Digital Equipment Corporation - the Decline

After protracted negotiations, Compaq announced on January 26, 1998 that it would acquire a downsized Digital Equipment Corporation. The deal closed in June. The purchase price was $9.6 billion dollars. DEC shareholders got $30 plus one share of Compaq stock for each DEC share. This for a computer company once second only to IBM, a company that had reached annual sales of $14 billion dollars, market capitalization of $24 billion and 125,000 employees working in more than 80 countries.

Stumbles in the end that contributed to DEC’s decline and fall were many. A simplistic, off-repeated story is that DEC had declined to get into the personal computer business, but this was only a small part of the problem. Circa 1985, DEC decided to compete in the arena of commercial data centers. This market traditionally belonged to International Business Machines, and to complete would require a massive increase in staff involved in sales and service. The employee population increased 26,800 in two years. Around the same time, senior management decided that the upgraded VAX system would no longer support ‘open architecture’, making it difficult for manufacturers of add-on components. DEC also decided that any purchase of a used DEC computer would require a fee to relicense the software that was already on the computer. Profitable short-term? Yes. Angry customers? Also yes.

"Clocktower" belt buckle for employees
who had been at headquarters five years.

The company was also strongly committed to vertical integration, meaning that it wanted to own its manufacture of components – chips, screens, keyboards – even when buying from independent companies would cost less. Meanwhile, competition had gained ground. Sun Microsystems and Data General competed head-to-head in the mini-computer niche, DEC failed in an attempt to compete with IBM in the mainframe niche (development of the failed VAX9000 mainframe chewed through $3 billion in critically needed capital), and while DEC was focusing upward IBM, all the micro-computer companies were approaching fast from below.

DEC’s crash was fast. The last year of billion-dollar profits was 1989. Total revenue continued to increase, but 1990 was only marginally profitable, and subsequent years saw losses in the hundreds of millions of dollars. Restructuring was rampant and continuous. People in senior management were leaving. There were hiring freezes, followed by offerings of early retirement and generous severance packages for those willing to volunteer to leave. The layoffs began in earnest in January 1991, including in Maynard. All company operations in the mill buildings shut down in 1993, the Parker Street complex soon after. Company headquarters had previously been relocated to a new building on Powdermill Road (later sold to Stratus Technologies, soon to become part of Beijing Royal School).

Ken Olsen, President of DEC
Click on photos to enlarge

President Ken Olsen, 65 years old in 1991, and the only president the company had had since its creation in 1957, was strongly against layoffs. From a May 1992 article in the New York Times: “We’ve lived through many recessions,” he said, “This is just one more.”

The company had weathered downturns before by depending on its research excellence to leapfrog the competition to a new industry supremacy. Staff were reassigned, but not let go. This time, no. In July 1992, the company’s Board of Directors forced Olsen to resign. For thousands of employees, working for DEC within the empowering management system and mantra of “Do the right thing,” this was a heart-wrenching event. A forum comment from one employee “I used to drive to the office in the morning, and I couldn’t wait to get to work – I love my job and the company environment… The company doesn’t love itself anymore. Now I drive to work in the morning and all I can think about is getting out of this company and doing something else”

Robert Palmer, who had joined the company in 1985 to run the computer chip manufacturing division, took over as president, also taking on the title of Chief Executive Officer, and later, Chairman of the Board. He was perceived as competent, but not visionary. Over six years, Palmer oversaw plant closings, staff relocations, layoffs of 60,000 employees and sale of many of the major components of the company. Downsizing cost the company close to $5 billion.

Poster for DEC's search engine, AltaVista

Even during the decline, there had been successes. Digital launched the internet search engine AltaVista in 1995. It was the most popular among many competing search engines such as Lycos, AskJeeves and Yahoo, until Google came to dominate the market after 2000. According to one source, Larry Page and Sergey Brin had approached DEC in 1997 with their Pagerank system, hoping to be acquired by Altavista, before going on to start Google.

DEC was not alone in suffering setbacks and contractions in the 1990s. IBM shrank from 405,000 employees in 1985 to 220,000 by 1994, and reduced its stock dividend by two-thirds. Data General, Wang Laboratories, Prime Computer, Lotus Development Corporation and Apollo Computer were all greater-Boston area computer companies that faded and folded or were acquired around the same time.

Was the sale inevitable? Probably not. With a different senior management, it is possible that Digital could have survived, perhaps prospered, but unlikely that it could have regained its aura as a radically innovative company attracting the best and the brightest. Instead, ex-DEC employees went on to populate the next generation of tech companies.