COMPAQ-DIGITAL: LET THE SLIMMING BEGINCan the combine be made as cost-efficient as the PC industry?
Eckhard Pfeiffer is on his way to achieving his biggest dream--vaulting Compaq Computer Corp. (CPQ) into the top three of the computer industry. On June 11, Compaq shareholders are expected to bless the $9 billion merger with Digital Equipment Corp. (DEC) that will make Compaq No.2 behind IBM (IBM).
On June 12, CEO Pfeiffer will start to lay out his plan for making sure his massive new company doesn't become a bloated, inefficient giant. The basic idea is to sell corporate customers bundles of computers, services, networks, and software--the so-called ''enterprise'' systems that companies such as Digital traditionally offer--while maintaining the lean overhead of the PC industry. ''We are creating a new breed of computer company that takes the PC model of efficiency to the enterprise market,'' he says. Pfeiffer won't reveal his cost target, but analysts expect him to set the newly combined Compaq's sales overhead at 17% of revenues--well below Digital's 24% or the 21% at IBM and 28% at Sun Microsystems.
BIG CHOP. Getting there won't be easy--or pretty. First, the merger will chop some 17,000 people from the combined companies' 67,000-member workforce in the next six months, at a projected cost of $1 billion. Among them will be top Compaq executives, including Senior Vice-Presidents Robert W. Stearns and Alan Lutz. Compaq won't confirm, but sources say Pfeiffer also plans to replace his disk- storage, server, and PC-division execs with Digital people.
On the rise are such Digital execs as John Rando, named senior vice-president for services, William D. Strecker, named senior vice-president for technology and corporate development, and Thomas A. Siekman, named senior vice-president and general counsel. On the retirement list: Digital Chief Executive Robert B. Palmer.
Pfeiffer will also close a handful of factories where the companies overlap. But Wall Street is looking for bigger cuts, since Compaq's costs are already significantly higher than those of Dell Computer Corp.'s (DELL). Some are asking: How can Compaq absorb the relatively fat Digital operation and push downcosts in its core business, too? Indeed, Compaq already has an earnings problem. For the first quarter, it reported profits fell 96%, to $16 million, as a result of price cutting and dealer incentives. Its shares are down 22% since February, even as the Standard & Poor's Computer Systems Index has climbed 10%.
BIG LOSS. The PC price war shows no sign of letup, and despite efforts to tighten up inventories, Compaq still has as much as seven weeks of supply in some products. ''Compaq today is caught with its pants down,'' says Piper Jaffray Inc. analyst Ashok Kumar. Analysts now expect the company to have a $70 million operating loss in the June quarter--as revenue slips to a projected $5.2 billion, from $5.7 billion in the first quarter.
Pfeiffer dismisses the doubters. ''I am extremely comfortable we can handle efficiency and strategy,'' he says. And in his 35 years in computers, he has proved skeptics wrong before. This time, a big factor will be how well he can run Digital's high-margin services business, which includes 22,000 technical-services experts, who can help sell bundles of computers, software, and services. One executive involved in the merger says that Compaq is ''counting on services to drive the company's repositioning.''
Other promising pieces of the Digital portfolio include disk- storage systems, where the new Compaq will hold the second-largest market share, with $4 billion in revenue; Internet servers, where Digital's Alpha servers are already No.2; and server computers running the Unix operating system. Critically, these are all areas where margins are as high as 40%. ''These are the strategic areas to watch,'' says Compaq Chief Financial Officer Earl L. Mason.
Pfeiffer can count on support from Digital's long-suffering customers. After a decade of downsizing and retrenching at Digital, customers breathed a sigh of relief when Compaq showed up, says Joseph Pollizzi, president of the U.S. chapter of Digital's user group. ''What we need is [somebody] to move products and get the company's message out. Those are all things Compaq is very good at,'' he says. Pfeiffer's job will be to make sure it's better than ever.
By Gary McWilliams in Houston
Updated June 11, 1998 by bwwebmaster
Copyright 1998, Bloomberg L.P.