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Compaq to Take $5.4-Billion Charge

Firm, suffering from lagging PC sales, also plans job cuts as result of Digital Equipment purchase.

June 12, 1998|From Times Wire Services

HOUSTON — Compaq Computer Corp. said it plans to take $5.4 billion in charges for its acquisition of Digital Equipment Corp., plus an unspecified charge for a restructuring that includes 2,000 Compaq job cuts.

The Digital charges include $2 billion for cutting 15,000 jobs and $3.4 billion for writing off research and development. Analysts and investors who attended a meeting about Compaq's plans said the restructuring charge may be as high as $2 billion for trimming Compaq jobs and facilities and could include the write-down of some excess PC inventory, though Compaq said that charge will probably be less than $2 billion.

Compaq, the No. 1 personal computer maker and now the world's second-largest computer maker, behind IBM Corp., has been struggling as demand slows and PC prices fall. As the company completes its $9.1-billion purchase of Maynard, Mass.-based Digital, investors are looking for signs that Compaq can successfully integrate the two companies, keep key Digital customers and get its own business back on track.

"I'm hopeful. Compaq has better management than Digital, and it can potentially do a whole lot more with the technology and the customer base," said portfolio manager Lisa Rapuano of Legg Mason Inc. "But I haven't seen Compaq get their own house in order yet."

Shares of Compaq closed at $28.06, down 63 cents on the New York Stock Exchange.

The company shipped too many machines to dealers and distributors late last year, and then got stuck when PC demand waned. The weaker-than-expected sales erased Compaq's profit in the first quarter. At the meeting Thursday, Compaq reiterated its plans to reduce PC inventory to four weeks by the end of this month.

"At one time I was worried that we would have too much Compaq inventory and too much Digital inventory. I am not worried about that now," said Compaq Chief Financial Officer Earl Mason.

Mason said any inventory write-down will be "small," and the company will disclose specifics of the restructuring charge when it reports second-quarter results July 15.

Houston-based Compaq also reiterated that it expects to break even before charges in the second quarter. The company said it expects the Digital business to start adding to earnings by the fourth quarter, and analysts estimate the company can save $2 billion to $2.5 billion from combining the firms.

Following the acquisition, Compaq will have about 67,000 employees, after the 15,000 cuts at Digital and 2,000 at Compaq. Intel Corp. also is taking 2,000 employees with its acquisition of Digital's Alpha microprocessor business.

"The Compaq job cuts were unexpected. It's icing on the cake in terms of cost reduction," said analyst Mark Specker of SoundView Financial Group, who has a "buy" rating on the stock. "I think things are getting better."

Compaq introduced the senior management team of the combined company Wednesday. Only three of Digital's top executives were tapped to join the new inner circle.

Robert B. Palmer, chairman, president and chief executive of Digital, will leave the company by the end of July.

John Rando, who heads Digital's prized services division, was selected to be Compaq's senior vice president and group manager of services, which means Digital's services group will stay in Stow, Mass.

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