For two years, Compaq Computer weighed a move into the booming networking business. Employees gathered company data, romanced more than a dozen prospective acquisitions, poured over market projections and products. In fact, they did so much analyzing, prospects wondered whether Compaq would ever make up its mind. They're wondering no more: In two quick moves, culminating with its Nov. 6 bid for NetWorth Inc., Compaq grabbed the people and products needed to launch itself into the flourishing $4 billion market for providing computer networks to company branch offices and departments.
The purchases represent the biggest financial gamble in Compaq Computer Corp.'s 13-year history. The Houston company will spend about $400 million to enter the business for high-speed network gear. The centerpiece of its strategy is NetWorth, which holds a leading 44% share of the $46 million market, according to market researcher Dell'Oro Group. NetWorth even is profitable: It earned $645,000, before one-time charges for an acquisition, on sales of $55.5 million in the year ended June 30.
RECORD OF FAILURE. Just three weeks before moving in on NetWorth, Compaq announced a deal to buy Thomas-Conrad Corp., an Austin (Tex.) maker of network products for personal computers. Add in development deals struck earlier this summer with Cisco Systems Inc. and Germany's ITK Telekommunikation, Compaq has amassed the technology to offer a complete network package to corporate customers (table).
But can Compaq mold these disparate pieces into a winner? The industry track record is inauspicious: AT&T and Tandem Computers Inc. both failed in efforts to merge computer and networking companies. Compaq has a big advantage, though: It is the market leader in selling PC servers, which hook together networks of PCs. Compaq hopes that by selling networking gear to its server customers, it can pick off IBM's huge base of clients in departments and branches, says Group Vice-President Doug Pushard.
In that gambit, Compaq may be gaining an ace in NetWorth Chief Executive John F. McHale, who, along with Pushard, will run its networking business. The ex-Texas Instruments Inc. engineer started the Irving (Tex.) company 10 years ago and deftly led it through several remakes. NetWorth started out as a developer of proprietary network products and shifted into standard networks and high-growth niches such as network switching. "John has always had the ability to make changes to NetWorth quickly enough and seize market opportunities," says Terry Klein, a Dell Computer Corp. vice-president who previously was a sales vice-president at NetWorth.
GOOD TIMING. More than a market seer, McHale invested heavily in robotic production lines to keep costs low. That helped his company win some big contracts. One major coup: snaring IBM as a customer two years ago. Big Blue now accounts for 22% of NetWorth's revenues. With Compaq acquiring NetWorth, analysts expect IBM to start buying from 3Com Corp. instead.
McHale, who will join Compaq as a corporate vice-president, expects Compaq's imprimatur to give NetWorth's networks, which run at 10 times the speed of standard Ethernet networks, a major sales boost. He'll need every edge to beat out rivals such as 3Com, Bay Networks, and Cabletron, which also make high-speed PC networks. But the combination of Compaq's sales reach and acquired products "puts us squarely in a position to reshape the competitive landscape," McHale says.
Compaq's best buyers may be ripe for a change, too. Many insurance, banking, and retailing companies are now updating their branch-office computers and networks. In the process, customers such as Chase Manhattan Bank are weighing a shift from IBM's OS/2 to Microsoft Corp.'s Windows NT operating software--giving Compaq an opening. "The timing is right," agrees Richard Villars, an International Data Corp. analyst. Now, Compaq just has to succeed where many other giants have failed in the past.
Compaq Builds a Network
NETWORTH The PC company said on Nov. 6 it would pay $372 million for this $55 million maker of high-speed local network switches and PC cards.
THOMAS-CONRAD Compaq is acquiring this $50 million manufacturer of local-network cards for PCs. The deal is expected to close in November.
CISCO SYSTEMS The two have a joint development deal to build low-cost gear connecting server computers to networks. First products are due late this year.
ITK Compaq has a development deal with this German maker of digital modems that link portable PCs to servers. Products are in development.
TEXAS INSTRUMENTS The two are jointly designing high-speed networking
chips. Their first products were announced this fall.