Pfeiffer: Deal takes Compaq to the next level

Compaq Computer Corp. CEO Eckhard Pfeiffer said his company's $9.6 billion acquisition of Digital Equipment Corp. is not only the biggest deal in the computer industry's history, but it positions Compaq as the second largest computer company in the world. Today's deal will make Digital (DEC) a wholly owned subsidiary of Compaq (CPQ) and give the No. 1 PC company in the world access to Digital's services and enterprise markets and customers. The new company will have combined annual revenues of more than $37 billion.

"We have said of late that we want to become the strategic partner to IT customers worldwide, working to their competitive advantage," Pfeiffer said during a conference call this afternoon. "Last year's acquisition of [mainframe and server manufacturer] Tandem [Computers Inc.] put us on the fast track. This represents the next step."

Industry analysts agreed that Compaq needs this aspect of Digital to take it to the next level.

Compaq's Pfeiffer describes the size and shape of his new computing behemoth. Also how the deal affects its sales and distribution strategy. (Source: MSNBC)

"What Compaq is buying is the services organization and presence and the customer base. Compaq needed that service expertise to get credibility," said Rich Ptak, an analyst at D.H. Brown Associates Inc., in Amherst, N.H., who previously worked at Digital for 16 years.

Under the terms of the deal, each Digital shareholder will receive $30 and 0.945 share of Compaq stock per share of Digital stock. Compaq will issue 150 million shares to cover the deal and pay out $4.8 billion in cash.

The deal will make Compaq money within a year, according to Chief Financial Officer Earl Mason. Houston-based Compaq will take a one-time charge in the second quarter, when the deal is expected to be completed. The acquisition still needs to get the approval of Digital's shareholders as well as certain governmental agencies.

Today's merger had been rumored for more than a year, as Compaq officials made it known they wanted to move up to the top tier of IT companies worldwide. Compaq acquired Tandem in June of last year for $3 billion.

Meanwhile, Digital has shed several divisions, including a deal with Intel Corp. for manufacturing its 64-bit Alpha chip. In November, the Maynard, Mass., company sold its networking division to Cabletron Systems Inc. for $430 million.

Pfeiffer said that after the first set of talks, the two companies renewed discussions and the deal was completed in two weeks.

He reiterated the company's support for Alpha but pointed out that Compaq would now be "without a doubt the strongest sales, solution and support organization in the world with respect to [Windows] NT."

Digital's Robert Palmer says the potential strength of the combination is the reason for the agreement. Plus, he addresses the future of Digital's employees. (Source: MSNBC)

Executives today would not discuss what impact the merger would have on the companies' respective workforces, although they did acknowledge an overlap in product lines. In particular, Digital's desktop products would seem to conflict with Compaq's PC business.

Despite perceived problems, analysts reacted positively to the deal, saying it fills in gaps in Compaq's business, particularly in the services and high-end systems areas.

"This fills the gap between [Compaq's] NT servers and Tandem's high-end [products]," said Kevin Hause, an analyst at International Data Corp., in Mountain View, Calif.

The biggest challenge will be in successfully digesting both this deal and the Tandem acquisition, other observers said.

"From a financial perspective, they're there. From an organizational perspective, there's a lot of work to do," said Jon Oltsik, an analyst at Forrester Research Inc., in Cambridge, Mass. "Compaq has now made two huge acquisitions over the past year, and that's not easy to swallow. They have a lot of work there. From just a resources perspective, they should be able to do very well. Digital was underutilized for years. Now they're marrying with OK technology and great marketing."

Pfeiffer said during the conference that the Tandem acquisition has been handled adroitly, adding that he hopes to do the same with Digital.

"We had a tremendous learning experience in the Tandem integration. It has been perfect," he said.

Pfeiffer added that, within four months, the two companies' sales teams had been cross-trained and their road maps synchronized.

"That's the approach we're going to apply in the Digital relationship," he said.

(Paula Musich contributed to this story.)