April 18, 1999 10:40 PM PDT

Compaq ousts CEO in major shakeup

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In a move with ramifications throughout the high-tech world, Eckhard Pfeiffer was unexpectedly ousted today as Compaq Computer's chief executive officer.

The stunning top-level shakeup, prompted by chairman Benjamin Rosen, also included the resignation of Earl Mason as chief financial Earl Mason officer of the leading PC maker. Pfeiffer's immediate plans are not known, but Mason is leaving to take over as chief executive of Alliance Foods, a large food corporation in Chicago, analysts say.

Until a new CEO is found, Compaq's board of directors has formed a three-member office of the chief executive to oversee daily operations. Rosen and vice chairmen Frank Doyle and Robert Ted Enloe will maintain that office, the company said.

"The board is committed to move quickly to select the right chief executive officer to lead the next era of Compaq's growth and development," Rosen said in a statement from Compaq's Houston headquarters. The company added that treasurer Ben Wells will serve as chief financial officer on an acting basis.

Although no official reason was given for the Pfeiffer's sudden departure, Rosen indicated later in an interview with Reuters that the company needed to move faster to stay ahead of increasingly cutthroat competition.

Without addressing Pfeiffer's performance specifically, he said Compaq "really needed a change in the leadership" to maintain its industry position. "In some way we have been too slow...We want to try and get ahead of the curve."

The resignations followed the surprise April 9 announcement of a first-quarter shortfall by Compaq, which Pfeiffer blamed on relentless price wars and other industry factors. Rosen, however, told Reuters that external market forces were not the only reasons Compaq was expecting earnings of about 15 cents per share, less than half of the 31 cents projected by First Call financial analysts.

"In fairness, a lot of it was our fault," Rosen said of the disappointing first-quarter results, which are to be reported officially Wednesday. Although he called Compaq's strategies "fundamentally sound," Rosen said: "I don't think we executed well. I hope that in subsequent periods we can improve on that performance."

A class-action lawsuit was filed Friday alleging that Compaq, Pfeiffer, and Mason misled investors by failing to disclose information related to weakening demand for its PCs.

Analysts generally agree that Compaq has not performed as well as many of its competitors. "Compaq's shortfall is not representative of the health of the industry. We estimate that PC unit shipments are down [more] for Compaq vs....the broad market," said Ashok Kumar of Piper Jaffray.

Roger Kay, an analyst at International Data Corporation, said Compaq's behavior at times seemed like a personal vendetta. "Eckhard has been so obsessed with staying ahead of Dell that they focused too hard on market share and stopped paying attention to profitability and liquidity," he said. "They got whacked in a price war that they started."

Like all computer manufacturers, Compaq has encountered ever-shrinking profit margins brought on by the introduction of PCs selling for less than $1,000 or increasingly even $500. But its problems were compounded by the dilemma of selling its products through third-party resellers while moving toward sales straight to customers to compete with direct marketers such as Dell and Gateway.

"The only thing worse than cannibalizing your own sales is to have a competitor cannibalize yours. Compaq never understood they had to do a flash transformation: one day distributors, next day direct," said Danny Lam, a director of consulting firm Fisher-Holstein. But he acknowledges that "it would have been a project of Herculian proportions to have pulled it off."

"Direct sales is now clearly the norm in the United States and, ultimately, the world. Inventory management, lean manufacturing and distribution, and build-to-order are the new mantras necessary for survival, let alone profitability," Lam added. "Compaq, like IBM, missed their turns in the road during this tumulous time and, instead, dissipated their energies on acquisitions."

IBM has, however, kept up pressure on Compaq and the rest of the industry where prices are concerned. So much so, in fact, that Dell has complained of low-ball pricing by IBM as it vies for large corporate customers. IDC said IBM was one of the few top PC companies to gain market share in the fourth quarter of 1998, snagging almost 10 percent of the market vs. 9 percent last year, despite losing almost $1 billion in its PC business in 1998.

Today's resignations underscore how quickly and drastically strategies can be undermined See special report: Compaq's quest to become No. 1 in the hyperspeed of high technology. Only a year ago, for example, Compaq shocked the industry with a record $9.6 billion purchase of Digital Equipment in its bid to become a computing superpower.

Pfeiffer's brief comments today, included in the unusual Sunday corporate statement, were hardly recognizable of a man who appeared to be sitting on top of the world only a short time ago.

"Compaq has come a long way since I joined the company in 1983. We are a world leader in personal computing, enterprise computing, and Internet applications," he said. "Under Ben's guidance, I know this company will realize its potential, transforming the industry yet again. I am thankful to all employees at Compaq for their support and the chance to work with them."

In addition to the recent earnings debacle, speculation about reasons behind the ouster include difficulty in integrating acquisitions such as Tandem and Shopping.com, as well as Digital.

In the end, however, what may have done Pfeiffer in was his credibility. One of the more imperial executives in the industry, he announced a number of ambitious plans for Compaq in the past two years, but many have yet to bear fruit.

Pfeiffer also tended to claim that Compaq's problems were symptomatic of problems endemic to the entire industry, which many saw as merely an excuse to shift blame from management. One source today called him "totally supercilious" in dealing with investors, analysts, and the press.

Microsoft had this to say: "Our relationship with Compaq is as strong as ever and we are proud of the work we have done for customers over the past several years," said a Microsoft spokesperson. "Microsoft looks forward to continued partnership on great PC technology solutions for customers."

News.com's Michael Kanellos, Brooke Crothers, and Ben Heskett contributed to this report.

 

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