Investors bet on Digital -- one last time

Once burned, shame on you. Twice burned, shame on me. But three times -- talk about gluttons for punishment.

Yet many financial analysts are willing to accord Digital Equipment. Corp. another chance. But unlike years past, when they trusted management's promise that a comeback was just over the horizon, now they vow this will be the last time they place their faith and money in the hands of CEO Robert Palmer.

Their begrudging vote of confidence follows reports that Digital plans to sell its networking business to Cabletron Systems Inc. for between $400 million to $500 million. Neither company confirmed the deal, but Palmer came close at the company's annual shareholders meeting on Thursday, saying Digital "needs to find a partner" for its networking line.

The move would give Digital a nice pile of cash. It would also allow it to focus more on the service and support divisions which account for more than 50 percent of the company's annual revenue. That would resonate with Wall Street, where Digital watchers have urged the company to abandon its ambition to become an end-to-end systems provider.

"If they keep selling off pieces and partner with companies that specialize in some of their product lines, they'll be fine," said Jeffrey Pittsburg, an analyst at Goldis-Pittsburg Investment Services. "But I've been slapped in the face too many times before by this stock. If Palmer doesn't get his act together, I'll be at the front of the line of investors screaming for his resignation."

The company has not been immune to criticism and has begun to jettison less profitable parts of the business. Last summer, Digital sold its printer business to Genicom. In October, the company sold its semiconductor manufacturing operations to Intel Corp. for $700 million. It also signed a licensing agreement with Intel that analysts say could bring in at least that much or more in the next two to three years.

What's more, rumors have circulated for some time that Compaq Computer Corp. was interested in Digital's services division.

For a company that was once one of the industry's leaders, the evolution of the technology industry in the past five years has been painful. In this day of specialization, DEC has realized that it can't be everything to everyone, say company watchers.

"I don't think you can do it end to end -- the PCs, networking, communications -- it's too big. ... You can sell it but you can't make it," said Virginia Brooks, an analyst at the Aberdeen Group in Boston. "They're really moving toward a systems integration, sales, and service company strategy."

For investors, the transition can't come quickly enough.

"It's been bleep, bleep, and bleep," Pittsburg said. "It gets down in the low $20s, close to its book value, and looks like it's ready for a recovery, and then it goes in the tank. Of the 80-plus stocks we follow, only three have disappointed us -- and Digital's one of them."

But after Digital's sale of its chip division and the possible unloading of its networking side, analysts have adjusted their ratings in hopes that Palmer and company will maintain their momentum.

Last week, PaineWebber upgraded the stock from "attractive" to "buy," and Goldis-Pittsburg upgraded it from "hold" to "buy."

"I don't really have a choice," Pittsburg said. "But if they falter this time, I won't do it again."

DEC's stock closed up 75 cents per share Thursday to $48.31.

Margaret Kane contributed to this report.