In July '96, Digital Equipment Corp. was forced to take an unexpected $475 million write- off. Enrico Pesatori, then chief lieutenant to Digital CEO Robert Palmer, resigned the day before the company revealed that news. Most analysts believed that Palmer, angered at massive PC inventory buildups, made PC honcho Pesatori the fall guy.
Today, Pesatori is the president of Tandem Computers Inc., a wholly owned subsidiary of Houston-based Compaq Computer Corp. He soon will be working again with Palmer, whose Digital is being bought by Compaq.
Imagine Compaq CEO Eckhard Pfeiffer presiding over the next executive confab: ''Bob, say hello to Enrico. Enrico, you remember Bob.''
Palmer and Pesatori likely will make their peace. Pfeiffer isn't one to let someone else's bygones foul up his plans.
But their unlikely reunion reflects the rather odd hodgepodge of assets assembled by Compaq.
After spending $4 billion in stock to buy Tandem just eight months ago, Compaq bid more than $9 billion for Digital - a company with similar strategic value.
So here's the $4 billion question: Now that Compaq has Digital, why does it need Tandem? Put another way, if Compaq had bought Digital first, would it still want Tandem?
''Quite frankly, I think maybe not,'' ventured Megan Graham-Hackett, an analyst with Standard & Poor's Equity Group.
''I could understand why they paid $9.6 billion for Digital. I'm still scratching my head why they paid $4 billion for Tandem,'' said Nick Earle, worldwide marketing manager for the Enterprise Systems Group at Hewlett- Packard Co.
''Had they bought Digital first, they wouldn't have had to buy Tandem,'' asserted Jon Oltsik, an analyst with Forrester Research in Cambridge, Mass. Oltsik warned against the Tandem acquisition back in June.
''In its haste to reinvent itself, Compaq bought the wrong company,'' he wrote in an advisory to Forrester clients. Either Data General Corp., Unisys Corp. or Digital would have been a better pick, he argued then. Tandem, he says now, gives Compaq ''only niche benefits.''
Jim Poyner, a veteran Compaq watcher with CIBC Oppenheimer Corp., also was asked if Compaq would still want Tandem had it bought Digital first. ''That's a very interesting question,'' mused Poyner.
Compaq probably shied away from Digital last summer, he says, wanting to see further proof that DEC could restore profitability. DEC's favorable patent settlement with Intel Corp. last year, along with improved earnings, boosted Compaq's confidence in Digital.
But if Digital had its house in order last summer, ''I've got to believe Compaq would have tapped DEC's shoulder first,'' Poyner said. ''DEC is a much broader-based supplier than Tandem.''
Compaq officials declined to answer the question. Pfeiffer has said the integration of Tandem has gone well.
But a look at Compaq's rationale for buying Tandem looks very much like its rationale for buying Digital. On almost every count, Digital offers what Tandem did - but in spades.
When Compaq bought Tandem, it cited Tandem's prowess in systems that run critical corporate applications, along with its seasoned sales and service forces.
With DEC, Compaq gets much more of the same. While Tandem has roughly 4,000 sales and service staffers, Digital has about 23,000 in services alone. But Tandem offers a bit more presence at the very high end, where IBM is the chief rival.
For Compaq, the challenge is focus. This is a firm that has flourished by targeting a single product type -personal computers based on Intel chips and Microsoft Corp. operating software.
Compaq never has designed or built its own parts, done much research and development or managed a direct sales force. Mostly, it has packaged hardware and software made by others into desktops sold through third-party distribution. Now, it suddenly must manage large sales and service forces, as well as a mishmash of products based on disparate hardware and software platforms.
Pfeiffer will have his hands full integrating the three firms, says John Shoemaker, vice president and general manager of Sun Microsystems Inc.'s Enterprise Server and Storage Group.
''It's going to be a huge, huge challenge,'' Shoemaker said. ''It's going to be a tremendous sink for management time.''
Shoemaker contends that Compaq will have to choose among the Windows NT, Tandem Unix, Digital Unix and Digital VMS operating software. He says it may want to winnow down its chip architecture. Aside from the Intel line, that now includes Digital's Alpha and Tandem's MIPs processors.
Poyner notes that Tandem and Digital have competing products in the class of computers priced from $100,000 to several hundred thousand dollars.
''There is significant overlap,'' said Poyner. ''I can't see them trying to sell three different platforms indefinitely in the NT and Unix space.''
Tandem also appealed to Compaq because of its strength in markets like telecommunications and financial services. For such customers, Tandem's guarantee of ''fault-resistant'' computing was a major selling point. But Poyner notes that Digital also is strong in telecom and finance.
Yet another overlap: Both Tandem and Digital are leaders in bringing higher reliability to NT systems. Compaq will have to decide which approach it favors.
Analysts expect the Digital purchase to create duplications that will require a write-off to cover cutbacks in jobs and programs.
Even if Compaq has blown $4 billion, it's tough to come down too hard on this peerless engine of growth.
The truth is that few have prospered second-guessing Compaq. As S&P's Graham-Hackett noted: ''Every time the pessimists say they're (Compaq) taking on too big a chunk, they seem to surprise on the upside.'' |
