Compaq and the road not
taken
In latest transition, 'what ifs' of failed Gateway
deal linger
By Michael R. Zimmerman, PC Week Online
May 3, 1999 9:00 AM ET
The next CEO to walk through the doors of Compaq
Computer Corp.'s drab, gray Houston offices will face a
series of complex problems--one of the most serious of
which is arguably Compaq's multipronged PC
distribution strategy.
Could the company have avoided such a muddled
distribution model and its drag on the company's
revenues? For many former executives, the answer is
yes--if the board of directors had followed through on its
plan to purchase Gateway Inc. two years ago.
Compaq's 1997 bid for Gateway is a story of missed
opportunities. Had things played out differently,
Compaq would likely be in a much different position
than the transitional phase it finds itself in today.
Had Compaq not walked away from the deal, insiders
say, the company would have immediately thwarted the
threat of Dell Computer Corp. by clearly delineating its
distribution methods.
"We would have immediately had a direct fulfillment
organization," said Eckhard Pfeiffer, Compaq's recently
ousted CEO, in an interview last week from his home in
Houston. "And we would have rationalized, over time,
products, branding and a fulfillment engine to move
huge volumes."
With the Gateway brand addressing the direct market,
Compaq could have focused its own brand on the
higher-end, enterprise systems market--without
alienating its dealer channel.
"If managed properly, it would have allowed a separate
brand and identity to compete with Dell without
screwing up the rest of the business," said Jim
Schraith, a former senior vice president who left
Compaq last year and is now CEO and president of
ShareWave Inc., in El Dorado Hills, Calif.
Compaq held informal talks about acquiring Gateway as
early as 1994. But it wasn't until January 1997 that
Compaq first approached Gateway, sources said.
During the early stages of negotiations, Compaq's
board rejected Gateway CEO Ted Waitt's insistence on
being an active member of a post-merger board.
The board later capitulated, and after four months of
meetings, including discussions between Pfeiffer and
Waitt, the parties were ready to close the deal for
approximately $7 billion, sources said.
An announcement was scheduled for this month at
Gateway, in North Sioux City, S.D. A public relations
"war room" was set up and ready to flip the switch on a
worldwide announcement. Compaq
executives--including Pfeiffer--were either en route or
making plans to go to South Dakota.
"We were locked and loaded," said a former Compaq
public relations manager who worked closely on the
event and requested anonymity. "We were just waiting
for the 'go.' Then we got a 'go'--but it was a 'go home.'"
For reasons no one directly involved in the negotiations
will discuss, Compaq's board rejected the contract at
the 11th hour, and both sides walked away from the
deal.
"Ted put up some conditions--he wanted to be one of
the people leading Compaq--and we were pleased with
the existing management," said one source close to
Compaq's board. "It would have been a fabulous
combination."
Not everyone agrees. A Compaq-Gateway tandem
"would have cut Dell off at the knees," said Kimball
Brown, an analyst at Dataquest Inc., in San Jose, Calif.
But Compaq still would have faced conflicts trying to
manage separate direct and indirect operations.
"No one's ever done it, and no one ever will," Brown
said. Although Compaq's distribution model--a
mishmash of retail, reseller, direct and online sales--is
"completely confusing," purchasing Gateway would not
have resolved Compaq's ingrained pricing problems in
the channel, he said.
The Gateway acquisition was just one cog in Pfeiffer's
strategy to build Compaq into a top global computer
company by the year 2000. Another part of the plan
was to acquire an enterprise services company, which
turned out to be Digital Equipment Corp. Efficiently
integrating Digital into the fold remains a major issue 10
months after the acquisition. Integrating Gateway may
have been an equally daunting task.
"One of our big concerns [with Gateway] was culture
clash," said Andrew Watson, a former director at
Compaq who's now president and chief operating officer
of Monorail Computer Corp., in Atlanta. "Gateway was
very much a shoot-from-the-hip cowboy, and we were
not."
Gateway officials declined to comment for this story.
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