Compaq is already the largest supplier of personal computers (PCs) in the world.
The move is part of Compaq's strategy to offer a "one-stop shop" of computing equipment and services, thereby building up its corporate customer base. Last year, Compaq acquired Tandem, which specialises in large, expensive mainframe systems, for $3bn.
Digital is a leading manufacturer of computers as well as of network systems. Its position in the network niche makes Digital a key supplier to the corporate market in the United States and world-wide. The company is also an important manufacturer of microprocessors, and has an extensive service and systems integration business.
In a statement, Eckhard Pfeiffer, president and chief executive of Compaq, said his company was committed to "investing in Digital's strategic assets, particularly its world-wide service organisation, as well as its 64-bit leadership with Alpha microprocessors, Open VMS, Digital UNIX and Windows NT enterprise systems, open storage and software products".
Under the terms of the $9.8bn (pounds 5.9bn) deal, Compaq will issue 150 million shares and pay $4.8bn in cash for Digital, whose shareholders will receive $30 in cash and about 0.945 Compaq shares for each Digital share. At the end of September 1997, Compaq had a cash pile of $4.84bn. Meanwhile, Digital has $2.3bn in cash. Compaq said the deal would enhance its earnings in the first year.
News of the deal sent shares in Digital soaring in New York yesterday. By lunchtime, Digital's shares rose $10.31 to $55.75. Compaq, by contrast, fell by $2.44 to $29.31.
For Compaq, the deal is a means to consolidate its already dominant position in a fiercely competitive industry. It has been particularly successful in selling its Presario line to home PC users. However, the selling of PCs has been transformed in recent months by a continuing trend of price- cuts, giving consumers access to simple PCs for under $1,000 for the first time. Compaq's leading position is also under attack from fast-growing US competitors such as Gateway and Dell, who cut costs by selling directly via the telephone or internet.
Compaq's response has been to broaden its product range and attract more business customers. Digital, which has a large corporate client base supported by an extensive service network, fits that strategy. Joe McNally, chief executive of Compaq UK, said: "This deal is not just about hardware. It's about service and support as well as consultancy and systems integration."
The merger is likely to mean job losses in the UK, though Mr McNally said it was too early to tell how many jobs would go. Compaq employs 2,500 in the UK, mostly at its manufacturing base in Erskine, near Glasgow. Digital has 4,000 UK employees spread around the country, half of which are concentrated on three sites in Scotland.
Digital has suffered very different fortunes compared to its predator in recent years. While Compaq has turned in impressive sales growth, Digital's sales have been broadly flat. In the past five years, the group has racked up losses of more than $2.5bn, though in 1997 it reported a $140.9m profit. Over the same period, Digital's shares have made little progress while Compaq shares are now worth almost 11 times more than they were at the beginning of 1993.
Meanwhile, Compaq is taking other steps to ensure its leadership in the computer industry. This week plans are expected to be unveiled for the introduction of a super-modem that has been developed by a consortium of Compaq, Intel and Microsoft. The modems promise to deliver content from the World Wide Web to users at 30 times the speed possible from existing modems.
The deal will catapult Compaq into second position in the table of the world's largest computer makers in the world. With pro forma revenue of $37.7bn, it will still be half the size of IBM, the largest in the industry with $76bn a year, and marginally ahead of Fujitsu of Japan and Hewlett Packard of the US, which both have annual turnovers of about $36bn.
Outlook, page 23