Compaq Aims for Corporate Market With Tandem Bid

Compaq Computer Corp., already the No. 1 personal computer maker in the world, Monday moved to expand into a more powerful and often more profitable echelon of the industry with an agreement to buy Tandem Computers Inc. for $3 billion in stock.

Cupertino, Calif.-based Tandem makes high-performance machines that most consumers never see but with which they interact nearly every day. The company’s high-priced computer systems handle 80% of bank automated teller machine transactions, for instance, and also are used to process credit card transactions and stock market trades.

The deal underscores Compaq’s effort to get a broader base in the corporate computer market at a time when the company is facing increased pressure from such rivals as surging Dell Computer Corp., which cuts costs by selling directly to end users.

The acquisition of Tandem would enable Compaq to offer a more complete product line to corporate customers, thereby firming its grip on their business, and it would double the Houston-based company’s sales and support staffs worldwide.

“Now we can go to a global bank, a global telecommunications provider, and we can address their total needs,” said Eckhard Pfeiffer, chief executive of Compaq. “Our total addressable market has been doubled to about $650 billion.”

Analysts said the acquisition would strengthen the position of both companies and move Compaq solidly into the high-performance tier of the industry, where there are fewer competitors and typically fatter profit margins on each machine.

“To continue to grow in revenue, they’ve got to go farther up the food chain, and this is a good way to do it,” said Kimball Brown, an analyst at Dataquest in San Jose.

Tandem’s shares, which had been in a slump, shot up $5.75 to close at $20.75 on the New York Stock Exchange. Compaq’s stock fell $2.875 to close at $103.875, also on the NYSE.

According to the terms of the deal, Compaq would issue 29 million shares of stock to Tandem shareholders, or 0.21 Compaq share for each Tandem share. The value of the deal is based on June 20 closing prices. Tandem would become a wholly owned subsidiary of Compaq.

The companies said no layoffs are planned. Tandem Chief Executive Roel Pieper would serve as chief executive of the Tandem subsidiary after the acquisition, which is expected to be completed in the fourth quarter.

Tandem, which was founded in 1974, became a critical link in many banks’ ATM networks in the early 1980s because its machines and software, with their elaborate schemes for backing up data and functions, are considered very reliable.

But Tandem, which has nearly 7,000 employees in more than 50 countries, has struggled with losses and declining sales in recent years. The company reported a $5.43-million loss last year on sales of $1.9 billion.

On the other hand, Compaq has more than quadrupled its sales over the last five years, and it reported a record profit of $1.31 billion on sales of $18.1 billion in 1996. But the company has shown signs that it is nervous about its position in an industry changing from top to bottom.

At the lower end of the market, direct-sales companies such as Dell have begun to erode Compaq’s traditional strength: price competitiveness. Compaq was reportedly in talks to acquire Gateway 2000, the second-largest direct-sale PC company, but the deal recently unraveled.

Calling them “rumors of the past,” Pfeiffer said Monday that Compaq does not plan to embrace the direct-sales route, but he has launched a series of initiatives aimed at lowering costs and thinning inventories. He has also set a goal for the company to reach $40 billion in sales by the turn of the century.

Meanwhile, Intel Corp. and Microsoft Corp., companies traditionally associated with PC technology, are beginning to push their products into areas long dominated by expensive mainframe and minicomputer systems.

Tandem was at first hurt by that trend, but analysts said the company now seems poised to help Compaq capitalize on it. At a recent trade show, Tandem exhibited a high-performance system using Intel microprocessors. And a piece of Tandem software was used by Microsoft in its Windows NT operating system, which is increasingly used by businesses to manage their computer networks.

“The world is changing very rapidly,” Pfeiffer said. “We’re now capable of moving forward as the strongest company in the NT space.”

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Computer Combination

Compaq Computer Corp. agreed to purchase Tandem Computers Inc. for about $3 billion in stock. A look at the companies:

Compaq Computer Corp.

* Headquarters: Houston

* Chief executive: Eckhard Pfeiffer

* Employees: 18,900

* Major products: IBM-compatible personal computers for professional users and consumers

* 1996 revenue: $18.1 billion

* 1996 earnings: $1.3 billion

Tandem Computers Inc.

* Headquarters: Cupertino

* Chief executive: Roel Pieper

* Employees: 7,938

* Major products: “Fault-tolerant” computers that run automated teller machines and stock exchanges and data security systems

* 1996 revenue: $1.9 billion

* 1996 earnings: $22.8 million

Source: Bloomberg News