Compaq soars to #2 on Digital buyout

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Compaq soars to #2 on Digital buyout

By Richard Morochove

First published January 29, 1998

At Compaq Computer's Innovate Forum 97 held in hometown Houston last April, CEO Eckhard Pfeiffer confidently predicted his company would rank among the world's three largest computer makers by the year 2000.

Pfeiffer achieved his goal early. With its purchase of Digital Equipment Corp. (DEC), Compaq's revenues should top $40 billion (U.S.) this year, making it second only to IBM in computer sales.

Compaq's offer to take over DEC for $9.6 billion (U.S.) is the largest acquisition in the history of the computer industry. The deal is scheduled to close in the second quarter, subject to shareholder and regulatory approval.

While Digital will boost Compaq's capability to service corporate customers, I predict it will also strengthen its hand as the world's largest PC maker and allow it to be more competitive in Canada.

Compaq's move to number 2 is all the more remarkable an achievement for a company that clocked in with just over $3 billion (U.S.) in revenues and lost money in 1991, just before Pfeiffer took over the reins as CEO.

Not everyone believed Pfeiffer could pull it off. A few weeks after Pfeiffer's prediction, I met with Hewlett-Packard CEO Lew Platt. He didn't think Pfeiffer knew how to service the large corporate customers needed to fuel the PC maker's future sales growth.

Platt said, "The support requirements are different. He's trying to build a support organization to support the enterprise customer. He's got a lot of work ahead of him."

It looks like Pfeiffer was listening, because Digital is strong where Compaq is weak, in customer consulting and support services.

Digital invented the concept of the mini or mid-range computer and at one time ranked second only to IBM in size. However, DEC's growth stalled for many years. DEC lost ground because it was a latecomer to the important PC market. The company was outfoxed by rival Hewlett-Packard in the workstation and mid-range computer business.

Yet 40-year-old Digital Equipment looks like it's finally on the road to recovery. It sold off its money-losing Alpha chipmaking business to Intel last year. On Jan. 15, Digital reported net income of $75 million (U.S.) for its second quarter, more than double the profit for the period in the prior year.

It's too early to predict what might happen to the combined companies in Canada. Compaq Canada cracked the billion dollar sales mark last year, up 39 per cent from 1996, even though average PC prices plummeted. It sold 348,000 computers in Canada, up 63 per cent from the year before.

The Digital deal brings Compaq Canada added flexibility in the highly competitive PC arena. All Compaq PCs are now assembled outside Canada. This means the company must plan the configuration of new models many months ahead of their launch. It makes it difficult to change models in response to market conditions.

IBM Canada has taken advantage of this in the past by waiting for Compaq Canada to announce its PCs. Then Big Blue quickly comes out with models that closely match Compaq's, yet undercut them on price. Many of IBM Canada's PCs are assembled in Canada at facilities in Markham and Mississauga. This means new models can roll off the assembly line within a couple of weeks of the go-ahead at IBM Canada's head office.

Digital Canada has experience assembling PCs for itself and others in a plant in Kanata, just outside Ottawa. If Compaq Canada is smart, it will use this plant to assemble PCs for the Canadian market so it can quickly counter IBM Canada's moves.

Is Compaq's shopping spree over? Last year Compaq acquired Tandem Computer, a maker of high end computers for big business. With Digital making mid-range computers and Compaq's own personal computer models, it now looks like it covers the waterfront.

I think there's still an opening. Compaq sells PCs only through retailers, yet some consumers prefer buying direct from the manufacturer.

Compaq has cast envious eyes at Dell Computer, which prospers by selling PCs direct to the consumer. Last year Compaq came very close to purchasing Gateway 2000 Inc., a direct PC seller based in North Dakota, but negotiations stalled.

The direct PC market is too lucrative to ignore, so I predict Pfeiffer will either acquire a company in this business or develop a new computer brand to enter this market. CW

Richard Morochove, FCA, is a Toronto-based computer consultant.

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