BILLWOT, SONNY -- FROM BARRON'S FEB-9 ,1998---CPQ/DEC
And here at home, the PC king, Compaq Computer, said it aims to snap up Digital Equipment, the once-brilliant data-processing star whose light has dimmed considerably in recent years.
The Compaq deal is particularly intriguing. For it greatly expands the company's horizons, extending them to realms that were previously the exclusive domain of IBM, Sun Microsystems and Hewlett-Packard. For Digital, despite its travails and flounderings, still boasts some noteworthy attributes. It has, for example, a very good, very large and very lucrative service and support business, whose margins are appreciably higher than Compaq's. More important, perhaps, DEC's Unix-based server products will provide entry for Compaq to the lush and growing high-end corporate and government markets.
The combo will boast revenues north of $37 billion, not quite up to IBM ($79 billion) or Hewlett-Packard ($43 billion) but more than Intel's $25 billion and nearly triple Microsoft's $13 billion. Strictly heavyweight-class.
DEC won't be an easy swallow, obviously. It has over 50,000 employees, dwarfing Compaq's existing 33,000 head count. Reinvigorating that vast and somewhat dispirited corps shapes up as no piece of cake. There'll be the usual culture shock, to say nothing of the formidable task of melding operations and structures. Odds are, it's going to be a messy meshing period.
And, needless to say, there's no guarantee that even if and when Compaq gets everything in gear, the payoff will be as significant as the company and its legion of fans in Wall Street expect.
While in a caveating mood, we also might raise the remote possibility -- just for comic relief -- that the PC boom might lose some of its steam or, heaven forfend, peter out for a spell.
Still, there's no denying (and there's no reason to) Compaq is a heck of a competitor. (Don't take our word for it, just ask IBM.) Moreover, even a cursory glance at the deal raises the suspicion that Compaq is buying DEC very much on the cheap. As one analyst, Charles Wolf at Credit Suisse First Boston, gleefully put it: "In its acquisition of Digital Equipment, Compaq raises theft to a new level."
What makes DEC such a "steal" for Compaq is its flush balance sheet. Under the terms of the acquisition, Compaq will shell out around $9.5 billion for Digital, of which $4.5 billion will be in cash. However, as part of its dowry, DEC brings a neat $1.3 billion in cash to the union.
Moreover, sale of the company's semiconductor and networking businesses should further swell that cache of cash. And, for all its wounds, DEC has been throwing off something like $1 billion a year in cash flow.
Analyst Wolf, plainly bullish over the prospect of a DEC-enriched Compaq, figures that Compaq can cut DEC's component costs by 10%; shrink its payroll by 10,000; make manifest use of DEC's $1.2 billion tax-loss carryforward; sharply reduce the days outstanding of DEC's accounts receivable, while increasing the length of days outstanding of its payables; and more than double DEC's inventory turnover ratio.
He calculates, breathing rather heavily, that with all the aforegoing and after "liberating the cash sloshing around in DEC's balance sheet," the cost of the acquisition will be slashed from the aforementioned $9.5 billion to a piddly $3.5 billion. Which would be, he reckons, something less than four times DEC's cash flow next year.
If so -- and the operative word is "if" -- who can quarrel? The deal really is a steal.
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