December 28, 1999 4:00 AM PST

For Compaq, 1999 was the year that wasn't

1999: The year in technology For Compaq Computer, 1999 was the year that wasn't.

After overcoming bloated PC inventories in early 1998 and completing the initial stages of acquiring Digital Equipment, Compaq managers started the year upbeat and bullish.

They had good reason to be optimistic. The Digital purchase, announced in January 1998 and sealed by June, had made Compaq the second-largest computer company and positioned the Houston-based outfit as a major force in storage, services and consulting, "back-end" servers, microprocessors and, with the AltaVista search engine, even Internet publishing and Web content. Meanwhile, sales and profits had begun to rebound.

But in the first few months of 1999, many of those same executives, including CEO Eckhard Pfeiffer, either left or were forced out by an angry board, setting the stage for one of the most remarkable dramas in the high-tech industry this year.

Rather than entering 2000 as a $50 billion company that could rival IBM or Hewlett-Packard in the breadth of its technology and capability, Compaq is fighting for survival.

"Next year will make or break Compaq," said Aberdeen analyst James Gruener, who warned the company has run out of time for fixing its problems.

Analysts tell a story of two Compaqs: One company with great technology and a sound foundation for developing new products, and another incapable of producing and distributing products cheaply enough to compete with direct competitors, such as Dell Computer.

In January 1999, the latter position seemed nearly impossible.

Fourth-quarter 1998 earnings beat Wall Street expectations by six cents a share, with record 48 percent growth. A planned IPO for AltaVista toward the end of 1999 was set to capitalize on the frenzy around Internet stocks. And Compaq launched Compaq.com as the vanguard of a new direct sales strategy.

Compaq: 1999
Jan. Compaq buys shopping.com, launches Compaq.com on-line sales arm, and spins off AltaVista as separate company. Fourth-quarter earnings results reveal record growth.
Feb.-
Mar.
CFO Earl Mason draws ire for disclosing financial data to a select few analysts.
April Compaq issues major first-quarter earnings warning, which CEO Eckhard Pfeiffer controversially blames on industry-wide PC sales slowdown. Pfeiffer is ousted and Mason resigns as Compaq chairman Benjamin Rosen takes temporary control.
May Bloodletting begins with the first of several plant closings and divestitures.
June CIO Michael Capellas steps in as chief operating officer, as more executives, including enterprise chief John Rose, leave. Compaq divides operations into three business units, followed by the sale of AltaVista to CMGI.
July COO Capellas gets the job days before Compaq releases second-quarter results. Capellas later announces layoffs of up to 8,000 and a third-quarter charge of approximately $1 billion.
Aug. Near end of the month, Compaq lays off 1,600 in Singapore.
Sept. Compaq pulls plug on Unix development for Intel's Merced processor, in another cost-cutting move.
Nov. Compaq unveils the iPaq, an all-in-one legacy-free PC set the revitalize its beleaguered commercial PC businesses. Compaq cuts deal with Cable & Wireless for application hosting. Company also shows off "Clipper", a web appliance.
Dec. Rumors surface Compaq may buy a distributor's assembly facilities amid concerns the company may not be ready to meet demand for iPaq.
Cracks in the facade began to emerge by February, however, when analysts warned that first-quarter results would be lower than expected. Financial analysts increasingly began to raise red flags throughout March, when Compaq unveiled a new dealer program. As in the past, Compaq appeared to be trying to sell direct while appeasing its wholesalers, a combination that had yet to work well.

CEO Pfeiffer then dropped a bombshell to go along with the earlier warning: First-quarter earnings would be half of expectations.

Pfeiffer initially laid the blame on slowing PC sales, but other PC makers said sales were strong. In reality PC sales surged industry-wide, with consumer PC sales, for example, growing 40.3 percent the first quarter and 56.3 percent the second quarter, according to International Data Corp.

Behind the earnings drama, a subplot unfolded around Earl Mason, then Compaq's chief financial officer. At a briefing, Mason disclosed information about the company's financial crisis to select analysts and not to the entire community. That exclusive disclosure, which prompted some financial analysts to call for the CFO's resignation, dogged Mason as the depth of Compaq's problems emerged.

