Compaq's Quest for Power

By John Greenwald

Back in 1982, a brash newcomer called Compaq Computer sprang up to clone IBM personal computers. Last week Compaq became a virtual clone of IBM, the company. The computer maker will pay some $9 billion for Digital Equipment, a dented dynamo of a company based in Framingham, Mass., in a deal that will complete the transformation of Compaq into a global provider of everything from handheld computers to the monster machines that power corporate networks and the Internet. The buyout creates a behemoth with $37 billion in revenues that trails only the $78 billion IBM. "In the early '80s, if we had thought of one day displacing IBM in PCs and rivaling it in size overall, we would have made good candidates for the loony bin," says Compaq chairman Ben Rosen.

Compaq (1997 revenues: $24.6 billion) survived a near collapse a few years back to become the world's leading PC provider. Last year the company, based in Houston, brought home computing to the masses by popularizing the sub-$1,000 PC. Digital, a legendary innovator in the 1970s and '80s and a legendary disaster in the '90s (it flat missed the PC revolution) had few options. Now Compaq can couple its manufacturing and marketing savvy with Digital's high-end technology and global sales and service reach. Compaq will rely less on hardware, an advantage in an industry whose prices continue to erode. "This gets Compaq out of being a box supplier and puts it in the position of delivering full-service solutions to huge corporations," says Stuart Woodring, a vice president for Forrester Research in Cambridge, Mass.

The deal brings sweet redemption to Digital's shareholders. Burdened by losses of more than $5 billion this decade, the company's stock slumped from nearly $200 a share in 1987 to $45 when Compaq jumped in with its $57.40-a-share offer. Compaq's stock, which more than doubled in the past year, closed at $30 last week.

It looks like a good bet that Compaq CEO Eckhard Pfeiffer will reach his audacious goal of $50 billion in sales by 2001. That would have seemed impossible when the German-born Pfeiffer replaced ousted co-founder Rod Canion in 1991, a year in which price wars and a slumping economy cut Compaq's sales 10%, to $3.2 billion. Pfeiffer applied American management techniques, slashing payrolls and streamlining manufacturing. He used the savings to launch lines of lower-priced PCs. In '96 he led the company into high-margin, big-iron computing, buying Tandem Computer for $3 billion. Tandem's machines process everything from stock trades to credit-card transactions.

Digital completes a strategic triangle. It produces such high-margin items as the servers that link thousands of PCs on the Net, but its support staff serves such blue-chip customers as Citicorp and Lockheed Martin. Digital will smooth Compaq's path into the corporate computing world coveted by Pfeiffer. "Services open the door for hardware," says Digital chairman Robert Palmer.

Compaq wasted little time flexing its muscle. Shortly after announcing the Digital deal, Compaq elbowed IBM aside to become the exclusive PC supplier to Radio Shack's chain of 6,800 electronics stores. It surprised no one to watch an upstart that began by copying IBM triumph in a byte-to-byte contest with Big Blue.

--By John Greenwald. Reported by Daniel Eisenberg/New York

With reporting by DANIEL EISENBERG/NEW YORK