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January 29, 1998

COMPAQ/DEC DEAL – WHICH BITS OF DEC WILL REMAIN?

By CBR Staff Writer

It is only two weeks since Compaq Computer Corp and Digital Equipment Corp finally sat round the table to sign 40 years of DEC heritage over to Compaq. Too early for either party to be drawn on the consequences for DEC and its technologies, but changes are bound to be afoot. Just last week while announcing its annual financial results, Compaq said its goal for 1998 was to become known as Compaq, the computer company, rather than simply Compaq the PC company. Not such a wild ambition, given it had its acquisition of DEC up its sleeve (CI No 3,334).

By Joanne Wallen

Subject to the usual approvals, DEC, or Digital as it has preferred to be known in recent years, will become a wholly owned subsidiary of Compaq, and will take on the suffix to its name acquired by Tandem Computers Inc last year, and which surely pre- empts the eventual loss of a separate corporate identity, namely a Compaq company. Having not so very long ago shaken off its perception as just a notebook or mobile computer player, Compaq now has high-end, high availability offerings with Tandem’s proprietary Himalaya servers and NonStop software, as well as Tandem’s major enterprise Unix systems dominating the financial and telecommunications sectors. One of the other things it gained with the Tandem buy was Tandem’s direct sales force, one used to selling high end systems to long term strategic customers, and which now includes Compaq desktops, workstations and mobiles in its portfolio. What it most wanted from Digital, it says, was to fill the mid-range space between the traditional Compaq and Tandem offerings. Compaq president and chief executive Eckhart Pfeiffer says Compaq actually runs its own business entirely on Compaq systems, but he admitted the company did not have a sufficient range of offerings to compete in bids for mid-range enterprise systems. One of the particularly interesting parts of DEC therefore is the company’s worldwide service organization, and certainly it will need the service and support infrastructure if it is to become a computer rather than a personal computer company.

Trimming off some fat

Prior to acquiring Tandem, Compaq had just 2,000 direct sales executives; with Tandem, it added a further 1,500. Digital currently has 14,000 sales people worldwide, and while in principle this sales force will be important to Compaq’s ambitions, Pfeiffer is also known for running an extremely lean organization. It seems likely that he will be trimming off some fat in the next couple of months. Also high on the shopping list, according to Pfeiffer, was DEC’s 64-bit leadership with Alpha microprocessors. Given the deal is no more than two weeks old, and unlikely to close before May, no one is willing to say exactly how the integration will pan out, or give precise details of how many of Digital’s staff is likely to stay around, nor which of Digital’s technologies Compaq will keep and which will go by the wayside. As Pfeiffer pointed out, the two companies remain competitors until the deal is finalized, and will continue to operate separately until then. Pfeiffer did say that OpenVMS, with its installed base in the hundreds of thousands, will continue to be supported and maintained, although it obviously won’t be developed. Digital has already had its Affinity program in place for a couple of years, under which it has been working toward aligning OpenVMS with NT to the point that customers would be able to migrate to NT once it is robust enough and enterprise- ready as an operating system, and Compaq says this is the path it will continue to tread. As to the future of the Alpha chip, so recently called into question with the settlement of Digital’s patent dispute with Intel Corp (CI No 3,160), Pfeiffer would say only that Intel has a seven year agreement to manufacture it, and Digital would continue to design and develop it, with Compaq’s backing. So the world is left to speculate. The Wall Street Journal was quick to cite lawyers close to the Federal Trade Commission, who suggest the acquisition wi

ll add fuel to the Commission’s existing investigation into Intel’s monopoly position, given the chip giant’s dominance with its own architecture. Gaining the rival Alpha architecture, which could arguably now become a serious player were it to be backed with Compaq’s money, would, they suggest, give Intel an unacceptable stranglehold (CI No 3,336).

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While it is clear that Pfeiffer, who had planned to address a large audience of press and analysts on Tuesday in London even before the announcement of the Digital deal on Monday, had to do some quick re-jigging of his corporate presentation, he none-the- less managed to cover the Digital news as if he’d known all along that this would be included in the event. The Alpha chip, however, never actually made it into his roadmap for the company’s future. Instead, the road ahead was quite clearly marked out by Intel’s new Deschutes 333Mhz Pentium II chip (CI No 3,333), starting with four-way Deschutes followed by 8-way, and finally going in 1999 to Merced. Pfeiffer, who was otherwise well prepared for integrating Digital into the picture, made no mention of the Alpha chip until questioned on its future. So what is the future for Digital and its employees? According to Pfeiffer, the Tandem integration experience has been fabulous. We were encouraged by the tremendous experience with Tandem he said, and the intention with Digital is to motivate its staff and keep the talent on board. He would not be drawn on the role for Digital chief Bob Palmer going forward, but if the Tandem experience is anything to go by, Tandem chief executive Roel Pieper moved over to Compaq as senior vice president and general manager of Compaq worldwide sales only three months after his company’s acquisition (CI No 3,244), and some three months after that he had left for pastures yet to be revealed (CI No 3,324). One person that should be pleased by the news is Data General Corp chief executive Ron Skates, who, on hearing of the Tandem acquisition last year said he thought Digital would have been a more suitable bride. DEC made a big mistake by not selling out to Compaq, he said at the time, I’m amazed it would turn down the offer that Compaq said they made. Well after two years of being courted by Compaq, Digital obviously thought again. Once completed, the deal will make Compaq far and away the biggest Microsoft Corp customer (can customers be investigated for having a purchasing power monopoly?) and makes it the number two computer company in the world, although the gap between Compaq with combined annual revenues at around $37bn and IBM Corp at $78.5bn is still pretty significant. Two years ago Compaq sets its sights at becoming a $40bn company. Last year it revised that goal to $50bn. Now Pfeiffer says it will no doubt soon be revising that figure once more.

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