Like Napoleon retreating from Moscow in 1812, Digital was flounderingpaq and Digital merger bode for the future? in the icy wastes of an unfamiliar technological climate.
Until, that is, Compaq rode to the rescue with a takeover bid estimated to be worth $9 billion (PC Dealer, 28 January). There had been rumours for some years that Compaq would acquire Digital, but these were laid to rest last year when the PC company acquired Tandem, manufacturer of fault-tolerant systems widely used in the banking and defence sectors. With the Digital merger - the biggest in IT history - now underway, Compaq will take the position it has coveted for some years - number two in the IT league table.
For Digital, the deal represents a lifeline and a chance to restore some of its former glory. The advantage to Compaq is that it now has access to Digital's installed base and its 64-bit Alpha technology.
In many ways, Compaq's origins mirror those of Digital, albeit 25 years later. From its foundation back in 1957, Digital has always been a strong engineering company, guided by its founder, Ken Olsen.
Olsen recognised in these early days, with the company still relatively small, that a direct challenge to IBM in the commercial world would not only be futile but would draw its competitive attention.
But, by the mid 1980s, with the mainframe under fire and distributed computing becoming more acceptable commercially, Digital felt confident enough to position the Vax as a business machine. In 1986, Digital took $2 billion of orders for the Vax.
By the late 1980s, Digital was second only to IBM in the IT industry.
But then in the 1990s, disaster struck - Digital had overreached itself.
From 1991 to 1994, Digital suffered severe financial losses, which in 1992 and in 1994, amounted to $2 billion.
With IBM in the lead, and Hewlett Packard bringing up the rear, Digital desperately needed something to re-establish itself as a contender. That something was the 64-bit Alpha chip and an alliance with Microsoft to promote Alpha as the best platform for NT. The first Alpha systems appeared in 1992 and were adopted by Digital's established user base, the scientific and engineering community. The Alpha machines ran both Open VMS, Digital's proprietary operating system and Digital Unix.
Compaq was founded in 1982 as an IBM PC compatible supplier. Its founders realised that simply producing another clone machine would not be enough to grab a major share of the market and so it looked for a unique selling point. The vendor thus hit upon the idea of making the first portable, compatible computer - although users risked serious injury if they carried the 30lb machine.
Compaq consistently beat IBM to the punch, but like Digital, Compaq hit rocky times in the early 1990s and moved from profit into loss in 1992.
However, unlike Digital, it managed to pull itself back into profitability very quickly.
Over the past few years, Digital has been divesting itself of both staff and constituent parts of its business, including the Alpha manufacturing plant to Intel and parts of its software division to Computer Associates.
The channel has reacted cautiously to the proposed merger, but many are enthusiastic. 'It is something I have been hoping and praying would happen for a long time,' says Martin Finn, commercial director of Digital and Compaq reseller Hamilton Rentals. Finn believes one of the major advantages is that Digital's high-end systems will now have the benefit of Compaq's brand image. 'Having the Compaq brand behind Alpha is exactly what is required,' he says.
But then Compaq can also claim benefits - Digital's services arm, Multivendor Customer Services (MCS), contributes almost half of the company's turnover and will therefore boost Compaq in a sector where it has always been weak.
Previously, the manufacturer had relied on partners and the channel for maintenance and support.
'Compaq's existing services partners could not offer the sort of services the corporate user requires. It is no good saying that they would turn up in 24 hours and fix a machine if they only could. What corporate users want is 24-hour, 365 days a year, four-hour response times,' Finn says.
Compaq's acquisition of Digital has raised the threat of channel conflict as it struggles to absorb the size of the purchase as well as manage the services side of the business - it is too soon to tell which partners will win the rights to supply both companies' products.
In the next few months, partners face the uncertainty of whether they will continue to sell Compaq or Digital kit. There is bound to be a massive culling of the reseller base as there is simply no need for the company to hang on to its current number of partners.
The merger would also give Compaq access to Digital's clustering technology which the company pioneered with the Vax Cluster. Bob Grindley, commercial manager at Digital and Compaq distributor Metrologie, welcomed the merger.
'It is a good thing for both companies. It gives Compaq a high-end machine and the clustering technology,' he says.
Compaq also gained access to clustering technology when it took over Tandem, some of which now underlies Microsoft's WolfPack.
Digital invented clustering, the linking together of several processors to increase capacity and availability, and had its products on sale even before IBM had announced its version, Parallel Sysplex.
In a report, Parallel Database Technology: An Evaluation and Comparison of Scalable Systems, published by Bloor Research in 1995, Digital's clustering technology and its hardware architecture comes in for praise: 'Overall, we believe the AlphaServer 8400 has the potential to turn Digital around.
Our evaluation puts the AlphaServer 8400 system as the highest performance symmetrical multiprocessing (SMP) we are looking at. We are also positive about Digital's new clustering technology.
