Takeover rumours rife as Digital sees upturn

Speculation is mounting that Digital will sell its hardware operations, after senior executives cashed in on $2.5m (#1.47m) of share options last month and the company produced a better than expected second-quarter profit.

Digital made $31.9m profit in its second quarter, ended 28 December.

This was higher than analysts' predictions, but considerably down on the same period last year.

Some observers insist that Compaq is considering a takeover bid for Digital and that chairman Bob Palmer may appease shareholders by offloading the company's hardware arm.

One analyst said: 'Palmer is coming to the end of his service and he could offer shareholders real value. He could sell the server and PC units, which contribute $6bn to the $14bn turnover, for about $2bn, 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. The company would certainly hang on to high-growth areas such as network products and Internet software.

US analysts claim Palmer's job is under threat. Digital's board voluntarily confirmed its support for him last autumn, leading to suspicion that some shareholders wanted to replace him.

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 $3.36bn, down 15% from $3.95bn in the second quarter of 1996. Last year, the company claimed that its second quarter was a turning point, indicating it had a stable future.

It made $148.8m profit, putting its loss-making quarters behind it.

Palmer admitted Digital needed to make some changes during recent quarters to allow it to grow in the long term.