Compaq Expected to Cut Number of PC Distributors (Update1) (Adds details, updates stock prices.)
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Houston, May 7 (Bloomberg) -- Compaq Computer Corp., the world's largest personal computer maker, is expected to cut the number of distributors that sell its products to about four from as many as 40 to curb costs and manage inventory, analysts said.
The move, the first big decision by Chairman Ben Rosen since he ousted Chief Executive Eckhard Pfeiffer last month, could come as early as Monday, said analyst Kurt King of NationsBanc Montgomery Securities. Compaq's partners are likely to be Ingram Micro Inc., Tech Data Corp., Merisel Inc. and CompuCom Systems Inc., said analyst Ashok Kumar of US Bancorp. Piper Jaffray.
Compaq wants to winnow the companies that distribute its PCs because it's too difficult to control inventory, gauge demand and keep costs down with dozens of disparate sellers. In exchange for giving a handful of companies more sales, Compaq likely will seek better terms from its remaining partners. ''They'll have control of what demand and inventory look like and they'll get cost savings,'' said Kumar, who rates Compaq ''buy.''
Compaq rose 1/8 to 24 3/4 at early afternoon and was the fifth-most active stock in U.S. trading. Ingram Micro, the world's No. 1 PC distributor, rose 2 1/8 to 26 3/4. No. 2 Tech Data gained 2 3/8 to 28 1/4.
Compaq's Woes
Compaq has struggled with slowing sales, lower earnings and a cost structure that made it difficult to compete with No. 1 PC direct seller Dell Computer Corp. Dell builds its machines to a customer's order, helping it hold down its parts inventory and benefit when costs fall, as they typically do in the PC industry.
Compaq's problems, exacerbated by a first-quarter profit shortfall and a 40 percent plunge in its stock price this year, led to Pfeiffer's dismissal April 18. ''Compaq has been in discussions with our U.S. channel partners to maximize our distribution model. We expect these discussions to lead to refinements in the model,'' said Compaq spokesman Jim Finlaw. He said the company expects to make an announcement early next week.
Ingram Micro and Tech Data already make Compaq's Prosignia products for small and medium-sized businesses and build some others at Compaq's headquarters in Houston. Merisel also works with Compaq to build some machines on site.
Compaq has tried to shift from its traditional method of selling through a web of resellers, which typically mark up prices on the PCs and may have competing demands. ''When you have 40 vendors you have no idea what is going on,'' analyst Kumar said.
The shift has been difficult because of resistance from the dealers, which don't want Compaq to compete with them, and Compaq's failure to articulate a clear strategy. ''Compaq's job of managing distribution will become a lot simpler,'' said Montgomery's King, who rates Compaq ''buy.''
Price Protection
Compaq also is likely to reduce the amount of price protection it gives to distributors, analysts said.
When a computer is sold through a distributor, the manufacturer often guarantees that if prices fall before the machine is sold, it will make up the difference.
That makes it difficult to compete with PC makers like Dell, which carry only days of inventory and don't have to offer any price protection.
Computer prices can fall as much as 1 percent a week while sitting on warehouse shelves.
So-called co-location helps because it means distributors take on more of the assembly tasks, putting the boxes together quickly as the main parts come off Compaq's manufacturing lines. It also lets them build machines as orders come in, which means lower inventory.
Other computer-related companies already have made similar moves in consolidating distributors. Apple Computer Inc. cut the number of distributors from five to two and Seagate Technology Inc., the world's largest disk drive maker, winnowed its distributors to five from about 12. |
