USA Today - not MONEY MAGAZINE - sorry. Anyway, here it is:
01/24/00- Updated 11:19 PM ET
CEO reboots Compaq spirit
Capellas appears to have put company on comeback road
By Edward Iwata, USA TODAY
HOUSTON - To the beat of Patti LaBelle's New Attitude, the boss of the world's largest computer maker pumped his fists, high-fived colleagues and leaped onstage to cheers.
"We need to jump-start ourselves and get our momentum back," Compaq Computer CEO Michael Capellas said in a recent satellite broadcast to his 68,000 troops worldwide. "We need to find our sense of purpose and pride again."
The husky Capellas, a former linebacker at Kent State University, knows he still has some moves to make at Compaq. The company isn't changing fast enough to compete with build-to-order PC makers or to trim $2 billion in annual expenses, analysts say. Compaq also is having problems filling key executive spots, including the chief financial officer post, as the hottest candidates land sexier gigs at highflying dot-coms.
Yet there are signs that the rah-rah CEO, just six months since taking the top job, might be staging a comeback for Compaq, an industry leader humbled last year by management bloodshed, $3 billion in losses and a dying stock.
Compaq's bottom line and stock performance are rallying. The company earned $140 million in the third quarter and is expected to announce today a stronger fourth quarter. Its shares, which fell as low as $18 last fall, had rebounded to $32 3/8 as of Monday.
Compaq's stock also may get a lift from Saudi Prince Alwaleed Bin Talal, who Monday bought a 2% stake in Compaq worth up to $1 billion, according to CNN.
Capellas has vowed to turn Compaq into a youthful online firm that peddles cool Internet products and services. His war cry in meetings: "Everything to the Internet!" Compaq made its goal of selling 25% of its products online and by phone by the end of 1999 and is aiming for 40% by the end of this year.
Some longtime employees say Compaq's innovative spirit is back. Fear and inertia had crept in, but the new Internet strategy has fired up the workforce. "There is such a groundswell of support and a tremendous hunger now," says Jerry Meerkatz, Compaq's general manager of Internet products and services.
Compaq has started to streamline its slow and costly distribution network - a creaky model in the Internet age, when consumers and businesses can buy products online. Compaq has axed its distributors from 40 to five and told some dealers it will sell Compaq products directly to customers.
Early this month, Compaq boosted its ability to quickly ship built-to-order products by buying a chunk of Inacom, a computer assembly firm in Omaha, for $370 million.
"Capellas gets high marks so far," says Roger Kay, an analyst at International Data Corp. "He's managed to stabilize the company and get it ready for the next period of growth."
No overnight fix
Even with the Inacom deal, questions remain about Compaq's clogged distribution arteries, which pump millions of computers through retailers and resellers. By contrast, Dell sells 100% of its PCs online or by phone, virtually eliminating excess inventory.
"Compaq is slowly turning around, but it won't happen overnight," says Kurtis King, an analyst at Bank of America in San Francisco. "They still have an obsolete business model that predates the Internet age, and the transition they're going through doesn't come naturally for them."
Fans of Capellas hope he'll return Compaq to its glory days of the 1980s and early 1990s. The firm resembled a fast-growing start-up then, giving birth to new technologies and whipping IBM and others in the PC mass market. The spirit of the era is symbolized by a wrinkled paper placemat in a glass display at Compaq's offices. As the tale goes, the three former Texas Instrument engineers who co-founded Compaq in 1982 were dining at a House of Pies restaurant in Houston. Inspired, they scribbled a design for Compaq's first portable computer on the white place mat.
It'll take more than corporate lore, though, to fully revive Compaq. The high-tech Goliath suffered through the worst period in its history last year.
While the PC industry was enjoying record profits, Compaq was enduring quarterly losses. While other PC makers were toning their muscles in the late '90s, Compaq was digesting its acquisitions of Digital Equipment and Tandem Computers.
Worse, Compaq gave up U.S. market share and No. 1 bragging rights to Dell, its cross-state rival and a darling of Wall Street. Nor could Compaq shake its old-fashioned image among some in the industry.
The troubles led angry Compaq board directors to oust CEO Eckhard Pfeiffer last April. Chairman Ben Rosen, a legendary financier in the PC industry, stepped in as acting CEO. He forced out several more executives.
After a three-month search for a seasoned CEO - Nortel President David House and Hewlett-Packard CEO Carly Fiorina were reportedly on the short list -- Rosen surprised many by offering the job to Capellas. Compaq's little-known chief operating officer accepted the post over dinner and drinks at a nearby steakhouse.
The energetic Capellas wasted no time. He and his lieutenants reshaped Compaq into three divisions: consumer PCs, business PCs and large-scale corporate computing and e-commerce services . They closed several plants and slashed 17,000 employees through layoffs and attrition, aiming to save costs and create a leaner workforce.
Capellas also went out of his way to reassure anxious corporate customers that Compaq was still a world-class player that valued their business. Barely 24 hours after he was named CEO, for instance, Capellas flew America Online executives to Houston to visit for two days.
"Michael was accessible and responsive to us, and he told us his vision of the Internet," says AOL President Bob Pittman, whose firm buys large Compaq servers for its data centers. "The good news is he does everything he says he's going to do."
Adds John McKinley, chief technology officer at Merrill Lynch, who uses Compaq computers and servers as the giant brokerage firm embraces online investing: "He brings a businessman's savvy and an appreciation of engineering."
Steering toward the Net
Compaq is jazzing up its product line with stylish, easy-to-use PCs designed for Web-based computing. Compaq engineers also are designing cheap, simple Internet devices such as the Clipper, a small Web terminal that may use Microsoft's Web Companion platform.
Compaq's Internet fate, though, probably rests with its enterprise computing division, run by Compaq executive Enrico Pesatori. The division, which cranked out more than half of the company's revenue last year, sells large Internet-based computers and servers to blue-chip clients such as AOL, Merrill Lynch and Amazon.com. The division also runs Compaq's growing e-business services arm, called NonStop eBusiness.
This year, it's hard to predict whether market trends will help or hurt Compaq. In consumer PCs, Compaq, Dell and Hewlett-Packard will see less competition and should have an easier time. Bloodied by price wars, IBM, Packard Bell/NEC and Acer are abandoning the retail battleground. In the more lucrative arena of business PCs, analysts foresee a gruesome price war as the high-tech titans fight for corporate dollars - especially from thousands of small and midsize businesses.
And, of course, every hardware and software maker, online start-up and cable and telecom firm is angling to reap the potential bonanza from Internet and wireless devices.
Can Compaq deliver? Capellas, who paces like he's back in college stalking a quarterback, knows his company must shed its stodgy image. The market is brutal toward slow prey. "We're not standing still," he says. "We're gaining momentum: I can see it, feel it, touch it. The only thing left is to take it to the streets and execute like hell."
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