Speculation is mounting that Digital Equipment's chairman Bob Palmer will sell the company's hardware operations, after senior executives cashed in on $2.5 million of share options last month and the company produced a better than expected second quarter profit.
Digital made $31.9 million profit in its second quarter, ended 28 December, higher than analysts? predictions, after poorer than expected results in its first quarter, but considerably down on the same period last year. Sources insist that Compaq is considering a takeover bid for Digital and that Palmer may appease shareholders by offloading the company?s hardware arm.
One analyst said: "Palmer?s coming to the end of his service and he could offer shareholders real value. He could sell the server and PC units, which contribute $6 billion to the $14 billion turnover, for about $2 billion, and keep the profitable bits. He would get a rebadging agreement with Compaq, cash in the bank and happy investors. All this is on the back of good results which put Digital shares on an upturn."
It is not clear whether Digital would retain its own Alpha chip making business. It would certainly hang on to high growth areas such as network products and Internet software.
US analysts claim Palmer?s job is threatened and the Digital board voluntarily confirmed its support for him last autumn, leading to suspicion that some shareholders wanted to replace him.
A UK source close to Digital agreed that an acquisition would make sense. "Compaq has nowhere to go. They can?t just keep chopping 25 per cent off prices and holding their position. Digital wouldn?t give them instant profit, but it would offer critical mass, their own technology like the Strong Arm [Internet device processor] and more technical engineers at the enterprise level, which they lack. Compaq must be planning something strategic. Perhaps this is it."
A director at Digital UK confirmed that rumours of a Compaq takeover were rife. "I think it is only rumoured, not a distinct possibility," he said. "But I can see some sense in the speculation."
The executives selling Digital shares are mainly cashing in on options prior to retirement but it is possible they would rather collect money now than wait for the fluctuations that could arise if Palmer is ousted or a takeover bid is made. US stock exchange laws forbid Digital or Compaq from officially commenting on the takeover speculation.
Digital?s turnover for the quarter was $3.36 billion, down 15 per cent from $3.95 in Q2 1996. Last year Digital claimed its second quarter was a turning point, indicating it had a stable future and had put its loss-making quarters behind it, as it made $148.8 million profit.
Palmer admitted the company needed to make some changes during recent quarters to allow it to grow in the long term. "We are doing so. I am satisfied with the progress the company demonstrated in the second quarter compared with our first quarter results," he said.
Palmer praised the performance of the PC business unit, which was profitable in Q2, and Digital?s Internet software business. The manufacturer cut 1,100 of its 57,000 staff and six per cent of its operating expenses during the three-month period.
The senior executives who sold share options totalling $2.4 million last month - as Digital shares rebounded from a two-year low - included chief financial officer Vince Mullarkey, who sold stock valued at $1.18 million, according to the Washington Service, which tracks insider stock transactions. Also selling large chunks were head of sales and marketing, Harry Copperman, services division chief John Rando, chief technical officer Bill Strecker and Charles Christ, vice president in charge of components.
Digital said the timing of the option-related stock sales was a "personal decision" by the executives. Christ said his sale was part of an agreement with his former wife.
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