January 08, 2001 03:18
Compaq Executive Urges Employees to Smile through
Tough Tech Times
By John Pletz, Austin American-Statesman, Texas
Jan. 8--HOUSTON--Toward the end of another long day, with more work still ahead,
Michael Capellas detours into his executive assistant's office, grabbing a nearby
picture of himself standing next to Ronald McDonald.
"Think fast," he says, with a mischievous smile. "Which one's the clown?"
Kay Hammonds, a 12-year Compaq Computer Corp. veteran who's been working for
Capellas less than a week, blushes and manages a nervous laugh.
Capellas, chairman and chief executive of the world's largest personal-computer
maker, answers for her: "Both."
Capellas is keeping his sense of humor when some in the industry seem on the
verge of tears. It's just a few days before Christmas, and the PC business is
experiencing the kind of holiday season that even the Grinch wouldn't have dumped
on the Whos.
Consumer demand -- the fuel for what is traditionally the best quarter of the year for
computer makers -- departed with the ghost of Christmases past. Corporate
demand is also weak.
Every computer maker has warned of lower sales and profits or revised forecasts.
Compaq did it Dec. 12, warning that fourth-quarter sales would be about $1 billion
below Wall Street estimates and that earnings would be off about 21 percent.
It was the last thing Compaq wanted to do. Since Capellas took over in July 1999,
after a disastrous six months that sent Eckhard Pfeiffer tumbling out of the
eighth-floor executive suite at Compaq, the company has met or beaten Wall Street
estimates in every quarter.
Brokerage houses began recommending the stock again. Compaq shares peaked
at $34.88 on Aug. 29, 2000, up from $24.79 when Capellas took over. But the stock
has since fallen along with the rest of the industry, to $16.68 per share Friday.
"Of course it was tough," Capellas says of having to warn Wall Street. "But you do
it and move on."
He knew this day would come, although he wasn't expecting it just yet.
"I knew at some point we would have a character test," Capellas says. "So far it's
been pretty encouraging. People aren't panicking. We'll get through it."
But some on Wall Street again are questioning whether the company's turnaround,
which seemed to be gathering steam, is faltering.
"If they'd not done what they did, they'd be in serious trouble," says Andrew Neff, an
analyst at Bear, Stearns, which recently downgraded Compaq to "neutral" from
"attractive." "A major accomplishment is really pulling together this team. Before
they were just losing people left and right."
Among them was Earl Mason, chief financial officer, who left with Pfeiffer. Enrico
Pesatori, who headed high-end hardware products, left a few months later for a
startup.
"Step two is, now you have a team, what's the strategy?" Neff asks.
Neff and others will be looking for answers Jan. 26, when Compaq holds its annual
meeting with analysts in Houston. Soup to nuts Compaq wants to be all things to
all people, selling everything from desktop and handheld computers to
supercomputers and system design. IBM Corp. and Hewlett-Packard Co. are
pursuing similar strategies.
"No one will be successful in this business being focused on a single business,"
Capellas says. "The Internet is about integration and being able to put all the pieces
together."
Companies and consumers need to access information by desktop computers,
notebooks or wireless devices. Compaq, like its rivals, also wants to sell services
such as Internet access.
Businesses need servers to run their computer networks and Web sites. They need
high-end servers and custom software to process transactions online 24 hours a
day without failure. And they need a way to store massive amounts of data
generated in this increasingly computer-driven world.
Compaq's heavy-duty Himalaya servers, a product of its $8.3 billion purchase of
Tandem Computers Inc. in 1997, power most of the world's stock exchanges and a
large portion of ATM networks.
While Compaq is struggling to gain a bigger slice of the high-end market, it's the
leading seller of less-expensive, Intel-based servers.
"We have all the pieces," Capellas says. "The challenge is wrapping it together.
The only two companies that have all these capabilities are Compaq and IBM."
Few question the strategy, but they wonder about Compaq's ability to pull it off.
Fighting wars on multiple fronts is risky business.
"Think about the top competition in each segment," says ABN-AMRO analyst Bill
Shope, who has a "hold" rating on the stock. "Dell focuses just on PCs and
Windows servers. Sun does nothing but compete in the midrange and high-end
Unix server market. EMC does nothing but storage.
"A lot of people say Compaq's PC business may not be as efficient as Dell's, but
they have an enterprise business. But that business is not as focused as EMC and
Sun."
Capellas doesn't buy the argument.
"We're trying to balance a lot of risk over time," he says. "People who've fallen
hardest, who are only in one part of the market, really got hurt when that market
turned. The upside is very good, but the downside is brutal." One persistent
criticism of Compaq has been over how it competes with Dell's more efficient
direct-sales model. The company now does about 40 percent of its U.S. sales
direct, but it will continue to sell products through retailers and resellers.
"Trying to do both is something we tried several years ago, and we found we didn't
do very well at either," says Dell spokesman T.R. Reid.
