Conference 7.286::digital

    "Investment types" have often said that Digital would become a takeover
    candidate when the founder retired.  The most frequently mentioned
    candidates for taking over Digital are General Electric and Ford. In
    the national interest, it would be unlikely be a foreign corporation. 
    
    Digital's conservative financial policies and hoard of cash contribute
    to this impression. 

Given the current stock price - do you think they'll wait that long?

    I would think a strategy has been worked out to make DEC an unlikely
    takeover candidate.  Maybe all that cash can be used for the buyback
    of stock.  Or perhaps in ten years, DEC will be so large that a
    takeover would require the financial assets that very few companies
    would be able to afford.  Has any corporation or individual ever
    tried to buyout IBM?  Not recently, they're too big to swallow.
    
    Hopefully the same will hold true for DEC.
    
    Bryan

    I heard Ken Olsen say several years ago that a good part of the
    company's financial strategy was geared towards making the corporation
    an unattractive hostile takeover target, while still giving upper
    management the flexibility to negotiate a "desireable" sale of the
    company. 
    
    A high stock price (relative to book value) is one way to insure
    against a LBO.  Lots of cash and little debt is another.
    
    /Al
    

    If you know how to create "a high stock price (relative to book
    value)", you really ought to start your own company.
    
    In part 2, you've got it reversed.  Lots of cash and little debt
    make one an _attractive_ takeover for a leveraged buyout (LBO).
    
    The acquiring company goes into the capital market and borrows $10
    billion for arguments sake, takes over Digital and then immediately
    retires $6 billion from Digital's current assets (including cash) and
    pays off the other $4 billion over the next 25 years (maybe $200
    million per year). 
    
    How much is Digital worth?  Take shares outstanding (June 1987 numbers
    were 130 million shrs) and multiply by the share price (roughly 100)
    and you get a market valuation of $13 billion. 
    
    (Special disclaimer: I do NOT work for Investor Services, Corporate
    Relations, or any group within Digital with material non-public
    knowledge of the financial state of the corporation.  The views abbove
    are my own) 

RE: .5
    
  > Lots of cash and little debt make one an _attractive_ takeover for a
  > leveraged buyout (LBO). 
    
    This question is from an admitted financial midget:  I don't
    understand.  It seems like having a couple of billion in the bank
    and the credit to borrow more would give Digital the ability to
    buy up our own stock and thereby AVOID a leveraged buyout.
    
    A major southern textile company just managed last year to avoid
    a takeover by buying up their own stock and making it unavailable
    to the would-be purchaser.  Southland Corporation here in Dallas did
    the same thing last year, selling off many of their subsidiaries
    to raise the cash to buy their stock.
    
    Pat, can you explain further?
    
    							Pat

>    This question is from an admitted financial midget:  I don't
>    understand.  It seems like having a couple of billion in the bank
>    and the credit to borrow more would give Digital the ability to
>    buy up our own stock and thereby AVOID a leveraged buyout.
    
I believe insiders hold around 5% of DEC stock, about 85% of DEC stock
is in institutional hands, who may find it hard to turn down a
generous offer.  For us to buy back enough stock to prevent a takeover
is tantamount to going private, which does not feel like something DEC
would do.  For someone else to buy our stock and absorb us, may or may
not be possible - I'm a bit of a $ midget too, any M & A experts care
to comment? 

    re:  Takeovers or buyouts

    Take this analysis for with a grain of salt, as my Finance days
    are well behind me:
    
    Given the Market Value of the Company, a raider would most likely
    have to raise well over ten billion bucks to attempt a buyout, and
    a leveraged buyout probably would break down if the raider could
    not raise lots of capital *fast*.  Even a hint of a takeover would
    drive the stock price up, and the Market Value of the Company would
    probably outpace the raider's capital pool before he gains control.

    Even though DEC has a lot of cash and about the lowest debt-to-equity
    ratio around, KO could change that picture with the stroke of a pen.
    A stock buy-back, or a reciprocal takeover bid could easily soak up
    all of our liquid cash and lines of credit.  Even taking the company
    private is a possibility, albeit farfetched.  The fact that we have
    a lot of flexibility with liquid assets and a sterling credit rating
    makes us a hard target pin down, so Ken has a lot more options open
    to him that most other CEO would in a takeover situation.
    
    The fact that most of our stock has been traditionally held by the
    institutional-type investors also works in our favor.  These are
    the people who are most likely to dump a stock (via the "programmed
    trades" we hear so much about) when it's going down.  But they buy
    the stock based on the idea that it *will* rise over the long term,
    and if the price is going up, they will hold onto the stock instead
    of selling it for a short-term gain.  *That* mode of operation is the
    hallmark of the mutual funds, and speculative investors.

