The Old Man And The Brat

Compaq''s historic acquisition of Digital for $

9.6 billion, creating the second largest edifice in the worldwide IT industry, has made

the Dells and the Gerstners of the world sit up and rework their strategies for the

future. The ripples created extend much beyond the surface, with the impact being felt all

over the world.

It is a sad end to a great company, what

could have been a great company has met this fate. These comments from Pravin Gandhi, one

of the founder directors of Digital India and one of the men responsible for getting

Digital into India, first as an agency through Hinditron, and then as a joint venture with

Digital Equipment Corp. (DEC) itself, sum up the sentiments of many an old timer about the

acquisition of Digital by Compaq. Equally poignant is that Digital, considered at one time

as one of the challengers to IBM, will in fact be actually challenging IBM after the

acquisition by Compaq more effectively. It would be a matter of immense satisfaction to

the Founder of Digital Ken Olsen that as a 100 percent subsidiary of Compaq, his original

dream is getting fulfilled.

Not that the end of Digital as a separate

entity was unexpected. In the past few years, in spite of the bravado put up by the legion

of Digital executives, the company has been in trouble. Despite denials, its Great White

Hope, Alpha, has not been doing particularly well. Its PCs, despite a good batting

average, were not there yet, certainly not amongst the Top Five PC vendors. Proprietary OS

VMS was, as per the trends elsewhere in the world, on the decline. In fact, many argue

that what was carrying the company was the sheer inertia of force of the yesteryears. At

one point in time, Businessweek even theorized that Chairman Robert Palmer may be on his

way out. Trouble was that there were few who wanted to be on the way in.

What was unexpected was that it would be

acquired by someone like Compaq. Not that it is meant in a derogatory sense toward Compaq,

but compared to the history of Digital, Compaq is a Johnny-come-lately. It is primarily a

PC company or a box pusher. Its strengths are in channels, volumes, and crashing prices.

Streetsmart Compaq, was not anywhere known for enterprise-wide solutions. However, besides

all the above, what Compaq does have is enormous panache, tremendous ambition, and a

shark-like instinct for growth-at-any-cost. It had also recently exhibited its hunger for

high-end solutions market by gobbling up Tandem and just when the world thought that

Chairman Eckhard Pfeiffer had achieved his 12-month nirvana, he gobbled up Digital too.

Compaqization Of Digital



An immediate impact of the Compaqization of Digital is that the IT industry gets divided a
little more neatly. At the top end, we now have IBM, HP, and Compaq (or Comdig, if we

choose to call it). These are the big boys of enterprise solutions, with a repertoire of

offerings ranging from, to borrow a phrase from IBM, palmtops to teraflops. They play just

about every segment of the market. Each boasts of a global presence and will be competing

with each other everywhere. The second tier comprises companies like Dell, Acer, Packard

Bell- quintessentially PC companies, which with the help of Intel''s power increases on the

chip and Microsoft''s proportionate ballooning of applications, are trying to scale the

desktops into Small and Medium Enterprise (SME) and into departmental servers in larger

corporates. Their key strength is perhaps not even technology. It is logistics and supply

chain management in getting their product faster, in a configuration as desired by their

customers, worldwide. Between the two layers, horizontally, we have the two ''enablers''

Intel and Microsoft, who, when are not spending their time in Washington lobbying against

Justice department, produce the processors and the key software needed by the two

players-the OS, the suites, and the browsers. Then we have a plethora of players, playing

in a plethora of niches. We have datacom companies like Cisco and 3Com in the burgeoning

datacom equipment market, we have players like Oracle and Novell, straddling the OS as

well as the tools market. We have players like EDS and Perot Systems, who are in the

high-end systems integration market, and Computer Associates (CA), a plumber in the large

enterprises'' solutions market. Bringing up the bottom will be the geography-specific local

companies, like Zenith etc. in India and Legend in China.

