STOCKREPORTS		 Tandem Computers Incorporated NYSE Symbol TDM
In S&P 500
19-JUL-97 Industry:
Computers (Hardware)		 Summary: This company, which manufactures continuously available multi-processing servers and fault-tolerant UNIX systems, has agreed to merge with Compaq Computer.

Recent Price 26.25
52 Wk Range 26.25 - 10.50		 Yield Nil
12-Mo. P/E 49.5

Quantitative Evaluation:
Outlook (1 Lowest - 5 Highest)
2-
Fair Value
24.10
Risk
MEDIUM
Earn/Div Rank
B-
Technical Evaluation:
BEARISH since 06/97
Rel. Strength Rank (1 Lowest - 99 Highest)
99
Insider Activity
Neutral

Overview 16-JUL-97

Revenues should grow nearly 10% in FY 97 (Sep.), reflecting contributions from TDM's new server product lines, which incorporate its ServerNet clustering technology. Also included in the product introduction is a new line of Windows NT servers, which are expected to see good acceptance in the face of strong market demand. These new products should boost comparisons in the second half. Furthermore, the company is also expected to realize revenues from the licensing of ServerNet. Compaq (see below) and Dell are already licensees, while pacts with other OEMs are being considered. Gross margins are expected to narrow, reflecting price pressures and a greater proportion of less profitable NT server products. However, operating expenses are expected to decline on an absolute basis. We estimate EPS of $1.10 for FY 97.

Valuation 16-JUL-97

The shares jumped after Compaq Computer (CPQ) and Tandem announced a definitive agreement for CPQ to acquire Tandem in a stock transaction. Compaq will issue 0.21 of a share of its common stock for each Tandem share. Based on the June 20 closing price of the stocks, the deal was valued at $3 billion, and the ratio established gave a roughly 50% premium to Tandem shareholders. Tandem shares have been rising since then, tracking the 0.21 exchange ratio in relation to Compaq shares. We believe the companies will both enjoy synergies from their powerful combination and continue to recommend accumulating shares, as the newly formed company will be among the best positioned computer firms to capitalize on growing demand for personal computers and servers. The transaction is expected to close by September's end.

Key Stock Statistics

S&P EPS Est. 1997 1.10
P/E on S&P Est. 1997 23.9
S&P EPS Est. 1998 1.25
Dividend Rate/Share Nil
Shs. outstg. (M) 115.9
Avg. daily vol. (M) 3.461
Tang. Bk. Value/Share 9.41
Beta 1.15
Shareholders 8,600
Market cap. (B) $ 3.0
Inst. holdings 71%
Value of $10,000 invested 5 years ago:$ 23,333

Fiscal Year Ending Sep. 30

Revenue (Million $)
1997 1996 1995 1994 1993 1992
Q1 435.7 512.4 534.6 475.5 484.0 455.0
Q2 467.3 576.2 515.9 484.1 517.7 503.0
Q3 NA 465.8 594.4 543.9 475.6 503.0
Q4 NA 543.3 640.0 604.4 553.9 576.0
Year NA 1,900 2,285 2,108 2,031 2,037

Earning Per Share ($)
1997 1996 1995 1994 1993 1992
Q1 0.10 0.02 0.30 0.22 0.05 -0.88
Q2 0.21 -0.42 0.18 0.23 0.10 0.09
Q3 E0.30 0.20 0.26 0.43 -4.88 0.16
Q4 E0.50 0.34 0.17 0.62 0.03 0.25
Year E1.10 -0.04 0.91 1.50 -4.72 -0.38

Dividend Data: No cash dividends have been paid. A "poison pill" stock purchase rights plan was adopted in 1985.

Business Summary 16-JUL-97

Founded in 1974, Tandem's Non-Stop System and Non-Stop Himalaya systems have dominated in the financial arena in supplying the majority of mission critical applications in stock market, credit-card processing and ATM banking systems, by way of "clustering" solutions. Clustering links multiple systems, making two or more servers act like a single server, with applications moving from one server to another, transparent to the server. Benefits from clustering include scalability (enabling the system to expand) and fault tolerance (which lets other systems take over if one system fails).

While over the past 20 years, clustering has been available in the mainframe/minicomputer and UNIX server market, this technology is enabling lower priced, Intel-based servers to take over critical applications traditionally relegated to these bigger systems.

As this shift occurs, TDM plans to leverage its technology and expertise to expand into the Windows NT Server market. Microsoft efforts to extend Windows NT to support clustering, will employ code licensed from Tandem. TDM's ServerNet-enabled NT cluster systems, are expected to ramp production in the final quarter of FY 97, and contribute significantly to FY 98 revenues.

Last year, TDM unveiled two new S-series server families: NonStop Himalya servers for high-end environments, and Windows NT-based systems for business computing applications. Both server families utilize TDM's ServerNet technology, an interconnect technology used to create high-availability clustering. The S-series Himalya servers scale to massive levels input/output (I/O) bandwidth, processing power, and storage and are designed to meet future demands of media-rich applications and uses reduced instruction set computing (RISC) microprocessors. Its NonStop Kernal operating system is designed to keep applications running through any single failure--if a processor fails, work is redirected to other processors in the system. The S-series Windows NT Server-based systems are based on Intel's Pentium Pro microprocessor and will support Microsoft clustering environment when it becomes available, expected in the summer of 1997.

