Digital had merged with Compaq Computer Corporation worldwide in June 1998. Addressing a press conference to announce Digital India's third quarter results, Compaq India managing director Som Mittal said the restructuring exercise had created a software exports company with cash resources of over Rs 150 crore.

A new board will be constituted with focus on software and services exports business. It will have four Compaq representatives and four independent directors including a CEO who will be a senior IT industry figure, Mittal said.

The Compaq representatives are KannankoteSrikanth, vice president and general manager, network and systems integration services, Richard Fricchione, vice-president, advanced information technology and planning, Bernard Luksich, director, enterprise engineering solution services and Som Mittal. Srikanth will be chairman of Digital and Hemant Sonawala, chairman of Hinditron will continue as deputy chairman. Mittal will lead the existing management team until the new team is in place.

Of Digital India's 835 employees, 530 in the domestic computer products and services business will move to Compaq India and 305 in software exports business will remain with Digital. "There will be no job losses," Mittal asserted. He said the transaction would generate further job opportunities in Digital India. Compaq will continue to be an investor in Digital with 51 per cent stake and will be free to develop an independent customer base although Compaq will remain its customer.

The proposal is subject to shareholder approval at an EGM to be held on May 31, 1999.Mittal said the decision had been arrived at after a management analysis of the businesses revealed software and services exports of Digital had shown strong growth. It had outperformed its domestic computer products and services business in terms of operating margins and rates of return in line with market trends.

For the third quarter of the financial year 1998-99, Digital has recorded a total revenue of Rs 583.70 million with domestic computer products and services constituting Rs 402.40 million (68.90 per cent of revenue) and software exports Rs 181.30 million (31.1 per cent). Net profit for the quarter was Rs 29.50 million. Both revenue and net profit have fallen by 42.7 per cent and 72.8 per cent respectively from the figures recorded for the corresponding quarter of the previous year. Mittal said this was primarily because of Digital branded products moving outside the company's focus following the merger with Compaq.

On the rationale behind the transfer of domestic products and services businessesto Compaq, Mittal said the domestic computer products and services business, being very competitive and capital intensive, required considerable investment over the next few years to develop the market and create a strong competitive position for the company and its brands. The investments required were also likely to have a long gestation period imposing additional burden on the valuation of the company and its shareholders.

The worldwide merger of Compaq and Digital had resulted in Compaq branded products being marketed and serviced by both Compaq India and Digital India, causing customer difficulties. Shareholder concern was also expressed about duplication in the business. In this context, it was decided Digital would focus exclusively on software exports business to realize growth potential.

Digital will compete with other Indian software giants like Tata Consultancy Services, Infosys and Wipro. Luksich, director on the Digital board, said the firm was aiming to be among the top five Indian companiesin 2001 capitalising on its competencies in various core technologies. The company is also banking on its Rs 150 crore cash resources and strategic relationship with Compaq to achieve this.

The board had authorised Hemant Sonawala to pursue discussions with Compaq. Compaq was represented by Myles Owens, director, strategic business development, enterprise computing group. The investment bankers appointed to evaluate the transaction and arrive at a fair consideration were Jardine Fleming for Compaq and DSP Merrill Lynch Ltd for minority shareholders. It 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, Digital said.