The following is from the 11/02/98 copy of Forbes. El ............... In swallowing ailing Digital Equipment Corp.,
Compaq Computer risked indigestion—or worse. In
fact, Digital has been a tasty meal for the acquirer.
Bon appétit!
By Daniel Fisher
IN HIS RELENTLESS BID to poke Compaq Computer
Corp. into every nook and cranny of the computer
business, Eckhard Pfeiffer took a bold gamble when
he paid $8.4 billion in cash and stock to acquire
Digital Equipment Corp. in June. Here was a
narrowly focused outfit—Compaq, a maker and
seller of computer boxes—swallowing an older and
more complex operation. Their cultures were
entirely different, and Digital, once number two only
to IBM in the computer trade, had been slipping for
years.
Could Houston-based Compaq possibly digest
Maynard, Mass.-based Digital? It could—and is.
Pfeiffer has slashed 5,000 jobs in less than four
months, pruning away moneylosing operations and
absorbing the ones he wants to keep. Compaq's
chief financial officer, Earl Mason, says he's
extracted $400 million in cash from Digital's balance
sheet largely by speeding up bill collections and
slowing payments to creditors. Compaq is also
selling a large chunk of Digital's $3 billion in real
estate as it closes duplicate facilities such as
Digital's Maynard headquarters. Gone are Digital's
personal computer business and factories in
Singapore and Taiwan.
Separate paths
Compaq shares have skidded sideways while Dell's soared,
party on concern about Compaq Digital acquisition. That
could change soon.
Digital brought along $3 billion in cash and $3.3
billion in tax-loss carryforwards that Compaq can
use to offset taxes over the next eight years.
In short, Compaq is making the Digital acquisition
almost pay for itself and getting prize assets for
almost nothing. What Compaq really wanted was
Digital's $6 billion, 22,000-employee computer
services division and its $3-billion-a-year data
storage business. Both move Compaq decisively
away from its former near-reliance on selling
computer boxes.
After deducting the cash Compaq has wrung out of
its assets, its net cost for the acquisition drops to
$5 billion. Yet Digital's computer services unit alone
reported pretax income of about $1 billion last year.
Thrown in almost free are Digital's speedy Alpha
microprocessor and popular Alta Vista search
engine.
Financial officer Mason predicts that Digital's
operations will start contributing to Compaq's
earnings in the fourth quarter. That would help
rehabilitate his image with investors who are still
smarting from Compaq's surprise disclosure of
excess inventory earlier this year, from which its
stock has yet to recover: Compaq shares recently
traded at about 14 times estimated 1999 earnings of
$1.78 a share, compared with Dell Computer Corp.
at 50 times forward earnings.
"We're not perfect, we've proven that," says Mason,
chagrined by the inventory problems. "But can we
execute? We think so."
Apparently they can. Compaq got a head start on
the cost-reduction process by fielding more than
200 teams to draw up "road maps" detailing
products Compaq would continue to produce and
how they would be marketed and sold.
The teams began their work in January, just after
the Digital deal was announced. "By the time we
closed the transaction on June 11 we had the brunt
of the work all done," says John Rose, who quit
Digital in 1992 after a dispute with then-president
Kenneth Olsen and now heads Compaq's Enterprise
Computing Group.
Not everything has gone perfectly. Rivals such as
Hewlett-Packard picked off Digital's customers by
the hundreds after Compaq announced the takeover.
Competitors are still capitalizing on concerns that
Compaq won't support Digital's VMS and Unix
operating systems much longer. There are more
than 400,000 aging VMS minicomputers worldwide,
comprising a fat target for IBM, Sun Microsystems
and Hewlett-Packard. "We've been focusing on
Digital customers for the last three years, and
certainly in the last nine months our activity has
picked up," says Les Wilson, systems marketing
manager for HP's Unix business.
By the time we closed the [Digital]
transaction on June 11 we had the
brunt of the work all done," says
John Rose, Compaq senior vice
president.
But Compaq hasn't just cut. It has added thousands
of employees to Digital's service business. Pfeiffer
left the old Digital management team there intact
under John Rando, group general manager of
Compaq Services, who has a mandate to double
revenue to $15 billion by 2002. One of the hidden
assets Compaq obtained in the Digital takeover is
its 4,000-employee direct sales force, which when
combined with the 2,000 sales employees of
Tandem—acquired in August 1997—doubled
Compaq's direct-sales operation to 8,000
employees. The company added an additional 2,000
employees through outside hiring, bringing the total
to 10,000. These people have the skills to sell
everything from multimillion-dollar computer
networks to $1,500 notebook PCs. It's a big shift for
Compaq, which got its start as a PC-clonemaker
and still generated more than half of last year's
$24.6 billion in revenue from desktop PCs.
The challenge for Rose now is to shift the
customers Compaq inherited from Digital over to
new Compaq servers utilizing Microsoft's Windows
NT operating system. Compaq still sells Digital's
powerful Unix operating system, which competes
against similar products from IBM and Sun, but
Compaq's long-range plan is to move the bulk of its
customers over to the so-called Wintel combination
of Intel microprocessors and Microsoft software.
For all the problems involved, this looks like one
heck of a deal. It leaves Compaq broader and
stronger—and at what turns out to have been a
bargain price. |