One of the first problems that Pfeiffer

will have to attend to is the issue of what is to be done with Digital PCs, which have

reportedly had a decent run in the market. Will they coexist with Compaq PCs? In which

case, what part of the market will the Digital PCs target? Will they compete with Compaq

or not? If they have to be jettisoned, then will Compaq make a clean break or will it get

some ''breathing'' time? Much of the industry opinion, at least, in India seems to believe

that Compaq will kill Digital PCs, sooner or later. Zenith MD Raj Saraf feels,

"Compaq does not need the Digital PC line and may shelve it," while Shailendra

Gupta of Godrej Pacific echoes him "Digital PC will not find much place in the new

gameplan." Even the Digital old-timer Gandhi says bluntly, "over a period,

Digital PCs will die." Analysts across the Atlantic also expect that Compaq will

eventually terminate the Digital PC business entirely.

The Alpha Angle



However, beyond the PCs, the gameplan could be very different. Saraf says, "What
Compaq is getting is the Alpha line of servers and the consulting

business." In fact, Alpha has been mentioned both by Pfeiffer and Palmer as one of

the key constituents of the Comdig deal. This will be important as Compaq will try and

leverage the 64-bit technology (the only one) of Alpha in the enterprise segment of the

market. For long, Alpha has been seen as ''a processor in search of markets'' and the one

technology that Digital had staked everything for. Compaq''s acquisition of Digital also

has an Alpha angle as it is possibly the only chance that anyone will have of upstaging

the forthcoming Merced, the 64-bit Intel-HP development effort which will see

commercialization around 1999, at the earliest. Till then, Compaq has the chance, and the

panache to actually rule the roost in the 64-bit market. To do that, it needs a strong

loyal customer base, something it has, courtesy its PC and PC server strength, and a huge

war chest which though depleted by $ 4.5 odd billion, it will pay to Digital shareholders

in cash. If anything, Alpha has one ghost of a chance with Compaq, something it had less

and less of, with Digital.

Alpha will also be the one key component of

its strategy in the top league, where now all the three players have a lock-in with one

distinct processor technology, IBM with PowerPC, HP with Merced, and Compaq with Alpha.

What this means is that at the high-end and enterprise-wide computing level, there is a

distinct possibility of an alternative to Intel emerging, with AS/400 and RS/6000 on

PowerPC and Comdig high-end comprising VAX and other Digital systems on Alpha. Whether or

not Compaq will be able to capitalize on this opportunity remains to be seen. Says HP''s

Ashwini Agarwal, "There is little synergy between Compaq''s current high-volume PC

business and what remains of Digital''s operations," whereas Digital India''s CEO Som

Mittal calls the deal "a win-win situation for both, as Compaq will benefit from our

large service offering and reach into the enterprise markets." Speaking on the future

of Alpha, Mittal says, "Compaq needs a 64-bit architecture and today Alpha is the

only one, and with Merced delayed, if Compaq has to compete against IBM, HP, and Sun, then

Alpha is the only route." Mittal has a point there. However, what remains to be seen

is whether Compaq is willing to take the risk of betting on Alpha, a bet that Digital had

somewhere lost out on. The alternative to the Alpha strategy is that Compaq, like HP and

others, waits for Merced to come out, and in the meantime chugs along the 32-bit apps

route, where the pickings are in abundance the worldover. Under this scenario, Compaq has

tremendous leverage both with and without Alpha.

