Compaq needs to choose what gets cut next
By Joe Wilcox
Staff Writer, CNET News.com
August 19, 1999, 5:15 p.m. PT
news analysis A little more than a year after buying Digital Equipment,
Compaq Computer is unloading major chunks of its trophy acquisition.
And for good reason, say analysts and Compaq executives. Disparate
corporate cultures, problems integrating operations, and dead-end
technologies have contributed to Compaq's current problems.
Compaq also must clarify its strategy in three crucial areas: balancing
adoption of Intel's Merced processor with its own Alpha architecture, finding
ways to squeeze more profits out of the Unix technology it acquired with
Digital, and ironing out its distribution and dealer issues.
Along with this may come more job layoffs. Last month, the PC maker
announced a restructuring plan that included job cuts of up to 8,000.
Now it is up to new chief executive Michael Capellas and chief lieutenants
Mike Winkler, Peter Blackmore, and Enrico Pesatori to set things right. But
the biggest burden may be on Pesatori, senior vice president and group
general manager of the Enterprise Solutions and Services Group. Most of
the remaining Digital units are part of his organization and many of the
"keep it or dump it" decisions will affect his group the most.
Compaq today concluded its sale of the AltaVista entity to CMGI. The
Houston-based PC manufacturer spun
off the Internet portal as a separate
company earlier in the year and had
announced a late-year IPO, which was
later canceled.
Yesterday, Compaq sold its embedded
chip business to Smart Modular
Technologies for an undisclosed
amount. The former Digital division
makes computer circuit boards for about
100 large customers, including General
Electric. The deal affects about 120
Compaq employees mostly in
Massachusetts and Scotland with an
expected completion date of late fourth
quarter.
Deciding what, if any, division goes next
depends on what direction Compaq
takes, and that choice won't be easy.
Several Digital units seem to have
questionable or difficult long-term
futures ahead of them, but they
generate much-needed revenue now.
Tru64 Unix, the Unix technology Compaq inherited from Digital, and the
Alpha chip platform, again from Digital, represent two of the larger
dilemmas for Compaq.
"Tru64 Unix is making good money now," said Kimball Brown, analyst with
Dataquest. "But do you want to dump money down that rat hole? It's
high-margin stuff now, but what about the future?"
The future, say analysts, belongs to Monterey, the 64-bit Unix that IBM and
SCO are developing.
One area that might make sense for cuts is Windows NT on the Alpha chip.
Terry Shannon, editor of the Shannon Knows Compaq newsletter, said today
he's heard unconfirmed reports that Compaq plans to cut some of its NT
developers in Bellevue, Washington. The Alpha chip is the current basis for
development of 64-bit versions of Windows.
Shannon said he "believes Compaq has seen the handwriting on the wall.
The Windows NT operating system runs on a relatively small number of
AlphaServers," he said. "Compaq's recent and increasing emphasis on Linux
as an Alpha volume expansion solution represents a significant shift in the
DEC/Compaq volume strategy."
Compaq also faces a similar problem with its Alpha processor on the eve of
the IA-64 architecture from Intel, which will debut on the Merced
chip. "There is not much future there [for Alpha] with Merced," said
Roger Kay, analyst with International Data Corporation. "And it is an
expensive research and development effort for Compaq to
maintain."
Compaq is a supporter of Monterey and IA-64, and will likely
dedicate more resources to both technologies over time, said
analysts. That middle period will be the problem. The company has
already said it will invest $100 million for development and
marketing of Tru64 Unix and Alpha.
In addition to being expensive, the transition period will raise the
classic business dilemma: Should the company try to build these
technologies, or go for an end game?
Analysts suggest Compaq could still benefit from Alpha if it sold the
bulk of its operations, including research and development, to a
third party while maintaining a minority share. This is exactly what
Compaq did with AltaVista, for which it got about a 17 percent stake
in CMGI.
"Compaq has to figure out where the model fits and blow off the rest
of it," said Brown.
Eggs in one basket
Compaq set the stage on Tuesday for unloading unprofitable Digital
units by putting all the eggs in one basket. The company
announced a new enterprise and services organization divided into
three parts: storage, industry standard servers, and business-critical
servers. Aside from Digital's StorageWorks brand, which has been
very successful for Compaq, the bulk of remaining divisions and
those acquired from Tandem Computer are in this group.
Publicly, Compaq vigorously supports the Digital units, their
products, and customers. But analysts point out Compaq has made it
easier to sell off weaker units by grouping them together. It also
isolates some of the worst corporate culture problems inherited with
Digital.
Pesatori is quick to admit the cultural problems exist, but points out
Compaq is tackling them. "Compaq was always successful with a
very leveraged model," he said. "We have a much more focused
approach than Digital ever had and Compaq has had for the last
few months."
Not all analysts are sure Compaq will act quickly or drastically.
"What Compaq has to do is the give the units an opportunity to fight
for themselves and demonstrate they can survive," said Tony Iams,
analyst with D.H. Brown Associates. "I think it's still premature to
speculate which parts are not long for this world."
Other analysts argue there is no better time to act than now. With its
stock stuck in the low 20s, Compaq could afford to bite the bullet
and take a revenue hit now for future growth.
See Story in Context
Related news stories
• Compaq looks for good news with server launch August 12, 1999
• Compaq reports a loss, will lay off 8,000 July 28, 1999
• Compaq's CEO choice gets mixed reaction July 23, 1999
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