of money and energy to make Windows NT an enterprise solution, gives Compaq a viable Unix alternative to offer to users who are not ready to migrate, analysts said.

"If [Compaq] really wants to show some innovation and grow to be a full-line competitor, they really need to grow into the Unix space," said Rich Partridge, a research analyst at D.H. Brown and Associates, a Portchester, N.Y., research firm.

That offering includes technology— including fault tolerance, high-availability and clustering solutions— as well as services. Compaq would be hard-pressed to develop such a portfolio without this kind of acquisition, Clabby said. "It is very hard to grow that kind of expertise. There are just not that many people with that skillset readily available. The services business is what was key," he said.