Compaq Computer Corp

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COMPAQ COMPUTER CORP.

Compaq Computer Corp. is one of the largest personal computer (PC) manufacturers in the world. Among diversified computer companies like IBM and Hewlett-Packard, Compaq ranks third. Its products include desktop PCs, notebook computers, the Alpha operating system and Alpha chips, handheld computers, monitors, networking and communications equipment, parallel-processing computers, printers, servers and server software, storage products, and workstations. Compaq also offers consulting, outsourcing, project management, system design, system integration, and e-business services. After facing struggles in the late 1990s—involving troubles integrating its $8.45 billion purchase of Digital Equipment Corp. and being slow to upgrade its product delivery system to take advantage of Internet-based technology—the firm began retooling itself. Its "Everything to the Internet" initiative, launched by CEO Michael Capellas in 2000, reflects Compaq's new focus.

RAPID GROWTH AS A PERSONAL COMPUTER MANUFACTURER

Joseph R. Canion, James Harris, and William H. Murto left their management positions with Texas Instruments in 1982 to found a PC manufacturing business. The new firm, named Compaq Computer, was partly funded by high technology venture capitalist Sevin-Rosen Partners. An initial public offering the next year secured $67 million in additional capital. Sales totaled $111.2 million, a record for first full-year sales of a U.S. business.

A major component of the fledgling company's early success was its ability to bring new products to market in roughly six to nine months, must faster than the timeframe by which much larger competitors like IBM Corp. operated. In fact, the industry average for turning a concept into a product on the shelves was 12-18 months. Annual revenues in 1984 reached $329 million. Nearly 150,000 Compaq PCs were shipped that year, and the firm established sales units in France, Germany, and the United Kingdom.

In 1985, Intel agreed to form a joint venture with Compaq to develop a new microprocessor. The resulting Deskpro 386 topped the speed of IBM's fastest PC threefold. Less than four years after its inception, Compaq set another record by becoming the youngest firm to ever join the Fortune 500. International expansion continued with the establishment of a printed circuit board assembly facility in Singapore and a manufacturing plant in Scotland. As the 1980s came to a close, Compaq found itself the second-largest maker of PCs for European businesses.

Standard & Poor's Composite Index of 500 included Compaq in 1988. Compaq's SLT/286 laptop computer, shipped that year, was an overnight success, and the firm unveiled the Compaq LTE, its first notebook PC, in 1989. Growth continued with the purchase of the Stirling, Scotland-based Wang facility, which soon would house service operations. Compaq's efforts to enhance the speed and ability of its machines to handle complex applications led it to develop the Extended Industry Standard Architecture (EISA), which the firm began using in its servers by the turn of the decade.

Geographic expansion efforts extended to Latin America in the late 1980s. International operations were securing more than 50 percent of annual revenues by 1990. That year, new units were established in Austria, Finland, and Hong Kong. Compaq also reached licensed dealer agreements in Argentina, Germany, Hungary, Mexico, Trinidad, and Yugoslavia. The firm made its first inroads into the Asian PC market, particularly in Japan, in 1991.

Although new product development in the early 1990s continued with the launch of Deskpro/M computers and EDS, the industry's first worldwide systems-integration product, the firm struggled with organizational and managerial issues. As a result, Compaq initiated a restructuring that included laying off 14 percent of its employees and consolidating its operations into two product groupings: the Personal Computer Division, which accounted for 90 percent of sales, and the Systems Division. When Compaq posted a loss of $70 million in 1991, company co-founder Canion was ousted as CEO and succeeded by an executive vice president, Eckhard Pfeiffer. During the management shakeup, the last remaining company founder, Harris, also left Compaq.

Although layoffs continued, for the most part Compaq considered its reorganization complete and introduced 16 new products. Throughout the early and mid-1990s, the firm began scattered efforts to move into new markets, including developing its first printer products and inking a video conferencing joint venture agreement with PictureTel. Completing its largest deal to date, Compaq acquired Tandem Computers Inc. in 1997 for $4 billion. Tandem's server technology allowed Compaq to better meet the needs of its business clients, who were seeking more fully integrated products from PC makers, and also set the stage for future e-commerce ventures. A year later, Compaq topped the Tandem deal by paying $8.45 billion for Digital Equipment Corp., gaining access to that company's computer services and data storage operations.

TRANSITION TO A DIVERSIFIED COMPUTER COMPANY

The Digital Equipment acquisition vaulted Compaq to the ranks of industry giants like IBM and Hewlett-Packard Co. Revenues jumped from roughly $25 billion in 1997 to $31 billion in 1998. More importantly, sales from computer services operations grew from $462 million to $3.7 billion over the same time period, reflecting Compaq's decreasing reliance on the increasingly competitive PC market. The deal also marked Compaq's first real Internet undertaking as it gave the company control of Internet search engine Alta Vista.

Although it didn't unveil an actual e-commerce plan until mid-1999, rather late in comparison to most competitors, Compaq did begin an e-commerce push in 1998. The firm reached an agreement to integrate its Proliant server with Microsoft's Site Server Commerce, Raptor Systems Inc.'s Firewall, and Inex Corp.'s merchant software to form various e-commerce "bundles." Compaq's Tandem unit also launched iTP security software.

When problems surfaced regarding the integration of Digital Equipment with Compaq—mainly culture clashes and an inventory glut—surfaced in 1999, the board replaced Pfeiffer with Chief Information and Operations Officer Michael Capellas in April. Recognizing that the sales and distribution model that had served the PC maker well was no longer serving the more diverse operations of Compaq, Capellas began developing a new focus for the firm with an eye toward the Internet. He reorganized the firm into three separate business units. Enterprise Solutions and Services offers e-commerce services, as well as business critical application servers, industry standard servers, and storage devices for very large systems. The two remaining units, Commercial Personal Computer Group and Consumer Group, oversee PC development for their respective markets, a key focus of both being Internet access. Flint Brenton was named vice-president of a newly formed e-commerce unit in August.

Several products emerged after the restructuring, the most popular being the iPAQ pocket PC, shipped in April of 2000. The handheld unit allows users to connect to the Internet or to a corporate network using wireless technology. Compaq also began working with CMGI on a business-to-employee Web-based marketplace called Freeup that will build Web sites for groups of employees such as information technology workers.

To further promote its new "Everything to the Internet" focus, in October of 2000 the firm launched a $300 million marketing program that "points to Compaq's latest technology, such as its Proliant servers and storage systems, and a new generation of wireless local-area network devices, such as the hand-held iPaq computers. Those products are at the fore-front of Compaq's efforts to be both at the heart of the Internet's infrastructure and at the edge of the growing wireless Web," stated the Houston Chronicle's Tom Fowler.

In 2000, PCs brought in less than half of Compaq's sales, which totaled roughly $42 billion. While the firm had succeeded in diversifying its operations, in 2001 analysts remained uncertain about what impact Compaq's decision to compete in so many different markets—including all sizes and shapes of PCs, networking devices, and e-commerce products and services—would eventually have on its bottom line. Talks began in spring of 2001 to discuss the acquisition of Compaq, by Hewlett-Packard, for $24 billion. As of late 2001 that deal was still pending.