Compaq to acquire Tandem Computers for $3 billion Analysts say the merger will give Compaq credibility in the enterprise

June  1997

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New York (June 23, 1997) -- Compaq Computer Corp. and Tandem Computers Inc. today announced a merger agreement in a stock-for-stock transaction, valued at $3.0 billion based on Friday's closing share prices.

The definitive merger agreement calls for Compaq to issue approximately 29 million shares of Compaq common stock, based on an exchange ratio of .21 shares of Compaq common stock for each share of Tandem common stock, according to today's announcement. Tandem will become a wholly owned subsidiary of Compaq, according to the pact.

The merged company is poised to become the number one server supplier in the world, according to officials from the companies. The market the combined entity will be able to serve is valued at $650 billion, according to Eckhard Pfeiffer, president and CEO of Compaq, in a statement released this morning.

The company plans to offer a wide range of computing devices and server, from handhelds and portables up to Tandem's Himalaya range of massively parallel commercial systems, Pfeiffer said.

News of the deal was greeted favorably by analysts worldwide who said the merger makes sense for both parties.

For Compaq, the marriage will lend the company credibility in its quest to become an enterprise computing company, analysts said. Meanwhile, Tandem products will benefit from Compaq's brand name and massive worldwide distribution system.

In addition, both companies will gain entrance into markets which were essentially out of reach before -- the high end for Compaq and the low end for Tandem. "Compaq would struggle to put a compelling story forward on scaleability in the enterprise without Tandem," said Lorraine Cosgrove, research manager at International Data Corp. Merging with Tandem adds high-end, massively-parallel systems to Compaq's range of servers and desktops for the enterprise, she said.

"Compaq has been lacking the credibility to sell to big accounts for their mission critical needs," said Cedric Thomas, president of FronTier Associates, a Paris-based consulting firm. "With Tandem, Compaq will get the mission-critical credibility they have been seeking."

Both companies have become very focused on Microsoft Corp.'s Windows NT in the last year and the move makes sense on that front, Cosgrove said. Compaq has centered its scaleability strategy on grouping Intel-processors into robust NT-based PC servers, while Tandem has concentrated on porting its own ServerNet clustering technology and NonStop Kernel middleware from its Himalaya mainframe operating system to NT.

Tandem gets volume, Compaq gets credibility
"It makes perfect sense that they would be interested [in each other]," Thomas said. "Tandem wanted high-volume for ServerNet ... Compaq is buying the [high-end server] competence it didn't have in-house."

"This merger is basically taking Compaq into the high-end," agreed Mitul Mehta, an analyst at Frost & Sullivan in the U.K. On the other hand, it is taking the pressure off of Tandem to offer its own low-end NT servers in order to survive in the market, he said.

Tandem has its own line of 2-, 4- and 16-way Pentium Pro processor-based NT servers, but has had to sign up manufacturers to make the boxes, said Steve Josselyn, an analyst at IDC in Framingham, Massachusetts. Now, Tandem will most likely stop selling these servers and Compaq will probably replace them with its own ServerNet-enhanced NT boxes, he said.

"It gives both companies something they didn't have," Josselyn said. "They were at opposite ends of the scale in server technologies."

Compaq, which had already licensed Tandem's ServerNet clustering technology, now owns it and can build more scaleable Pentium-based NT servers. At the same time, Compaq can now offer Tandem's massively-parallel systems to the industries which demand even higher scaleability -- such as finance and telecommunications, Josselyn said.

By distributing Tandem products alongside its own NT servers, Compaq will look more solid to enterprises. In turn, Compaq's distribution model will help get Tandem products into more markets, said other observers.

"The real potential is combining Tandem's high-end technologies with Compaq's distribution streams," said Eric Woods, analyst at London-based Ovum Ltd.

Compaq has said that it will offer a wide range of enterprise solutions after the merger: "from handhelds and portables, to networked desktops and workstations, all the way to Windows NT servers and the Himalaya range of massively parallel commercial systems," said Compaq president and CEO Eckhard Pfeiffer in a statement.

In addition to helping the two companies reach new markets, the merger will benefit IT managers who are looking for ways to merge mainframe and PC server technologies, said another observer.

"Lots of companies are trying to evaluate the difference between NT and Unix," Mehta said. Being able to deal solely with Compaq for high-end, Unix-based Tandem systems and PC servers will make IT managers' jobs easier, he said.

However, combining the two somewhat disparate technologies won't be easy, Woods said. "It will be a challenge to deliver that level of integration." Mergers this size often have cultural and strategic problems as well, he added.

Another analyst agreed that Compaq and Tandem may have difficulties in melding their wholly different approaches to doing business.

"Tandem has an unassuming, low-profile approach to large accounts," Thomas said. "Compaq has a high-volume approach through distributors and they have the reputation of being arrogant."

--Kristi Essick and Marc Ferranti are contributors to the IDG News Service, a SunWorld affiliate. Jeanette Borzo, in Paris, contributed to this story

Resources

• Compaq
  http://www.compaq.com
• Tandem
  http://www.tandem.com
• "Compaq targets Sun with new workstations," SunWorld news story from June 1997
  http://www.sunworld.com/swol-06-1997/swol-06-eyeoncomp.html#5

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