From WSJ.COM:Compaq May Be Near a Plan To Assemble Tailor-Made PCs
December 21, 1999
By GARY MCWILLIAMS
Staff Reporter of THE WALL STREET JOURNAL
Compaq Computer Corp. may have finally found a fix for its costly distribution problems.
After failing for years to create an effective build-to-order system to compete with Dell Computer Corp., industry executives and analysts say Compaq, the largest personal-computer maker, is considering buying the ability to tailor-make PCs.
These people say Compaq and Inacom Corp. are discussing a deal that would turn over some of Inacom's assembly and distribution operations to Compaq. Inacom, an Omaha, Neb., company that customizes Compaq PCs for its own customers, would extend that build-to-order business to companies that buy directly from Compaq. "It makes all the sense in the world because it solves Compaq's problem," says Robert P. Anastasi, an analyst with Raymond James & Associates.
Geri Michelic, Inacom's marketing vice president, says that while the companies hold discussions all the time, "at this point in time there is no new relationship brewing."
In an interview, Compaq's Michael D. Capellas wouldn't confirm any talks. But six months after taking the job of chief executive officer, he concedes, "our supply chain isn't working the way we want it." Fixing it is crucial to repairing the company's giant corporate PC business.
Revolving Door
In 1997, Houston-based Compaq disclosed an ambitious program to stop building according to sales goals and only produce what customers had ordered. The program failed amid a revolving door of managers and Compaq's return to mass production when sales growth slowed.
The new attack on PC distribution comes at a time when Mr. Capellas says Compaq's other businesses are looking up. To let the world know that, he plans an "edgy" ad campaign that directly challenges rivals, and he pledges higher visibility, including the company's first analysts' meeting since former CEO Eckhard Pfeiffer was sacked in April.
"We're going to make some bold moves," Mr. Capellas promises. At a company with $38 billion in annual revenue that nonetheless has been criticized for missing the importance of the Internet, he has given its 68,000 employees a six-point plan of action. From now on, their goal will be "everything to the Internet." Compaq's strategy is to be recognized for "leadership in Internet access, infrastructure, services and solutions."
Prospects for Compaq's big computer and home-PC businesses are improving under new managers. The computer business turned in an operating profit of $599 million in the third quarter and home PCs chipped in $65 million. "We have a much healthier environment," says Senior Vice President Enrico Pesatori.
Online Shift
Compaq's Himalaya line of fault-tolerant computers, which was acquired in 1997 as part of its purchase of Tandem Computers Inc., is making gains among Internet and electronic-commerce companies, he says. Where top buyers had been financial-services companies, today's biggest owner is America Online Inc., he says.
Compaq continues to hold the No. 1 market position in home computers and in PC servers, where it has a commanding 32% share of sales, according to market researcher International Data Corp.
Thomas Siebel, head of sales and marketing at software developer Siebel Systems Inc., adds that Compaq has become much more responsive in recent months. "Mike Capellas and his team focused the business and turned it around. It seems like before he came in all action items were equal priority," says Mr. Siebel.
If there is a turnaround, however, it's not yet evident in results or Compaq's stock price. Wall Street currently expects fourth-quarter profit of $281 million, or 16 cents a diluted share, compared with $758 million, or 43 cents a share, a year earlier. Revenue is expected to slip to $10 billion from $10.85 billion.
Compaq's shares, which at the 4 p.m. close of the New York Stock Exchange on Monday were trading at $25.3125, up 31.25 cents, have hardly moved since earnings disappointments triggered Mr. Pfeiffer's departure. The stock is down 40% year to date.
Cost Cutting Criticized
Compaq remains slow in cutting costs, analysts say. While it set a goal of cutting $2 billion from annual expenses and trimming 7,000 positions, it has achieved only 10% of the promised savings. Eight months after its chief financial officer left, it still hasn't hired a permanent replacement.
"Compaq had a golden opportunity six or seven months ago to take radical steps at a low cost," says Louis J. Mazzucchelli Jr., an analyst at Gerard Klauer Mattison. And he says profitability will remain lackluster until the company gets serious about reducing operating expenses.
Mr. Capellas defends his handling of expense cuts, saying this quarter will show "substantial progress." The company "needs to put the rest of the cost reductions behind us," he says, but it won't neglect investments in customer support and advertising. "I tell our people gain share, get growth higher in the business, but get your costs out. I don't look at headcount," he says.
The most critical matter to Mr. Capellas, however, is a fix for the money-losing corporate PC business. That unit lost nearly $350 million in the first nine months of this year on $9 billion in sales.
Trimming Dealers
Mr. Capellas's early efforts to improve distribution costs included cutting down to just five dealers. But that was just an initial move, he says. Relying solely on dealers to reach customers "is dead, absolutely dead," he says. Mr. Capellas won't rule out an acquisition for the next step. "Would I look at some things? The idea is to buy low and sell high," he says.
After all, shares in Compaq's top three dealers -- Inacom, CompuCom Systems Inc. and MicroAge Inc. -- are so depressed their combined market value amounts to just 1.5% of Compaq's $43.6 billion market capitalization, notes Edward R. Anderson, who was CEO of CompuCom until July.
Still, any remedy involving purchases would face a skeptical reception on Wall Street given Compaq's poor results following its June 1998 acquisition of Digital Equipment Corp. "They need to get their house in order," says Ashok Kumar, an analyst at U.S. Bancorp Piper Jaffray. "Good or bad, acquisitions should be removed from Compaq's dictionary for the short term at least," he says.
Write to Gary McWilliams at gary.mcwilliams@wsj.com
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