At the end of the first 24 hours after
Compaq decided to buy Digital, there is only one question that remains unanswered-why? The
release from Compaq makes it appear as if Digital offered to sell and that is the reason
Compaq ‘agreed’ to buy the former. Sifting through the niceties of the press release, it
is apparent that Compaq bought Digital at a time when it suited Compaq and not necessarily
Digital, at a price which is cheap by any standards for things that Compaq wanted, and not
necessarily things that Digital wanted to sell. For it is not very often that a company is
sold for the value roughly equivalent to its annual revenue, and seldom at a price lower
than that. Digital’s revenues for the last financial year was a respectable $ 13.1
billion. In Digital’s second quarter reports (October-December ’97), profits doubled and
the company experienced tremendous growth in its target markets. And less than three weeks
after Digital achieved that Eckhard Pfeiffer struck.
The party line according to Compaq and
Digital is that Compaq will utilize the key technologies of Digital, and Pfeiffer has gone
on record to suggest that "Compaq will continue to invest in Digital’s worldwide
service organization, as well as its 64-bit leadership with Alpha technology…" What
is however unclear is how on earth is Compaq planning to girdle a plethora of OS
technologies, two different processors, a totally different market where Compaq has never
played before, and a services business which is as alien to Compaq as selling hamburgers?
What Compaq has bought and for which it has
paid the not insignificant $ 9.6 billion for is the shot at the higher end servers market,
where Digital has a tremendous mindshare, if not marketshare. It is also the market where
Compaq would love to get into, many industry analysts say ‘has to get into’, if it has to
sustain its profitability levels and its bloated war chest of cash to challenge the might
of IBM some day. While Alpha might yet remain on top of the public agenda for the two
companies, the emergence of Merced might be a damper on the Alpha-supporters within the
company. In any case, taking a contrarian view of the whole thing, Compaq might be Alpha’s
last bet and Intel’s last challenge for supremacy in the 64-bit market.
That leaves the huge services market, where
Digital has traditionally been strong in the past and has a very large family of partners
that it has managed to garner in the past. This market spans the entire spectrum from Unix
to NT to OpenVMS and a large number of global customers around the world who would now nod
approvingly at the merger, knowing the prowess of Compaq and the breadth of applications
that Digital has been supporting.
While both Compaq and Digital made the
necessarily cordial and understanding statements, according to analysts there was little
doubt that Pfeiffer was not going to be content by merely making a wholly-owned
subsidiary. Gartner-Dataquest’s Philip Williams was quoted by Reuters forecasting
significant layoffs and a possible conflict of cultures in the new setup. It is somewhat
clear that two separate management structures may not be allowed to coexist and knowing
the aggression with which Compaq addresses itself, it is all too possible that some heads
in the erstwhile Digital boardroom might roll. An early indication of this incompatibility
was the decision of Standard & Poor (S&P) to downgrade Compaq’s stock from
‘stable’ to ‘negative’.
In more ways than one, Compaq has staged a
coup of sorts. It has not only managed to create a $ 37 billion company, the second after
IBM, but it has also provided Compaq with another giant step toward becoming an IT giant,
and come out of the shadows of the mantle of a ‘boxwallah’. Against this backdrop, the $
10 billion that it has paid for Digital is `Penny-wise, Pound-wise’.