However, one area where Alpha will play a

key role will be in the workstations market, where Alpha''s 64-bit architecture gives it a

distinct market edge. Once again, Compaq will use its formidable channel strength to play

in a market where it has not played before. Both Sun and IBM will be faced with an

Alpha-peddler whose marketing aggression has already been proved in the mass market PC

arena. And Compaq would love to play in this market, as it will help the company in

shoring up its margins which are under increasing pressure in the PC marketplace. Back in

the Indian market, this will help Compaq gain access to a significant chunk of the

enterprise market and big ticket users who may be suspicious of tying up their computing

fortunes with an obviously declining Digital. This will be yet another lever for Compaq to

use against Intel, as the latter has been furiously upping the power in the processor and

has made no secret of its desire to play in the lucrative workstations market. Going by

the current market messages that Intel has been making on Pentium II, it is rather obvious

that the technical computing, games, multimedia, and graphics market is the next target

for the company. Merced, as and when it comes out, fits nicely into this scheme of things,

as all these applications will require the power of 64-bit architecture. Compaq, with

Alpha and a mass market focus is ideally suited to hit big time here, and has the capacity

to queer the pitch for Intel, now with Pentium II and Merced.

With or without Alpha, one area where

Compaq will try and hit paydirt with Digital is the enterprise. What with NT and Unix

competing furiously in this huge and expanding segment, Digital''s comfort level in the

enterprise will work to Compaq''s advantage. However, what worries analysts and delights

competitors is that post Comdig deal, Compaq will have Unix, Ultrix (DEC''s version), NT,

Tandem''s proprietary OS, and the legacy VMS, and OpenVMS. How the company juggles this

varied basket of technologies and spins out a coherent computing strategy for the

enterprise users in the short run, will be closely watched. In the medium and long run,

analysts believe that the Compaq-Digital combine will probably have only NT and Unix,

where NT will play a bigger role. This is obvious, considering that Digital has had a very

close relationship with NT and that expertise has already started paying dividend to the

erstwhile company. Second, the key reason for Compaq''s Digital acquisition is the

enterprise strength of the latter. As Abhishek Mukherjee, MD, Compaq Computer India Pvt.

Ltd points out, "Through the acquisition of Digital, Compaq will accelerate its

momentum toward enterprise solution leadership." "Specifically, the agreement

strengthens Compaq''s customer focus, positioning the company as a strategic IT partner to

customers of all sizes."

What''s The Big

Deal

"The reason for reaching this

agreement was really very simple. Together, we are a much stronger competitor than we were

as separate companies," says Robert Palmer, Chairman, DEC. Affirms Eckhard Pfeiffer,

Compaq CEO, "The combined revenues of the two companies for 1997 was $ 37.5 billion.

That makes us the # 2 computing company." Under terms of the deal, Digital

shareholders will receive $ 30 in cash and an estimated 0.945 shares of Compaq stock for

each Digital share. Compaq will issue about 150 million shares of its stock and pay $ 4.8

billion in cash for Digital.

Back home Abishek Mukherjee, MD, Compaq

India Pvt. Ltd, feels, "Compaq and Digital combine will continue to be the largest

manufacturer of portables, desktops, workstations, and servers using Intel/Microsoft

products. Our relationship with these two strategic partners should strengthen with this

acquisition." However, Som Mittal, CEO, Digital India, points out that Compaq is

certainly gaining a lot from the deal. It has paid nearly four to six times its profits to

acquire Digital. "Compaq in India is the only one among the majors not to have a

significant software presence, though it has had a long standing relationship with BFL

Software. With this merger that also has been taken care of. Compaq can leverage on DEIL''s

software and services expertise."

An interesting point is put forth by Raj

Saraf, CMD, Zenith Computers, "Essentially, I see that Compaq is going the IBM way.

In that, it is acquiring all the components that make up a complete business solutions

provider, except for the fact that IBM had to grow most of the technologies in-house, and

Compaq is acquiring them from outside." While Shailendra Gupta, CEO, Godrej Pacific,

feels that with the combined strength, Compaq would become a very formidable force.

"Now Compaq will be in high-end servers and solutions business where they were

traditionally not present. It will also cross-leverage its strengths between

segments."

Meanwhile one of the key founders of

Digital in the country, Pravin Gandhi presents the skeptic''s view: "There would be no

impact in India at least for a year because of the difference in the structuring of the

companies. Compaq has acquired many other companies too but it has taken a long time to

integrate those businesses within its framework, for instance, Tandem, Microcom etc. In

Digital''s case, it''s going to be more difficult. There will be some confusion in the

market as well as within the company."

