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Technology Stocks : Compaq -- Ignore unavailable to you. Want to Upgrade?

To: Richie who wrote (35346)	10/26/1998 7:46:00 AM
From: S.C. Barnard	Read Replies (1) \| Respond to of 97611

CPQ featured on CNBC'c "Coping with the Crisis" series tomorrow at roughly 7:40AMest(?)

To: Richie who wrote (35346)	10/26/1998 7:51:00 AM
From: Elwood P. Dowd	Read Replies (2) \| Respond to of 97611

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.