    The cash pot aside, I don't think DEC has the characteristics that
    would make it a takeover target:  We are a tightly-integrated, single-
    industry company, with no loose subsidiaries or independent units
    that could be broken off and easily sold.  Our credit rating, market
    share, and business reputation are all reflections of the confidence
    that business and financial leaders have in Ken Olsen as president.
    These intangible, but extremely valuable assets would not necessarily
    survive a takeover intact.  This is one reason I personally worry
    about the day when Ken *does* reliquish the reins ...
    
    Geoff
    

    This question is loosely related to the prvious replies!
    
    If we are not likely to be an LBO target why is the stock price
    dropping ($97.?? in todays Financial Times)
    
    As it drops do we not become increasingly attractive?
    
    From another investment/stock exchange midget!
    
    Jim

>    If we are not likely to be an LBO target why is the stock price
>    dropping ($97.?? in todays Financial Times)

It went up yesterday 7/8ths to 98 7/8; the big drop was on Monday (about 3),
along with the rest of the market, when interest rates went up.

Current DEC stock performance (in my opinion) is mostly due to DEC stock
following the rest of the market.  Why should a rise in interest rates cause
anyone who knows that the company had more interest *income* than interest
*expense* last year to sell?

One thing that an astute investor might notice is that our expenses, especially
cost of sales, are rising faster than our income.  We need to get these sort
of expenses under control.  This means cutting back in the field on things like
cars, lunches, and cellular phones.

/john

The topicality of Digital's stock performance has casued a shift in 
dialogue away from the original question.  Does a financial tutorial
of a relatively short-term nature (compared to Digital's historic stock
trend) really address the issue of a successor to Ken?  I think not.
    
Another perspective might be where is Digital going and whose leadership
will best get us there.  If you believe Digital will become more of
a services company like EDS, then Jack Shields might be a pretty good
choice.  Other possibilities, of course, exist.  Comments, please.
    
Joe
                    
    
    

    PCF would be an excellent choice.  As an aside, though, whatever
    happened to PCF's famous $10B Plan?
    
    Joe

    can't resist one last pass at leveraging a buy out.
    
    re: .6 and .8 - timing is EVERTHING - ask the Hunts!
    
    Cash on hand is a definite liability since it exposes us to being
    bought out by our own liquid capital.
    
    BUT - if it can't be orchestrated quietly and quickly via "un noticed"
    aquisitions then the market price will prevent the buyers from "shooting
    the moon".
    
    Since we are largely held by institutional programs, it would be
    very difficult to orchestrate such an "under the tables" acquisition
    program.
    
    By the by - you only need to capture a "controlling" interest not
    the whole bag of marbles, so were looking at some 35-45% of the
    outstanding issues.
    
    Also, I like the point about being a single focus corporation w/
    few undifferentiated subsidiaries available to be liquidated to
    generate capital.  That probable protects us some what, but also
    makes the market less confident in our ability to respond to changing
    market climates.  So its a double edged sword.

    
    Don't assume that a freindly merger with a strong company like
    GE would be entirely negative. As we move toward the year 2000,
    the largest, strongest global corporations will be $N*100 billion
    entities. Independence and singlular focus are great today,
    but they may be a liability in the future.
    
    A good example is RCA, which was in many ways the "DEC" of the
    1930's and 1940's - darling of Wall Street and very well thought
    of. By 1986, RCA, a $10 Billion company decided it was TOO small
    to compete in it's core industry of Aerospace, Broadcasting and
    Consumer Electronics. (GE has since sold the RCA and GE consumer
    products groups to Thompson CSF). 
    
    Another interesting DEC/RCA parallel is a singular strong leader
    (RCA's David Sarnoff). Though many felt that the world would come
    to an abrupt halt when The General passed away, life continued.
    No one is irreplacable - you can count on the board of directors
    of a $10 billion company to see to it that DEC will prosper
    even without KO.
    
    BTW, I am a former RCA employee *AND* a 12 year admirer of KO.
    
    /ljj
    
    

    I agree that it would be hard to expect a corporation this large
    to see an immediate and dramatic change when the leader moves on.
    Unless of course he's replaced by the board because of some "problem"
    in the company.
    
    I've been watching DEC fo 15 years now and been with the company
    for five.  We still act like 100+ small companies loosely alligned
    along product marketing strategies.  Down on the grass roots level,
    change occurs faster when district/area management changes.

