How the PC paid the bill

How the PC paid the bill

An unthinkable alliance only five years ago, Digital and Compaq were finally drawn together when the aggressive, volume-driven business model of the PC revolution overtook the button-down culture of corporate computing.

An unlikely juggernaut, the relationship has tantalised both companies for almost three years, but too much baggage at the negotiating table prevented its consummation.

Perhaps because of the on-and-off negotiations -- some that were just flirtations and others being near-deals -- the final talks that led to the acquisition of Digital by Compaq late last month were done quickly and quietly.

Compaq made the first call to Digital about two weeks before representatives from both parties sat down to negotiate in New York during the weekend of January 23 to January 25. The talks were kept to just a few people from each side, including Compaq president and CEO Eckhard Pfeiffer and CFO Earl Mason, along with Digital chairman Robert Palmer and Frank Doyle, a Digital board member and a retired executive from General Electric.

Both parties reportedly agreed on the $US9.6 billion price quickly and spent much of the time working on the details of how their respective products and services strategies, as well as those of their closest business partners, could be matched up.

As both companies neared agreement, Pfeiffer and Palmer made a call to Microsoft chairman Bill Gates to tell him they would announce the deal the following day in New York.

According to one Digital insider, Gates said he was "delighted" and would lend his full support to the new company. Indeed, Gates should be delighted because Microsoft's Windows NT, BackOffice, and Exchange products figure to receive an enormous boost in sales, services, and support.

The reason talks went so smoothly this time, compared with the three other negotiations conducted since 1995, may simply be that the time was right, according to analysts. During the past several years, Digital has been selling off businesses in an effort to abandon the "vertical" supplier model of a single company that builds and sells chips, hardware, and software. This process of paring down also made Digital more attractive for acquisition.

The other circumstance that cleared the way for a cleaner negotiation was the recent settlement of the suit that Digital had filed against Intel for allegedly infringing on its Alpha chip technologies.

In 1995, Compaq first approached Digital about doing a deal, reportedly offering $US10 billion, but it fell through over concerns about serious overlaps in the two companies' PC-based product lines, which were competing fiercely in the market.

The early days

Compaq tried again in 1996 but that attempt fell through largely due to Compaq's concern about the Alpha's commercial viability.

Meanwhile, Digital's board was convinced that Alpha was about to take off. A third negotiation was held last year but persistent technological and business conflicts killed that attempt as well.

Digital and ex-Digital employees were saddened to see the company, which has made many important and core technical contributions to the development of the computer industry, gobbled up by a much younger and aggressive competitor. The deal neatly sums up what has transpired during the past 10 years with microcomputer-based technologies rapidly encroaching on centralised systems, notably the minicomputers first brought to market by Digital in 1957.

Potential roadblocks for the new Compaq

Shifting from a PC hardware and Microsoft software focus to work in mixed environmentsShifting its high-growth PC-centric sales model to enterprise dealsIntegrating sales teams from Compaq, Digital, and TandemMaintaining Digital's Unix and OpenVMS corporate customersThe US Federal Trade Commission may challenge Intel/Digital settlement, leaving Compaq with Alpha chip manufacturingStaying competitive with Dell and Gateway during transformationMicrosoft may not deliver on time a Windows NT 5.0 that exploits the Merced chip.

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