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Digital cutting 15,000 jobs
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May 6, 1998: 1:20 p.m. ET
Cuts are part of restructuring that will result in $1.5B-$2B in charges
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NEW YORK (CNNfn) - Digital Equipment Corp. plans to cut about 15,000 jobs as a result of the $9.6 billion merger with Compaq Computer Corp., CNNfn has learned.
The projected reduction represents about 27 percent of the Maynard, Mass.-based computer maker's overall work force of 54,000, a source told CNNfn.
The company had no official comment.
Digital announced its intention to merge with Houston-based Compaq Jan. 26. Under terms of the agreement, Digital shareholders will get $30 cash and 0.945 share of Compaq stock for each Digital share.
The merger will result in restructuring charges for the combined entity of $1.5 billion to $2 billion, according to its preliminary proxy materials, filed Wednesday with the Securities and Exchange Commission.
"Management is in the process of assessing and formulating its integration plans, which are expected to include employee separations, elimination of duplicative facilities, employee relocations and other restructuring actions," Digital said in its filing.
The magnitude of the layoffs caught some Wall Street analysts off guard. "I'm surprised that they are going to be able to take that many," said John Jones, analyst at Salomon Smith Barney.
But at least one industry analyst said the layoffs are in line with his projections and are necessary given Digital's business model.
"They are just not as productive per employee as the Compaq guys. Almost immediately, that implies very large layoffs," said Roger Kay, senior analyst at International Data Corp., a Framingham, Mass.-based consulting firm.
About 22,000 workers, or 40 percent of Digital's work force, are service-oriented workers who bring in revenue through either maintenance or consulting fees.
"That's one of the things Compaq bought Digital for, their service organization," IDC's Kay said.
However, as measured per-employee, revenue generated by its service business is lower than that of the manufacturing operations.
"They have a different business model. Nonetheless, there is still an overall issue of productivity," Kay said.
Digital hasn't yet determined which sectors will be affected by the layoffs.
Digital shares (DEC) inched 1/8 points higher to 58-1/8 in Wednesday trading. Compaq's stock (CPQ) was unchanged at 30-9/16.
Talks began in 1995
The two companies first considered a possible combination back in 1995 when Digital Chairman Robert Palmer contacted his Compaq counterpart, Ben Rosen, to discuss a variety of collaborative efforts, the proxy said.
However, talks didn't reach accelerated stages until Frank Doyle, a member of Digital's board, stepped into the fray.
Doyle was contacted in December 1997 by legendary Wall Street investment banker Robert Greenhill on behalf of Compaq. And by January 1998, Doyle tapped Lehman Brothers and law firm Skadden Arps Slate Meagher & Flom to advise Digital on the deal.
On Jan. 22, Digital's entire board met in New York to consider the possibility of the transaction. The board subsequently held a special meeting Jan. 25 to discuss specific terms.
For his efforts, Doyle will become the sole Digital-designated director on Compaq's board following the merger.
As part of the compensation package for Palmer, the chief executive will be entitled to cash severance of $6.45 million if he leaves following the merger. At the time the merger was announced, Palmer wouldn't specify how long he would remain with the company.
In addition, Digital has set June 11 for its special shareholders meeting to vote on the deal, the proxy statement said.
The company also disclosed that it faces fees of $240 million if the merger agreement is terminated.
Separately, Digital said it has revised its results for the fiscal third quarter to reflect $35 million in additional income due to the sale of its network products business to Cabletron Systems Inc.
The revision increased net income for the quarter ended March 28 to $342 million, or $2.23 a share, the company said. 
-- by staff writer Robert Liu
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