Compaq's desktop-business has been under assault by Dell and others, but it
clearly has some work to do in other areas, too. Its business-critical server sales
grew just 5 percent in the third quarter from the year before to $813 million. Less
profitable Intel-based servers grew 41 percent.
Storage revenue grew just 9 percent in the quarter. Services revenue declined 2
percent from the same period in 1999, and profits fell 16 percent.
"Until the services business drives a significant amount of our overall growth, there's
going to be some questions," Capellas acknowledged. An unlikely CEO After 18
months as CEO, Capellas is used to the questions. He was seen as an unlikely
choice for the top job, even though he was named chief operating officer after
Pfeiffer's departure.
The 46-year-old came to the company 2<20> years ago from database-software
maker Oracle Corp., where he sold its products to the energy industry. Before that
he was at management-software maker SAP, where he headed up supply-chain
management.
"I spent a fair amount of my career in sales," Capellas says. "Having been a
customer of (information technology) and selling it was a real benefit."
But he spent the majority of his working life in low-tech, "old economy" industries.
After graduating from Kent State University in 1976, Capellas got his start at
steelmaker Republic Steel Corp. and spent five years there. From 1981 to 1996,
Capellas worked for oil-field services giant Schlumberger Ltd. At both places, he
witnessed brutal, industry-changing downturns.
"You do have some perspective, and mentally maybe you're a little tougher when
you go through that," says Capellas, who joined Compaq as chief information officer
in August 1998.
Some competitors acknowledge privately that while Compaq has certainly been
down, they didn't really think it was going to be out for long. It's just too big. Despite
its stumbles, the company remains the No. 1 PC maker worldwide with about 14
percent market share, according to industry researcher IDC.
But things certainly were grim in Houston when Capellas was named chief
executive on July 22, 1999. Less than a week later, he took center stage and
reported one of the company's worst quarters ever -- a loss of $184 million.
In addition to Pfeiffer, most of the executive staff, a dozen people, left, either
voluntarily or involuntarily.
Capellas stepped in to pick up the pieces, hiring what talent he could from outside
the company. But most of the new team came from inside -- by necessity, not
choice.
Capellas had to work hard to persuade people to stay. He relied heavily on a
surprising command of the details about the business and contagious enthusiasm,
employees say.
"We were in a crisis financially and had new management," says Jim Milton, who
joined the company in 1998 when Compaq acquired Digital Equipment Corp. He
moved from California to Houston last year to become general manager for North
American operations.
"For me to stay, there had to be something compelling. What impresses me most
is how involved he was in the business down to the detail level. He's one of those
rare animals that can do both strategy and execution."
Compaq needed both. When Capellas took over, the company was losing major
customers to Dell and other rivals. It was little surprise that Dell soon overtook
Compaq as the largest seller of PCs in the United States, the world's biggest
market.
Dell has no doubt taken plenty of business, but Compaq says it has won back
more than 50 large corporate accounts during the past six months. Among them is
a recent three-year deal with San Antonio-based SBC Communications Inc. valued
at $250 million.
Wall Street analysts, such as Kurt King of Banc of America Securities, began
hinting recently that Compaq and others were getting smarter and again putting the
heat on Dell.
Dell Vice Chairman Kevin Rollins acknowledged to analysts in October that Dell "let
our competitors up off the mat." Since then, Dell has been slashing prices
dramatically, cutting into its competitors' sales and profits by forcing a price war.
"They're having problems again in their PCs," ABN-AMRO's Shope says of
Compaq. "I think the turnaround success that some people saw was premature."
Still, Capellas gets credit for putting a much-needed tourniquet on the hemorrhaging
of cash from its corporate-PC business and talent from across the company.
He also offered a new vision, telling employees Compaq would return to its
engineering roots, developing new products or what he called "cool stuff."
Among the first efforts was the iPaq. The stripped-down corporate desktop that
sells for about $500 has become a $1 billion-a-year business.
Last spring, Compaq followed with a handheld computer of its own design, to
challenge Palm Inc.'s popular devices. It's also selling a pager-size device that
plays digital music files.
"What Capellas did was energize the teams necessary to make iPaq happen," said
Ted Clark, who worked in Compaq's notebook division but now heads up its
wireless-Internet unit.
"Getting back to doing cool stuff was an important change. We probably had gotten
stagnant and risk-averse. It made a huge difference. It wasn't a message we'd heard
for a long time," Clark said.
Capellas also got financials back on track. Revenue in the five quarters since he
became CEO has risen 14 percent to $50.5 billion from $44.3 billion in the previous
five-quarter period. Earnings are up 60 percent to $1.6 billion from $1 billion.
He was rewarded for his efforts in September with the additional title of chairman.
But the toughest challenge lies ahead in convincing Wall Street that he and
Compaq are for real.
"He seems to be very good at getting the troops motivated," Neff says. "He has a
good take-charge attitude, but, no, he has not completely delivered to within
expectations of investors. Is he up to it? The jury's still out."
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