'When clustered, AlphaServer 8400 systems will scale to performance levels equivalent to mid-sized massively parallel processing (MMP) machines,' the report stated. In the event, the machine and its underlying technology failed to turn Digital around, but when it falls into Compaq's hands, things may be different.
There will be a number of companies looking over their shoulders. Hewlett Packard took advantage of Digital's financial difficulties to climb into second place in hardware manufacturing, behind IBM. The company competes with Compaq at the PC level and with Digital in the mid-range arena.
James Wickes, managing director of distributor Ideal Hardware, believes resellers that want to survive will have to adopt e-commerce if they are to stay in business. 'As hardware becomes to look more alike across the board, companies begin to lose their unique selling point.
This merger will affect the whole computer industry. I would suggest that anyone who has not got an e-commerce strategy goes out and gets one,' Wickes says.
He also believes that the commoditisation of hardware will put a squeeze on profit margins and resellers will have to find some means of differentiating themselves from their competitors.
Formally, Compaq is still heavily committed to Intel and Microsoft, but it is now in a position of strength. 'Compaq is talking about Merced (a next generation chip jointly developed by Intel and Hewlett Packard) like it's a big deal, but we have had someone evaluating Alpha and it outperforms the Pentium by a factor of 10.
'I am sure that Compaq must have known that before it started negotiating with Digital,' says Robin Bloor, chief executive of Bloor Research.
Bloor also claims that Compaq is now in a strong position vis-a-vis Intel and Microsoft. 'The merger gives Compaq leverage over both Microsoft and Intel. Compaq was always a Wintel follower - now it is a Wintel leader. If I were a Digital user I would be very happy, but I do not think it will make much difference to Compaq users.'
According to Compaq, there will be no immediate job losses when the merger goes through. But, there is little sense in having two separate PC ranges, one carrying a Digital badge and the other a Compaq badge.
'It is too early to tell what will happen in the channel. They could go one of two ways - shut down the Digital channel and go solely with the Compaq channel or keep both going side by side,' says Wickes.
Phil Payne, director of consultancy Isham Research, believes the move is one of the most significant events in IT history and has implications for all the major players in the industry.
'The problem with Digital is that it has no marketing flair, whereas Hewlett Packard does. The merger gives Compaq muscle to use against Microsoft and Intel,' Payne says. There could even be a realignment of forces in the IT market. 'I would not be surprised if Compaq does a deal with IBM to bring a new architecture to the desktop,' he remarks.
In addition to access to the Alpha chip set, a services organisation capable of offering support and maintenance and outsourcing, and an entrance into Digital's installed base, the acquisition will also give Compaq a foothold in the Unix market, something which no PC supplier has ever really attained.
The takeover of Tandem by Compaq gave the manufacturer a foothold in the banking and financial world of online transaction processing (OLTP).
The latest merger brings the number of Compaq's business partners and channel outlets to 40,000 worldwide.
While the grouping of Compaq, Digital and Tandem undoubtedly makes it one of the most powerful IT manufacturers in the world, the road ahead will not be easy. One of the major difficulties the organisation will face is marrying its three very different cultures. Compaq, for all its bluster about penetrating the corporate market (which must be said it did successfully) never really got beyond the desktop.
Tandem made its name as a niche market player, supplying fault-tolerant OLTP systems. Founded in the 1970s, it spotted the financial customers' need for a non-stop OLTP machine, a system that no other supplier could meet, not even IBM. So successful was Tandem that IBM - when it finally woke up to the fact that Tandem was eating into its market share - was forced, in 1985, to re-badge a fault-tolerant machine from Tandem's rival, Stratus, which it sold as the System 88.
In 1993, IBM shelved the System 88 and ended the deal with Stratus. It reasoned, probably correctly, that its System/390 mainframes were now as fault-tolerant as any dedicated Stratus or Tandem machine.
Digital, which began life selling into the scientific and engineering market and gradually branched out into the commercial world, never really made much of a dent in IBM's mainframe market, although it did prove a challenge to the mid-range AS/400 and RS/ 6000 machines.
One of Digital's major problems was its poor marketing. When it launched its Vax 9000 machine, it variously described it as the top-of-the-range Vax, a super computer capable of rivalling a Cray XMP machine and an alternative mainframe. This trio of marketing messages left its customers and the world at large highly confused and, as a result, the machine sold only into existing Digital accounts that needed more power.
Compaq's takeover of Digital marks the biggest realignment the IT industry has seen for many years. But marrying together three different organisations, with different architectures, different management styles and different selling structures will not be an easy matter.
It will probably be at least six months before the dust settles and the true image of this newly formed company shows through. In that time, Compaq's and Digital's rivals will have prepared themselves for war, and will be ready to counter any attack. The truth is that the merger raises more questions about the future of the IT industry than it answers.
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