    It's hard to imagine any company growing from an out of the pocket
    (and possibly a little venture capital) company to 10+ billion dollars
    in around 30 years.  Is that really 9 zeroes?  More inconcievable
    is that one man started it and has led and sometimes dragged it
    this far.  DEC people are notorious for griping about the little
    things that we are uncertain about.  The sheer humungousness of
    the growth of this company is mind boggling.  Of course, there is
    no one to replace Ken Olson but, that's not what is to be anyway.
    Whoever takes over the reins is not starting in some lab at MIT.
    He (or she) is taking over as CEO of a Fortune 50 company.  By the
    year 2000 we should know how well it will work out.
    

    Ken can do it.  This is one of the most difficult goals that Ken
    has.  It is also one which he has planned for some time.  I certainly
    have enormous faith in his ability to make the right decisions to
    move Digital into the future.
    
    I have much less faith in Wall Street.  The people there are just
    like the dealers in a casino.  They help other people gamble their
    money and take a cut.  They are an effect and not a cause.
    
    We have always worried about the right things such as providing
    the systems our customers need.  As long as we do that we will be
    in good shape.  We must stop the trend toward being arrogant and
    complacent about our customers.  If we don't then the Wall Street
    people will be right about us.
    
    Keep the faith,
    
    Don

    
    	I don't know about what will happen AFTER Ken retires, but I
    	truly believe that we will see DEC declare a dividend by the
    	time he retires.  Even if it is only $1 per share (1%), with
    	KO holding X million shares, he can sleep well knowing that
    	his retirement years will be well-funded.
    
    	Joe Oppelt

	I'm not so sure we couldn't be split up. You might
	spin off a $3B+ maintainance organization, and a
	sizable system house/system integrator. Then use
	the cash and sell the receivables...

	Not a pretty thought.

	Jim

    From another struggling economics midget...
    
    I 'm sorry if the subtopic has been ended or moved, but I am curious
    about how buying our own stock will help avert a leveraged buyout.
    
    If buying our own stock reduces the number of shares outstanding
    (voting shares), and if a corporate raider holds x% of the outstanding
    already, doesn't a mass reduction of outstanding shares actually
    increase the potential raider's percentage of voting stock in the
    company? It is true that assets (cash) are reduced, but, unless
    the stock is cancelled, the potential new owner can reissue them
    and get money back into the company?
    
    The dividend idea is probably a good one, except that I have the
    impression that Ken already has more money than he could possibly
    use. ($300M or so?) The Government would get a good chunk of his
    money in this case.
    
    Distribution of cash some other way such as bonuses, raises, (c'mon,
    don't laugh, this is hypothetical) R&D, real estate, would affect
    the balance sheet, but the income statement seems to be of great
    concern right now. It seems that costs are about to catch up with
    revenues, and the day they cross, we start losing money. If Wall
    Street is nervous about us now, just wait until the day we post
    a loss. 
    
    Any thoughts?

    re: .21  buying back stock ...
    
    Buying back your own stock after a raider has started aquiring it
    is no help.  Buying back stock is a preventative measure to keep
    the stock price up, and discourage raiders from buying it.
    
    re:  dividends
    
    Ken owns a lot of stock compared to you or me, but he doesn't own
    much compared to the other major stockholders (institutions).  A
    dividend would make the stock more attractive to blue-chip investors
    who use their stock portfolio to generate dividend income, rather
    than speculators who are interested in capital gains.
    
    Geoff

    Thank you, Geoff, I had forgotton about the price support by reducing
    the number of outstanding shares.
    
    Is our stock really held by `speculators'? I know (after 10 years
    here) that there is no dividends on stock, or commissions on sales
    paid by DEC. Those two peculiarities make DEC unique on Wall Street.
    However, I think that even our investors (owners) misunderstand
    our position. I perceive that we are in `react mode' (a familiar
    field service term) depending on what Wall Street says about us.
    It was pointed out earlier that we have more income from interest
    than expense, so why did we suffer when the interest rate went up?
    
    Until we can  a)educate Wall Street on what we really are so that
    they can view us properly, or b)become more of a standard company
    (one of them) and revert to dividends, etc., or c)forget about what
    everybody says and stay the way we have been for the last 30-odd
    years, then I think that we are in for a rough and rugged road.
    
    Thanks for listening to the frustration from a novice econonomist
    ;-)

    First, if we (Digital) own certain shares of stock, then we have
    a "pretty good" idea of how those shares will be voted -- don't
    forget, those shares don't dissapear!
    
    Second, Instutional investors can to a large degree be classified
    as speculators . . .

    > First, if we (Digital) own certain shares of stock, then we have
    > a "pretty good" idea of how those shares will be voted -- don't
    > forget, those shares don't dissapear!
    