And what does competition has to say about

the whole gameplan? Stacy Plemmons, VP (Enterprise System Group), HP, says, "It is

good to have a competition. If the deal goes through, they will be second largest IT

company for only one year. Pfeiffer will have a tough job integrating both the

companies-what with two flavors to NT, four flavors of Unix, and three different

microprocessors. It will take at least three years for Compaq to integrate the two

companies. And by that time HP will be far ahead with Merced." Further, his colleague

Ashwini Agarwal points out, "We see little synergy between Compaq''s current, high

volume PC operations and what remains of Digital''s operations. Both companies offer

competing PC product lines, which have to be merged. The strategy to continue with Alpha

technology can only be successful if Alpha is able to prove its performance superiority.

HP believes that IA-64 is a platform for the future which significantly clouds the future

for Alpha."

Affirming the competition''s viewpoint says

an analyst: "cultures are difficult to meld, and the bigger the two companies are,

the more the issues that arise when they become one."

Despite everything the world has to say

about the deal, finally Compaq is the winner. A big deal indeed.

Third, Compaq, by itself, has little

experience with Unix, and if anything has a higher degree of comfort with NT. With

Microsoft scaling NT into enterprise-wide, except for the very specific or legacy

applications, Comdig will inexorably gravitate toward NT.

And then the services, the raison''

d''ˆtre of the Comdig deal. The hugely successful and lucrative consulting business,

which in many a bad quarter has actually salvaged the Digital pride, is an indispensable

tool for any IT company wanting to play in the big league. Once again, Comdig will go

head-to-head with IBM on this issue, and possibly also with companies such as EDS, Perot

etc. By Compaq''s reckoning, the leverage that this market will give them will help them

penetrate the high-end computing market. The services market is also seen by many as a

market, which is not as dependent on the overall economic outlook, unlike the PC market.

To that extent, Compaq will be looking to add a constant cash stream to its revenues. By

entering the services market, ahead of HP, it has stolen a march over its arch rival,

whose services market is yet fledgling.

What Next



Whatever be the hits and misses, a $ 37-billion edifice will need a tremendous amount of
managing. As Digital will not seamlessly fit into the Compaq structure. Cultural clashes

are likely to happen, as soon as the deal goes through. Most analysts agree that two

incongruent management strikers are unlikely to continue, which will only mean that there

might be casualties amongst the current Digital Board. Palmer''s future is also uncertain

as despite a clean mandate from the Board, after Founder Olsen''s boardroom ouster in 1995,

he has been unable to stem the rot on a regular basis. Palmer himself has given no

indications of either staying on or leaving, and if history is to be a guide, then going

by the Lotus, Tandem, and other examples, Palmer will exit after being at the helm since

1995 as Chairman and before that as President and CEO since 1992.

Another interesting twist to the Comdig

deal is the very strong feeling in the US IT industry about PC maker Dell, which

outsources much of its service work to Digital. To keep up, Dell will have to find a way

to either build a corporate computing ''enterprise'' division or find a partner or as many

believe, buy one. In the next 6-12 months, it will be interesting to watch as to how the

consolidation of the industry takes place and what kind of an impact it will have on the

Indian industry. For instance, the Comdig deal has not only created the world''s second

largest IT company (even if only for a year, as the HP spokesperson put it), but has also

created India''s third largest IT company, ahead of Tata-IBM. The impact of the deal will

also be felt with a phase lag in India, and it is altogether possible that but for the

PCs, there might not be any other change as far smaller markets like India are concerned.

Be that as it may, the Comdig deal is significant to the extent that Compaq will probably

acquire the characteristics of a Digital than the other way round, and that will be an

immense source of satisfaction to the old timers, like Olsen and Gandhi.

L SUBRAMANYAN,



in Delhi.