The $9.6 billion acquisition of Digital Equipment by Compaq Computer will come as no surprise to those who have followed Compaq's rapid ascent to the rank of industry leader.
Compaq is already the world's biggest PC maker, but more recently it has decided to target newer areas of the computer markets. One obvious target area is in the sale of more powerful business machines, such as work stations and servers, which are used by researchers, engineers and users of complex graphics - traditionally Digital's stomping ground.
The Compaq/Digital deal has been much rumoured for several years, with the Wall Street Journal reporting in May of last year that high level talks had taken place between the two companies in both 1995 and 1996. At the time it was reported that the two firms had reached a general agreement on a purchase price for Digital of between $9 billion and $10 billion, but that Digital later backed away.
With Compaq making ambitious noises last November about becoming a $50 billion company by the end of the millennium, the obvious next step for Compaq was a major outside acquisition.
Digital represents the ideal choice for Compaq, and the combination of the two will create one of the top three companies in the computer industry. Its products will range from small laptop computers to the servers on which large companies run their computer systems and will also encompass a link to Microsoft, the key software manufacturer.
The two organisations together will represent a powerful force. Already Compaq ranks fifth in the overall computer industry, posting 1997 sales of $24.6 billion, up from $20 billion in 1996. Net profits were $1.85 billion.
With the acquisition, the combined turover of Compaq/Digital would be some $37.5 billion on 1997 figures, putting it ahead of Hewlett-Packard, which had revenues of $35 billion, but behind Microsoft and IBM, the industry giant.
Compaq is already strongly positioned in the PC market. Last week, a US survey of more than 5,000 businesses by Computer Intelligence, saw the company retain its No.1 ranking as the top supplier of computers to business, with about a 17 per cent share during the fourth quarter of 1997. That put it well ahead of Dell Computer with 12 per cent and IBM with 10 per cent. At a global level, research firm Dataquest, recently found Compaq's market share for personal computer sales in 1997 grew to 12.4 per cent from 10.1 per cent. Compaq needs a solid service and support presence to accommodate the great commercial expansion it is anticipating. Earlier this month it announced it would soon begin producing PCs, servers and service programs aimed at small and medium businesses. Moving away from simply being a PC vendor, Compaq has started to develop a line of desktops, notebooks and servers keeping small and medium enterprises in mind.
In June, 1997, Compaq paid $3 billion for Tandem, which makes computer systems that are used by banks and others that function 24 hours a day. The move further extended Compaq's market with sophisticated business solutions and doubled the sales and service field resources.
The move to acquire Digital was a logical next step and will put the combined group in a leading position in the fast growing market for computer servers running Microsoft's Windows NT system. With Compaq seeking to provide across the board solutions to a wider market, the takeover has been well timed, as Digital has come to represent the high-end of the computer market with extremely powerful, multiprocessor machines.
The new alliance further strengthens the focus on creating competitive advantage for business customers, according to the companies. This will be achieved by delivering a wide range of technology based solutions from hand-held computers, notebooks, desktop computers, workstations, servers and high-end servers based on the 64-bit Alpha architecture, developed by Digital. Compaq is also buying a large services operation which provides systems integration support and maintenance to business customers and has healthy profit margins.
While the deal is subject to the approval of Digital's shareholders as well as clearance under anti-trust laws, it seems unlikely there will be any opposition to the move. In November, Digital's shareholders urged the company to remove potential obstacles to a takeover.
