News Analysis: A Digital deal that?s full of NT promises
The vendor?s NT alliance with Microsoft has worried shareholders that its networking will suffer
As Digital nears the end of another fiscal year unable to assure investors it will make a profit, shareholders and executives seem to be pulling in opposite directions.
However, as both go public with their strategies for turn- ing the company around, they seem to agree on one thing ? NT is the future. This message has left many users concerned that their investments in other Digital technologies, notably networking, will be swept aside.
The Digital board claims that the manufacturer?s close alliance with Microsoft makes it best placed of all the server makers to make money from the growing NT boom. Many major shareholders believe this too, but some are saying the strategy will only bloom under new ownership.
Institutional shareholders, in control of 40 per cent of Digital stock, have convened a meeting in New York to discuss the company?s poor share performance and the likelihood of a corporate turnaround. One issue at the forefront of their minds is an acquisition deal or a break-up of the company.
Herbert Denton, a shareholder activist well known for leading protests against IT com- panies? boards, has organised the meeting. Referring to the recent speculation that Compaq had come close to buying Digital for about $60 a share last year ? a deal Digital rejected ? Denton was reported as saying: ?If Compaq thinks Digital is worth $60, and you look at the break-up value of Digital in the high $60s, you know the issues facing this company need to be understood by the investment community.?
One shareholder said: ?That Compaq deal was an opportunity missed. Compaq is well placed to take Digital?s NT server business and really make it a market leader.?
There is strong feeling among many investors that the NT crown jewel should be spun off and allowed to compete without propping up other businesses including older Digital platforms. Even Unix is out of favour with some, both in the shareholder community and among Digital?s own managers, raising speculation that the company will defocus rapidly on Unix and become, in effect, an NT company.
Robert Bismuth, Digital vice president for corporate alliances, said last week that the five-year Microsoft relationship was the key to Digital?s financial recovery. One of the architects of that 1992 deal, Bismuth said the partnership would expand the NT market massively, leveraging Alpha?s power. For instance, he claimed that Digital pushed half the computers sold in the past year to power Microsoft Exchange.
But it begs the question if the Microsoft and Digital alliance was doing so well, why did Microsoft recently tie itself up with Hewlett Packard as well? With this agreement, it appeared that Microsoft had watered down its relationship with Digital, which had previously been the sole vendor to team up with Microsoft to push NT (PC Dealer, 26 March). At the time, Microsoft CEO Bill Gates refused to comment about the company?s alliance with Digital, claiming it was not the right time to discuss it .
As part of the Microsoft/HP agreement, the two firms will introduce a range of Net PCs to fit alongside HP?s existing PC Vectra range. The Net PCs are expected to be introduced in the second half of the year, priced at $1,000.
While such an alliance with Microsoft might enable Digital, at last, to find a mass market for its powerful Alpha processor, as NT moves into more heavy-duty roles as a corporate and Web server system, it will not just be Unix and the old VMS operating system that could be sidelined.
The networking business is one of Digital?s most consistently profitable, but the firm?s previously high profile has been overshadowed by NT.
The days when Digital saw networking as the cornerstone of its growth strategy, and even coined the slogan ?The network is the computer?, are gone. One option, say the discontented shareholders, is to maximise the returns on that business by spinning it off or selling it to a larger competitor such as Cisco.
For users who have built their corporate system around Vax servers and Digital networking (one of the vendor?s chief attractions to shareholders and potential buyers is that there is a substantial installed base left) the chief worry is not the future ownership of the products but whether they will continue to be enhanced, supported and marketed.
If the abortive Compaq merger plan is anything to go by, a takeover of Digital would not include these businesses and users could face being relegated to a backwater mainten-ance company.
The danger for Digital is that it will put all of its eggs in an NT basket that is also targeted by just about every other server maker in the industry. The fact remains that, in its five-year relationship with the Windows giant, the company has only seen one year in profit, while Microsoft has seen five years running of record profits.
?What does that tell you about who?s getting most out of this deal?? asked one analyst, who supported the idea of Digital being sold to an NT specialist. Failing that, the vendor may well need to fall back on businesses such as networking, that have served it well in the past.
With the meeting of investors due to be held soon, it will be interesting to see how Digital manages to pacify their fears and reassure shareholders that it does have a future as the company is structured now.