July 6, 1999 2:45 PM PDT

Compaq still dogged by Digital transition

Eighteen months after announcing its acquisition of Digital Equipment, Compaq continues to grapple with integration issues, particularly in Europe.

Although Compaq Computer has managed to reorganize its executive staff for operations on the continent, it has faced a number of issues--labor laws, ambivalence about direct sales, and simple organizational resistance within divisions picked up in the Digital acquisition--that have made the region somewhat of a sore point for the company.

The problem is as much cultural as organizational, where employees used to doing business one way have been slow to adopt to some of the company's new initiatives.

"There is actually a Compaq vs. Digital attitude in some of the geographies," said Lindy Lesperance, analyst with Technology Business Research.

Compaq acquired Digital in June 1998 but quickly ran into problems. European labor rules and work councils prevented Compaq from reducing staff quickly, and the company faced a number of problems integrating sales forces, said analysts. The company had announced 17,000 layoffs worldwide would result from the merger, as well as facilities consolidation and closings. But the process proceeded more slowly in Europe than other areas and is only now nearing completion.

The problems at Compaq came to a head in April, when then CEO Eckhard Pfeiffer was ousted from the top position after sluggish sales and poor earnings performance. The company has not yet named a new CEO.

Compaq executives would not give precise figures on the European integration because of the quiet period before its July 28 second quarter earnings announcement.

"If you look at Europe, Germany, France and countries like that, and their social contracts, it's real difficult to implement layoffs, reorganizations or anything else," said Terry Shannon, publisher of the Shannon Knows Compaq newsletter.

Problems surrounding layoffs snowballed into other areas, exacerbated by organizational structures that varied country to country and by local managers resistant to changes, analysts said.

Sales issues
Another problem, Lesperance said, has to do with the different ways Compaq and Digital handled their sales forces. "Digital's sales people had a lot of flexibility in the pricing, having free reign to adjust pricing so they could aggressively compete to win accounts. They don't have that freedom under Compaq, and by the time the Compaq bureaucracy makes a decision, they've lost the sale."

Compaq executives admit there have been some problems in Europe, mainly related to labor issues. But they contend there are no serious sales force problems associated with the integration.

Ironically, the proof of Compaq's European progress, or lack thereof, is in the earnings, Shannon said. "If you look at the differential in the fourth quarter of '98, comparing the performance between the United States and Europe, the United States kind of tanked, but Europe still looked good. The reason for that is because no significant changes had been implemented."

Merrill Lynch's Steve Milunovich said he was aware of Compaq's European problems but could not speculate on whether the company had completed its integration work.

That is one issue Compaq chairman Ben Rosen will have to address on July 28. So far, Compaq had completed 15,000 layoffs by the end of the first quarter, reducing its workforce to just over 69,000. At the same time, the company grew its services division by 2,000 to 27,000.

"Compaq set some various ambitious goals around the Digital acquisition, and we feel good about where things are 12 months out," a Compaq spokesperson said.

Compaq last week reorganized its EMEA (Europe, Middle East, and Africa) operation to more closely match a mid-June stateside reorganization. EMEA vice president Gerard van de Aast will head the newly formed Enterprise Solutions and Services Group.

Other leaders in the new core business organization include: Joe McNally, vice president and managing director for the United Kingdom and Ireland; Gerrit Huy, vice president and managing director, Germany; and Bernard Maniglier, vice president and managing director, France.

Direct pressure
"The alignment around the divisions makes a lot of sense, especially since they're mirroring overseas," Milunovich said. "That should make a simpler go-to-market approach. To me that is necessary but not sufficient to recover the company. It's on the right path, but it's not enough."

As part of its "customer choice" model, Compaq will ramp up direct Web sales in Europe over the coming months. Much of Compaq's U.S. direct efforts migrated up from its consumer division into small business and than the commercial space. In Europe, the company is going more aggressively after direct corporate sales.

This strategy has met with stiff resistance in some countries, said Lesperance. "Some of the geographies over there were saying they weren't going to go to direct. Some of the regional managers we're coming back and saying resellers are really the only way they do business there and they weren't willing to jeopardize the relationship."

 

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