    Common stock repurchased by the corporation has no voting rights; its
    monetary value is added to the shareholders equity.  The voting rights
    of those shares _do_ disappear. 
    
    "Management" is typically given a proxy to vote those shares held by
    individuals and corporations. 
    
    > Second, Instutional investors can to a large degree be classified
    > as speculators . . .
    
    Institutional investors are not speculators.  Speculators, by
    definition, assume large short-term risks.  Institutional Investors, by
    definition, are insurance companies, pension funds, and mutual funds.
    With the exception of a few mutual funds, all seek to preserve capital
    and achieve growth through income and capital gains.

Re .25:
>    > Second, Instutional investors can to a large degree be classified
>    > as speculators . . .
    
>    Institutional investors are not speculators.  Speculators, by
>    definition, assume large short-term risks.  Institutional Investors, by
>    definition, are insurance companies, pension funds, and mutual funds.
>    With the exception of a few mutual funds, all seek to preserve capital
>    and achieve growth through income and capital gains.

	True, but they have no real interest in the businesses they hold,
    other than as capital.  As a result, their only concern is the bottom 
    line, and the short term bottom line at that.  Further, being allergic to
    risk in any form, they accentuate any downward trend by getting out of
    any investment that looks the least bit rocky.  As a result, they act
    like speculators psychologically and have a destablizing effect on the 
    market.  It was their 'portfolio insurance' schemes that have been blamed
    to a large measure for the crash last year, at least by some sources.

	If DEC stock were held more by long term investors, and less by the
    institutions, the prices would probably be much more stable, and would
    react much more rationally.  We might just have reached that point.  In 
    the last few weeks, DEC stock prices have shown much less volatility than
    usual.

    When RAHAB::SOAPBOX is once again on-line, I hope we can continue this
    there.  The definition of "institutional investor" I gave in 596.25 isn't
    being challenged but some side-effect of their holdings in Digital is
    being argued in 596.26.

    Mr. Sweeney, could you clarify (and perhaps add some background
    on) what happens to the shares a company repurchases?  In particular,
    why do these shares lose their voting rights?  If repurchased shares
    effectively "go away", then what are the advantages to a company
    to repurchase its own stock?
    
    (As an aside, my original reference to instutional investors as
    "speculators" was intended humorously, and was directed at their
    tendancy to take short term positions and increase market volatility.
    I am aware that these are generalizations, but the drive of major
    investors to "beat the average" return, which they may contribute
    significantly to setting, is a strong underlying influence.)
    
    Regards,
    Russ Doty

    If you can accept the premise that a corporation cannot own itself;
    that ownership of a corporation must be held by individuals and other
    corporations, then it becomes clear that repurchased stock has no
    voting rights.  Who would vote the stock?
    
    The officers and directors of Digital only vote the stock they
    personally own or are given voting rights through a proxy from the
    holder of the voting rights. 
    
    (This is the season to read and sign your proxy, by the way.)
    
    This type of stock is called "Treasury Stock" and it has appeared
    on Digital's balance sheet only in 1987 and 1988.  Note J in the
    annual report will tell you it was purchased for various employee
    stock and option plans.
    
    Other companies purchase their own stock to reduce the cash and other
    assets of the company and make it a less attractive takeover target, or
    because they think that the climate isn't right for making any new
    capital investments. 

    Thanks for the clarification.  Is the premise that a corporation
    can't own itself part of law, tradition, custom, or what?  (It seems
    somewhat strange to me that a corporation can own other corporations,
    but can't own itself.)  Also, what are the implications of a
    corporation going private?

    It's a matter of logic that a corporation can't own itself.  That's
    like a indirect pointer reference that loops back on itself.  This bit
    of logic in embedded in corporation law, and the articles of
    incorporation, and the bylaws of the corporation.  This isn't going
    to happen to Digital. 
    
    A company that goes private cannot trade its stock in the public
    stock market, but on the other hand does not have to file public
    disclosures of its balance sheet and income statement as public
    companies do to the SEC.  This isn't going to happen to Digital,
    either.

        Perhaps extended discussions of investing, Wall Street, and the
        stock market belong in BMT::INVESTING?  If so, you can add it to
        your notebook by pressing KP7 or using the SELECT key or command. 
        
        Of course, aspects of investing specific to Digital and especially
        those germane to the question of how Ken Olsen's retirement will
        impact "the Digital way of working" (the subjects of this topic
        and this conference) are suitable here. 
        
        Tom

    Looks like we'll be finding out the answer to the question soon
    and it didn't take 10 years.