Compaq's Top 2 Leaders Resign

How bad is it, really?

That's what Compaq (CPQ) investors must be asking themselves after hearing the news today that the company's top two leaders have jumped ship.

"I'm totally shocked, not so much about [CFO Earl] Mason leaving, but that [CEO Eckhard] Pfeiffer is resigning," says John Mannino, a Compaq shareholder who lives in Philadelphia. "From a shareholder's standpoint, there has to be a lot more left unsaid from what was announced last week."

After the company preannounced nine days ago that its first-quarter earnings would be less than half of analysts' expectations, institutional investors were calling for Mason's head. But no one thought this one unexpectedly weak quarter would send Pfeiffer packing as well.

Pfeiffer, who has been with the company since 1983 and who as CEO throughout the 1990s led it to a leading position in the PC space, submitted his resignation, according to a statement hastily released by the Houston-based company this afternoon.

Chairman Ben Rosen, along with Vice Chairmen Frank Doyle and Robert Ted Enloe III, will oversee the day-to-day duties of the chief executive's office, Compaq said in its statement. "Under Ben's guidance, I know this company will realize its potential, transforming the industry yet again," Pfeiffer said. Rosen, who founded Compaq, hired Pfeiffer to lead the company in 1991.

At least Mason seemed to be ready for the news. The former Inland Steel CFO also resigned, taking a job as CEO "of a company in an unrelated industry," Compaq's statement said.

So far, Wall Street has decided the bad news coming out of Compaq this month is mostly company-specific. While Compaq's stock fell 30% over the last week, Dell's (DELL) was only off a fraction, and Gateway (GTW) was off 8%. Still, concerns were mounting that severe pricing pressures and the continuing commoditization of the PC industry will spell trouble for all companies, including Dell. The top PC companies -- in terms of market share, they are Compaq, Dell, Gateway, IBM (IBM) and Hewlett-Packard (HWP) -- all have been rapidly expanding into other areas (storage, servers, workstations) to compensate for any shortfall in PC profits.

But the news that Pfeiffer -- who has led this PC revolution almost more than any other executive -- is resigning could be a blow for all those who feel the PC will remain the main driver of this more than decade-long technology stock run.

"This really begs the question of what's going to happen to the PC industry,'' says Dan Niles, an analyst with BancBoston Robertson Stephens. "There were rumors that Mason was under a lot of pressure, but the fact that Pfeiffer wouldn't stick around means there is something more behind it." Niles, who downgraded Compaq to a buy from a strong buy last Monday, suggests that the company could once again be seeing channel inventory levels increasing. In December 1997, Niles foresaw a buildup in Compaq's inventory.

Of course, H-P and Dell went out of their way this month to say their PC business was still doing well in 1999. IBM is set to report earnings on Wednesday in what is sure to be a very interesting conference call. (Compaq, by the way, also reports first-quarter earnings before the open Wednesday.)

For some professional money managers, Compaq's management has always been a question mark. "My expectations have been coming down ever since Mason came on board in 1996," says an institutional money manager who asked not to be identified and who says he has no position in the PC group. The manager, who spoke with TSC last week, points to how the company is involved in six lawsuits, alleging that top executives sold off stock because they knew bad news was coming.

Compaq's Mason, for example, sold 265,000 shares, worth over $12 million, on Feb. 1, according to data tracker Baseline. Mason, who joined Compaq from Inland Steel in May 1996, wasn't immediately available for comment. Compaq Treasurer Ben Wells will become the new acting CFO.

Pfeiffer, despite this quarter's speed bump, seemed well on his way to making good on his audacious goal of $50 billion in sales by 2001, generating $31 billion in sales in 1998, up from just $3 billion in 1991.

But if recent history is any evidence, Rosen may have grown tired of Pfeiffer's boasts. In early 1991, Rosen came out with a report that proved Compaq was spending too much on producing PCs. He wanted to institute changes in the manufacturing process, but then-CEO Rod Canion resisted and Rosen replaced him with Pfeiffer.

Who will replace Pfeiffer? That's the multibillion-dollar question shareholders will be asking Monday.

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