Compaq buys distribution assets from Inacom

Attempting to build up its direct sales capabilities in a hurry to compete against Dell Computer, Compaq Computer today bought distribution facilities and other assets from PC distributor Inacom for $370 million in cash.

Selling computers directly to consumers and businesses has long been a dream and a curse for Houston-based Compaq. Compaq for years has tried, and often failed, with programs designed to allow the company to sell PCs and servers directly, rather than indirectly through dealers and distributors.

Selling direct, as Dell and Gateway do, reduces costs and inventory. It also lets the manufacturer customize PCs. To accomplish this efficiently, however, requires extensive computer tracking systems, different assembly and inventory techniques and other assets and know-how that Compaq lacked.

"Our major customers want to go direct," said Michael Capellas, Compaq's chief executive, in a conference call. "Our best option was to acquire some of the resources we needed." Compaq will next try to increase its direct capabilities in Europe and Asia, he added, hinting that further acquisitions could take place.

Under today's deal, Compaq will pick up 2,500 employees, four configuration centers, access to Inacom's customer lists, a call center and, perhaps most important of all, Inacom's order management, order tracking and e-commerce capabilities. It was the complexity of building the front-end and back-end systems that drove Compaq to the acquisition route, added Peter Blackmore, senior vice president of worldwide sales and marketing.

The Inacom acquisition will form a wholly owned subsidiary under Mike Winkler, senior vice president and Group General manager of the commercial personal computing group.

Ironically, because Inacom currently sells IBM and HP computers, Compaq will start doing so as well. "Because we want to maintain the third party product business?it is necessary to keep an arm's length," said Winkler.

The deal comes not a moment too soon either. Compaq is on the verge of launching its iPaq, an inexpensive, stylish PC for the business market. The company plans to sell the iPaq directly only. As reported earlier, various analysts have doubted that Compaq had the existing assets and facilities to start selling the iPaq directly, especially if it becomes a hit.

Inacom will benefit too. Margins in the distribution business have been shrinking in recent years as competition has become more heated. The company recently announced it would lay off 1,000 employees and place more emphasis on services in the future. Compaq products account for 40 percent of Inacom's product business today, according to the company.

Analysts and other sources predicted that Compaq would move soon to build up its direct capabilities, but they differed on whether Compaq would acquire another company, or merely enter into tighter relationship with Inacom or another distributor.

News of the deal did not alleviate these concerns. While the acquisition will give Compaq more resources for going direct, the acquisition could also place them in conflict with their traditional corporate dealers. The company is also still digesting the Digital acquisition.

"The danger is that it sounds equivocal," said Daniel Kunstler, an analyst at JP Morgan Securities, noting that Compaq seems to want to sell direct without alienating its traditional partners.

Compaq in fact will continue to balance direct sales with traditional dealer sales, said Compaq executives. By the end of the year, Compaq hopes to be selling 40 percent of its PCs and servers directly, but the percentage will vary by customer segment. Nearly all of Compaq's global customers will begin to buy direct while around 50 to 60 percent of large U.S. customers will eventually migrate to the direct path.

Only 30 to 35 percent of small and medium-sized businesses, however, may go direct because these customers continue to need on-site professional help. Consumers will present a mix.

Although the deal marks another acquisition for Compaq, it will be money well spent, Capellas asserted. Increased direct sales could lop as much as 4 to 6 percent off gross margin costs. The company will also be able to better streamline its operations and inventories.

"Inventory is the enemy," Capellas said.