WSJ-An analysis of the Compaq, Alpha factory close-down in Salem.
May 18, 1999
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Compaq to Plans to Shut Plant Acquired
In Digital Purchase, Eliminating 900 Jobs
By a WALL STREET JOURNAL Staff Reporter
HOUSTON -- Compaq Computer Corp., in the first cost-cutting move since reporting a profit slide last month, said it plans to shutter a computer manufacturing plant, cutting 900 jobs.
The Salem, N.H., operation, which builds Alpha minicomputers and workstations that were acquired with the purchase of Digital Equipment Corp., will halt production over the next nine months. The plant's products will be transferred to two existing plants in California and Texas.
A spokesman said the company expects "significant" savings from the move. The closing won't result in a new charge to earnings, the spokesman said. In June, Compaq took a $1.11 billion charge for restructuring as part of its Digital acquisition. On March 31, about $833 million remained from that reserve for employee severance and plant closings.
Analysts said the closing and job cuts are likely the first of new cost reductions spawned by Compaq's first-quarter shortfall, when its earnings came in at less than half of Wall Street's projections. Compaq's first-quarter pretax operating profit was just 4.7% of revenue, far below of the 12% margin earned for all of 1997.
"They certainly weren't selling enough of these [Alpha] machines to justify devoting a whole facility to it," said Louis J. Mazzucchelli Jr., an analyst at Gerard Klauer Mattison.
Charles R. Wolf, an analyst at Warburg Dillon Read, estimates Compaq would have to slash annual operating expenses by $455 million to achieve a 10% pretax operating margin. If it chooses to slash jobs to raise profits, it would have to cut 9,100, or 13%, of its 69,000 jobs, he said. |
