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A Staff Writer

The board of Digital Equipment (India) Limited today announced plans to sell its domestic computer products and services business to Compaq Computer (India) Private Limited for a cash consideration of Rs 830 million plus a non-compete fee of Rs 50 million.

This transforms Digital India into a focused software and services exports company.

It will have over Rs 1.5 billion cash resources that can be deployed to fund growth. It will become India's largest multinational listed software and services exports company and Compaq's largest holding in a software company worldwide.

A new board is being created which will focus on driving a software and services exports business and will be based on international best practice corporate governance.

It will have four Compaq representatives and four independent directors including a new CEO.

The nominees from Compaq Computer Corporation are senior figures within Compaq's major software and services development operations. They are Richard Fricchione, vice-president, advanced information technology and planning, and Bernard Luksich, director, enterprise engineering solution services.

Kannankote Srikanth, vice-president and general manager, network and systems integration services, Compaq Computer Corporation, who has served on the Digital India board for nearly two years, was elected chairman at the board meeting today.

Som Mittal will also remain on the board as one of the Compaq nominees and Hemant Sonawala, chairman, Hinditron, will remain deputy chairman.

The new board members were inducted today and Paul Chan, Ben Wells, Tan Choon Seng and Dr Mahendra Patel resigned to make way for the new software focused members.

A sub-committee of the board will search for suitable independent directors and an appropriately senior IT industry figure to be CEO.

A new management team focused on software and services exports will be created and a business plan prepared over the next few months.

The business will continue to be managed by the existing management team led by Som Mittal, until the new management team is in place.

Of the existing 835 people in Digital India, 305 are in the software and services exports business and 530 are with the domestic computer products and services business.

These 530 will move to Compaq India as a result of the transaction. The transaction is likely to create further job opportunities in Digital India. There will be no job losses.

The proposal is subject to shareholder approval at an extraordinary general meeting to be held on May 31.

Management analysis of the businesses revealed that over the last few years, the software and services exports business of Digital India has shown strong growth and has outperformed its domestic computer products and services business in terms of operating margins and rates of return in line with market trends.

At the same time, as a result of the worldwide merger of Compaq and Digital, Compaq branded products were being marketed and serviced by both Compaq India and Digital India and this was causing customer difficulties.

Shareholder concern was also expressed about the duplication in the business and the need for greater focus.

The domestic computer products and services business, being a very competitive and a capital-intensive business in India, requires considerable investment over the next few years to adequately develop the market and create a strong competitive position for the company and its brands.

The investments required are also likely to have a long gestation period, imposing an additional burden on the valuation of the company and thereby its shareholders.

The management considered all viable options for driving growth in the business and delivering improved shareholder returns and the board now proposes to sell the domestic computer products and services business and focus on developing and realising the growth potential of the software and services exports business.

In order to ensure a fair transaction, the board authorised Hemant Sonawala, an independent director, to pursue discussions with Compaq. Myles Owens, director, strategic business development, enterprise computing group represented Compaq.

Two distinctly autonomous transaction teams were appointed to evaluate the transaction and arrive at a fair consideration.

The teams comprised:

• Investment banks Jardine Fleming and DSP Merrill Lynch Limited for Compaq and minority shareholders respectively.
• Lawyers Dua Associates and Malavi Ranchoddas and Company represented Compaq and minority shareholders respectively and
• Accountants Pricewaterhouse Coopers for both the parties.

The consideration was arrived at after evaluating the domestic computer products and services business on a combination of valuation techniques including discounted cash flows, market multiples of comparable companies, comparable transactions and a balance sheet audit.

The sale of domestic computer products and services business will permit the board, management and staff of Digital India to focus entirely on the unrestricted growth and the development of the software and services exports business.

It will also allow business to be structured in a manner such that it will attract the best talent in the industry.

The board believes that Digital India shareholders will benefit from higher returns expected from the software and services exports business.

This is because the shareholders will not have to fund the considerable investment required to develop the domestic computer products and services business to the level required by Compaq worldwide.

Digital India will continue to enjoy the support of Compaq both as an investor and as a customer. To date Digital India has been supplying software to service only the captive requirements of Compaq, broadly through 'network and systems integration software' exports and through the India Development Centre.

Digital India will continue to service the growing software requirements of Compaq and will enjoy "preferred supplier" status to the 'network and system integration services' business unit and will aim to earn similar status across a select range of Compaq's other businesses.

In addition, Digital India will have the freedom to build an independent client base, leveraging Compaq's existing relationships with their international partners and customers.

Compaq will benefit by sharing in a growing software and services exports business, and by being able to offer valued-added software services to its clients through Digital India. This is in line with the stated Compaq global strategy of transforming from a PC company to a full service IT company.

Employees will benefit because those in the software and services exports business will be within a company structured entirely around software and those moving to Compaq will be within a computer products and services company structured to address the needs of the customer. Continuity of service and seniority will be assured.

Compaq customers in India will benefit because they will have a single-point contact and customer interface for all their Compaq product, solutions and service requirements.

This will stop the difficulties that previously existed in the marketplace and make it easier for customers to do business with Compaq.

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