The severity of Compaq's problems was apparent to chairman Benjamin Rosen, who in April led the ouster of Pfeiffer, announced on a Sunday following a Compaq customer convention in Houston. Not since Rosen forced out Compaq co-founder Rod Canion in 1991 had the chairman intervened so aggressively in company affairs.

For his part, Mason promptly resigned to become the CEO of a food processing company. Many would follow in their wake over the next few months.

Rosen immediately set out to right a listing Compaq, establishing a three-member executive committee to run the company and search for a new chief executive. But Compaq found wooing candidates to Houston under the shadow of Rosen to be a long and difficult task. Hewlett-Packard's simultaneous CEO search only complicated Compaq's problems. Candidates surfaced, but none were named to take the post.

In the meantime, Compaq's executive committee in May began the hard task of rebuilding the company. First, it overhauled its "channel" operations by trimming the number of distributors from 39 to four, a task which aimed to simplify sales and logistical operations. Compaq also launched its NonStop e-business initiative, similar to campaigns by IBM, Sun and HP, to establish itself as an e-commerce equipment and services provider.

As terminations and resignations mounted, Rosen's committee opened June by appointing chief information officer Michael Capellas as acting chief operating officer. During the summer, Capellas would take over Compaq's day-to-day operations and implement broad restructuring.

That restructuring broke Compaq into three broad business areas: consumer, personal computing, and enterprise computing and services.

As June closed, Compaq agreed to sell AltaVista to CMGI for $2.3 billion. The move marked the first in a series of divestitures as Compaq sought to get back to basics, unloading business units that were either loss makers or a distraction.

By July pressure had increased on Rosen to find a CEO, just as lingering issues from the Digital acquisition created wider problems. Days before announcing second-quarter earnings, Compaq picked COO Capellas as the new chief executive.

The coming-out party was wrought with bad news: lackluster earnings, plans to lay off up to 8,000 and a potential third-quarter charge of up to $1 billion. As a side note, his appointment came a few days after HP hired Carleton "Carly" Fiorina from Lucent to become its new CEO.

In August, Compaq flawlessly executed the launching of a powerful, "eight-way" Pentium III server. But days later the ending of Windows 2000 development on the Alpha processor overshadowed the debut.

Still, although in power for only a brief period, Capellas began to get the company moving again. Following his edict to make products cool, Compaq's consumer division in October introduced a sleek new PC, hot on form and function. The Presario 3500 set the stage for other new devices, including wireless notebooks.

In November Capellas followed by bringing out the iPaq, a "legacy free" PC that sheds old ports and connectors. The business desktop was designed in four months, extremely rapidly for Compaq, according to sources inside the company.

Besides being sleek, the iPaq will come with a fairly low price tag, starting at $499, and should be fairly inexpensive to build. Those parameters will be important. Although it won't arrive until 2000, the iPaq will be needed to boost the sagging fortunes of Compaq's PC division. Third-quarter earnings revealed the unit which accounted for 30 percent of revenue lost more than 6 percent on every system sold.

The iPaq is the first real test for Capellas, "who has executed pretty well," said IDC analyst Roger Kay. "It's a pretty good end to a year with the old regime locked into denial and bad practices of various sorts, then the great purge, and a period of uncertainty," he said.

Also in November, the company announced the Clipper, a simplified Web access device that will be sold through telephone companies and Net access providers such as Microsoft's MSN. Unlike most computers, the product won't be for sale in its own right. It will come only when customers sign up for a subscription.

As Compaq looks forward to 2000, it's biggest challenge will be reducing the costs of building and distributing computers, which is in part hampered by selling through wholesalers and dealers. Technology Business Research analyst Lindy Lesperance estimates it costs Compaq twice as much as rival Dell for every business system it sells.

The iPaq will only be sold directly, eliminating the middleman's costs, but this adds another wrinkle. Compaq does not yet have the capabilities to sell computers like Dell, according to many. Sources have speculated this could lead to some sort of acquisition, a process which critics point out got Compaq where it is today.

So as 2000 approaches, questions remain.

 

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