Meanwhile, Tandem's UNIX system-based Integrity FT and S400 servers are positioned for the telecommunications market. The Integrity FT systems family extend fault tolerance to the market for UNIX systems, also based on RISC technology.

In January 1997, TDM sold its networking business as part of a shift to an open strategy, with its technology supporting a variety of network vendors. Its UB Networks subsidiary provides modular and stackable hubs, high-speed concentrators, internetworking products and adapter cards, and had annual revenues of about $400 million. TDM received proceeds of $93 million, and recorded a gain of $1 million in FY 97.

Capitalization

Long Term Debt: $79,357,000 (3/97).
Options: To purchase 19,100,000 shs. (9/96).

Per Share Data ($)
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
Tangible Bk. Val. 9.19 9.46 8.07 6.30 9.47 9.79 9.62 7.80 6.78 7.74
Cash Flow 1.64 2.36 2.94 -3.50 1.26 1.84 2.23 2.22 1.78 1.59
Earnings -0.04 0.91 1.50 -4.72 -0.38 0.33 1.13 1.17 0.96 1.08
Dividends Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil
Payout Ratio Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil
Prices - High 15 1/4 19 3/4 19 1/8 16 7/8 15 7/8 17 5/8 30 1/8 26 3/8 29 1/2 37 5/8
- Low 8 3/8 10 10 1/2 8 1/2 9 7/8 9 1/8 8 7/8 14 3/4 12 3/8 17 1/8
P/E Ratio - High NM 22 13 NM NM 53 27 23 31 35
- Low NM 11 7 NM NM 28 8 13 13 16

Income Statement Analysis (Million $)
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
Revs. 1,900 2,285 2,108 2,031 2,037 1,922 1,866 1,633 1,315 1,035
Oper. Inc. 272 296 320 122 249 222 309 291 228 220
Depr. 198 171 163 137 179 163 120 106 81.0 50.0
Int. Exp. 15.0 13.0 13.0 15.7 17.6 20.3 19.6 11.2 9.7 1.8
Pretax Inc. 23.6 140 181 -462 -32.0 57.0 187 186 145 185
Eff. Tax Rate 1.23% 23% 6.10% NM NM 39% 35% 37% 35% 43%
Net Inc. -5.4 108 170 -529 -41.0 35.0 122 118 94.0 106

Balance Sheet & Other Fin. Data (Million $)
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
Cash 88.0 121 124 125 149 115 91.0 197 125 317
Curr. Assets 860 970 928 851 988 873 863 863 644 687
Total Assets 1,745 1,857 1,762 1,685 2,045 1,932 1,877 1,619 1,318 967
Curr. Liab. 583 670 737 862 631 511 495 441 365 192
LT Debt 75.2 75.9 86.0 86.0 94.0 93.0 96.0 107 58.0 9.0
Common Eqty. 1,086 1,110 939 737 1,237 1,248 1,203 989 857 721
Total Cap. 1,161 1,186 1,025 823 1,415 1,421 1,383 1,177 953 775
Cap. Exp. 151 188 153 146 125 138 301 136 245 142
Cash Flow 192 279 333 -392 138 198 242 225 175 155

Curr. Ratio 1.5 1.5 1.3 1.0 1.6 1.7 1.7 2.0 1.8 3.6
% LT Debt of Cap. 6.5 6.4 8.4 10.5 6.6 6.6 6.9 9.1 6.1 1.2
% Net Inc.of Revs. NM 4.7 8.1 NM NM 1.8 6.5 7.2 7.2 10.2
% Ret. on Assets NM 8.0 9.8 NM NM 1.8 6.8 7.9 8.2 12.3
% Ret. on Equity NM 10.5 20.1 NM NM 2.8 10.9 12.5 11.8 16.4

Data as orig. reptd.; bef. results of disc. opers. and/or spec. items. Per share data adj. for stk. divs. as of ex-div. date. E-Estimated. NA-Not Available. NM-Not Meaningful. NR-Not Ranked.

Office--19333 Vallco Parkway, Cupertino, CA 95014-2599. Tel--(408) 285-6000. Chrmn--T. J. Perkins. Vice Chrmn & CEO--R. Pieper. Pres & COO--E. Pesatori. SVP-Fin--K. Barber. VP & Secy--J. T. Parry. Investor Contact--Rayvon Williams. Dirs--J. F. Bennett, M. Collins, C. Fraser, F. P. Johnson Jr., B. Kavner, R. C. Marshall, T. J. Perkins, E. Pesatori, R. Pieper, V. S. Shirley, R. G. Stone Jr., W. SyCip, T. I. Unterberg, W. B. Wriston. Transfer Agent & Registrar--Boston EquiServe, Canton, MA. Incorporated--in California in 1974; reincorporated in Delaware in 1980. Empl-- 6,900. S&P Analyst: Megan Graham Hackett


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