Compaq Computer Corp chief executive Michael Capellas, who took over at the personal-computer maker in 1999, is hoping that his third reorganization will work.
Capellas, the former Oracle Corp executive whose two predecessors at Compaq were ousted by the board, last month sent a memo to employees outlining his latest effort to overhaul the company. His first two attempts failed to jump-start sales, and Compaq this year lost the title as the biggest PC seller to rival Dell Computer Corp.
PHOTO: BLOOMBERG
As PC sales slump, prices drop and profit margins narrow, Capellas is eyeing computer services, or setting up networks and managing systems and software for corporations. It's a strategy that helped International Business Machines Corp weather the slowdown in PC and computer demand -- and one that Compaq has tried and muffed before.
"They're doing a poor job of emulating" IBM, said Steven Salopek, a fund manager at Banc One Investment Advisors, which has reduced its Compaq shares to 4.4 million from 6.9 million, according to a March regulatory filing.
In Capellas's first reorganization, the Houston-based company last year reduced its distributors to four from more than 40, a move to mimic Dell, which sells PCs on the Internet and by phone.
In March, the company merged its corporate and consumer PC divisions and trimmed its workforce by 5,000.
"He took the helm of a company that needed open-heart surgery and his arsenal was a scalpel," said Ashok Kumar, an analyst at US Bancorp Piper Jaffray. "He should have brought in a hatchet." The changes didn't produce the expected increases in efficiency. With sales declining, Compaq has increased its job cuts this year to 8,500 workers, or 12 percent of its employees.
"These guys have a distribution problem and they've gone through a number of iterations mainly trying to compete against Dell," Salopek said. "They haven't executed." Capellas, 46, declined to be interviewed for this story, said Compaq spokesman Steve Sievert.
Compaq's past efforts to expand in services leave it far behind IBM, the biggest seller of computer hardware and related services. In 1998, Compaq bought Digital Equipment Corp for about US$9 billion, an acquisition meant to take on IBM with Digital's high-performance computers and services business. Instead, Compaq struggled to integrate Digital, and many consultants left the company after the sale.
In the first quarter, Compaq's Global Services revenue rose 4 percent to US$1.94 billion, or 21 percent of total sales. By comparison, IBM generated US$8.74 billion of its revenue from services in the second quarter, a 6.8 percent increase from a year earlier as a backlog of orders generated a steady stream of revenue. IBM's shares have climbed 23 percent this year, compared with Compaq's 7 percent drop.
In his June memo, Capellas wrote that low-end servers and storage devices, like PCs, are becoming commodities, and that's why Compaq must differentiate itself by selling services and software.
The company, already strong in telecommunications and financial services, is now targeting the entertainment and health care industries.
Capellas envisions 30 percent of Compaq's revenue coming each from PCs, services, and servers and storage devices plus 10 percent from software sales. The plan includes spending as much as US$500 million on computer-services companies and boosting services sales to reach 40 percent annual revenue growth.
Some of Capellas's efforts are paying off. Yesterday, the company said it won a three-year contract to supply PCs, servers and related services to Bank of America Corp, the third-largest US bank. The bank said it was switching to Compaq, which can supply the hardware and services, from a company that only provided services.
But Capellas knows what he's up against.
"We're in the midst of one of the most difficult periods in the history of our industry and our company," Capellas wrote in his memo.
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