For a year now, slumping European operations have given U. S. computer makers nightmares. And none more so than minicomputer maker Digital Equipment Corp., which gets 40% of its $13 billion in revenues and the bulk of its profits there. So, to make sure its profit engine doesn't sputter out, DEC is on a European spending spree that is on a par with that of the acquisitive Japanese.
The U. S. minicomputer company made its biggest play on July 23 with an agreement in principle to acquire Philips Electronics' $1 billion minicomputer business. The purchase, at a bargain-basement $300 million to $350 million price, signals that DEC is no longer counting on growth from within to pull it out of its profit slump. Now, its brightest hope is to rekindle Europe, where revenue growth, although still robust, has slipped to 14% from the 25% rate of just two years ago. DEC's strategy, says Sanford C. Bernstein & Co. analyst Barry F. Willman, is simply to "buy business."
SWEET DEAL. The price was right for Philips' money-losing minicomputer unit. At just 30~ to 35~ for every dollar of sales, the deal costs half what DEC paid in December to acquire its 65% stake in its German joint venture, Digital-Kienzle Computer Systems. Philips' customers are largely small to midsize companies whose computer purchases are projected to grow at a rate of 12% to 14%, vs. 4% to 6% among large corporations. With Digital-Kienzle, and now with the Philips bid, "we're looking for growth opportunities," says Wolfgang Jaeger, DEC Europe vice-president for strategic alliances.
DEC's plan is to turn Philips' minicomputer business into a reinvigorated distribution network. It would inherit Philips' customers, many in small retail banks and in countries such as Austria and Spain where DEC's current presence is minimal. Philips' customer base will also help DEC move away from slow-selling minis and instead peddle software and consulting as companies move off Philips' defunct mini line onto DEC machines.
But DEC will have to move fast. Philips has always sold at the periphery of its customers' business, selling computers that automate bank branch offices rather than headquarters, for example. "Philips is big in the financial and retail sectors but not in any controlling way," says Paul Lethbridge, a vice-president at market researcher INTECO Corp. European computer leaders IBM and Germany's Siemens could just as easily win over Philips' mini customers. DEC's latest restructuring charges also lend some urgency: With its U. S. operations hamstrung by recession and slower growth in Europe, DEC has laid off workers and closed plants to stanch the red ink.
The Maynard (Mass.) company's bid for Philips' unit comes amid a tough restructuring of struggling European computer makers. Last November, Fujitsu Ltd. acquired Britain's ICL and later added Nokia Data to its European subsidiary. DEC has been among the most energetic of the Americans. In addition to the $230 million spent for its stake in Digital-Kienzle, DEC recently bought up a small British financial-software house to aid its move into financial services. All told, DEC stands to add about $1.3 billion in annual revenues from its European acquisitions. What's more, the company is now exploring joint research with Italy's Olivetti. And as a part of their talks, DEC and Philips are considering ties in PCs and semiconductors.
To make the transatlantic plan work, DEC will not only have to hold on to Philips customers, it will also have to learn how to become a good European citizen. As part of the deal, DEC will pick up 7,000 Philips employees, all of whom want job guarantees. Before any deal can close, DEC must come to such an agreement with the employees' union--a foreign notion for nonunionized DEC. But DEC is betting that it will be able to restore some sparkle to one of the many Philips businesses that went flat.