Compaq/Tandem: Domination Plus Reliability - Compaq Computer Corp acquires Tandem Computers Inc - Company Business and Marketing

Compaq Computer Corp. (Houston) embarked on a mission to capture the highend computing enterprise by scooping up Tandem Computers Inc. (Cupertino, Calif.) for the cool price of $3 billion. Not only does Compaq benefit from Tandem's high-end server technology, but it gets hooked into Tandem's well-connected sales channel to boot.

In a definitive merger agreement, Compaq will issue about 29 million shares of Compaq common stock, based on an exchange ration of .21 shares of Compaq common stock for each share of Tandem common stock. "The combined companies will provide significant economic value growth for our shareholders," says Earl Mason, Compaq CFO. Tandem will become a wholly owned subsidiary of Compaq when the deal is completed sometime during the third quarter of this year.

According to Eckhard Pfeiffer, Compaq president and CEO, Compaq's market has been doubled to about $650 billion as a result of the deal: "We will offer complete solutions, from hand-helds and portables to networked desktops and workstations, all the way to Windows NT servers and the Himalaya range of massively parallel commercial systems."

Tandem's high-end server expertise will undoubtedly enable Compaq to make a bid for the high-end market. However, an even bigger potential benefit for Compaq comes from Tandem's seasoned sales force, which has experience selling to large organizations and will more than double Compaq's field resources. While Compaq has previously sold its products solely through third-party resellers, Tandem's sales force, some 4,000 persons strong, has sold both directly and through partners, as well as through resellers. Compaq will now have an "in" to many large corporation as a result of the deal.

"Tandem will give Compaq access to the suits. Compaq will have access to higher corporate levels than they've had in the past," says Tom Harris, International Data Corp. (IDC, Framingham, Mass.) research director of distributed computing. Harris feels that although the deal is pretty much a win-win situation, Compaq still has a lot of work to do. "Compaq has moved up the scale, but they still don't have the numbers as an established vendor has, like NCR."

Other analysts approve of the move. "They're [Compaq] essentially buying technology that will enable them to do some things with their NT strategy they wouldn't have been able to do otherwise, like building cluster technology that will be different from the rest of the crowd," says Greg Garry, an analyst with Dataquest (San Jose, Calif.), who believes that Compaq acquisition is indicative of a greater industry trend: "The acquisitions that have taken place recently have been made by marketing-driven companies that have deep pockets, who are buying these engineering-driven companies. People just don't have the time to invent new technologies -- if you've got the money, you've got to go out and buy the technology."

Although much focus has been placed on Compaq, benefits of the deal are not one-sided; Tandem is expected to benefit from Compaq's brand name and titanic worldwide distribution system. "[The acquisition] gets the Tandem folks out of carrying legacy hardware. A hardware shop is pretty expensive to run," says IDC's Harris. In short, the deal effectively extends the reach of both companies: to the higher end for Compaq and to the lower end for Tandem.

The Compaq/Tandem match makes sense from another perspective in that both companies have been focused on the Windows NT platform over the past year, with Compaq's working on clustered Windows NT server solutions and Tandem's porting its NonStop middleware and Server Net clustering technology to Windows NT. By extension, the third winner in this deal is undoubtedly Microsoft, whose Windows NT operating system will be pushed further into the high end.

Although the acquisition is good news for both Tandem and Compaq, Silicon Graphics Inc. (Mountain View, Calif.) may take a hit as a result of the deal. Tandem currently uses Silicon Graphics' Mips chips in its proprietary systems, but Tandem has already shown that its NonStop Himalaya server technology can be ported to the Intel platform. Now that Compaq is footing the bill, the Intel writing is on Tandem's wall.

Other problems may arise as Compaq, with its high-volume, mass-market-oriented culture, crashes into Tandem's smaller, vertically oriented marketing culture. Compaq will not initially be making any major personnel replacements. Roel Pieper will remain CEO of the Tandem subsidiary and take on the title of Compaq senior vice president, while Enrico Pesatori will continue as Tandem's president and COO. In addition, Tom Perkins, Tandem's chairman of the board, has been invited to join the Compaq board of directors.

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