What a Pfeiffer-less Compaq Looks Like

The PC giant will probably be stronger and more agile. But it must hire an effective leader -- like Rich Belluzo.
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Well, they did it.

Compaq

(CPQ)

(CPQ:NYSE) has

shown CEO Eckhard Pfeiffer and CFO Earl Mason the door. When I

wrote here last week that I thought Pfeiffer had to go, I nonetheless privately doubted the board would go that far.

Turns out that the Compaq directors were as tired of the Disappearing Duo as the Street is. Mason's departure wasn't much of a surprise -- as CFO, he pretty much had to fall on his sword after the financial-reporting debacle, especially after he and Pfeiffer failed to face the music for the earnings change when it was announced a week ago -- but, as much as I believe a Pfeiffer-less Compaq will be a stronger, more agile company, I'm still a little surprised the board acted so quickly and decisively.

Then again, history has a way of repeating itself -- especially when you have a strong chairman. In 1991, convinced that co-founder and CEO Rod Canion was moving too slowly, Compaq Chairman Ben Rosen -- he of Wall Street background and an early investor in both Compaq and another little startup,

Lotus

-- booted Canion and installed Herr Pfeiffer, who had been running European operations.

To give Pfeiffer his due, he did get the company off high center, and on the path again to industry leadership. Though Compaq, with sales of $31 billion in 1998, a tenfold increase since his arrival in 1991, is still far short of the overarchingly ambitious goal Pfeiffer set of $50 billion in sales by 2001, it has achieved tough volume goals in his term. Inventory-build-up problems and management inflexibility didn't help. Neither, probably, did his acquisitions, including

Thomas-Conrad

, a networking vendor acquired in 1996 and shut down last year, and both

Tandem

and

Digital Equipment Corp.

(including DEC's

AltaVista

Web search engine, which Compaq has said it will spin off, to enjoy the rewards of .com-dom).

Pfeiffer has been a highly visible industry leader while at Compaq's helm.

"The boy just overdrove his headlights one time too many," a long-time Compaq middle-manager told me this afternoon. "Time and again, he figured he'd decide something, give an order, and the world would stop, listen, then change. Doesn't work that way, and he learned that the hard way."

All through this past week, Pfeiffer maintained his commanding appearance and attitude at Compaq's Innovate '99 conference in Houston, as the company rolled out new plans for its Alpha chip line, acquired from DEC, and especially Pfeiffer's pet, the new Compaq NonStop eBusiness program, featured in Pfeiffer's Tuesday keynote at the conference.

Now someone else will be carrying out those initiatives.

Mason, the ex-CFO, has irritated more than a few on the Street with ambiguous statements that some thought were misleading. This past quarter has seen several examples of that. Moreover, Compaq leaders didn't seem to have their acts together, often telling contradictory stories.

With the earnings shortfall preannounced a week ago, when Compaq said first-quarter earnings would come in at 15 cents, not the 31 cents analysts had been led to expect (a number itself down from a higher one encouraged earlier in the quarter), Mason had to go, period.

Pfeiffer's failures of vision are not new.

Through the 1990s, Pfeiffer led the company deeper and deeper into a dead-end reliance on retailers and VARs (value-added resellers like specialized network contractors). At the same time, Michael Dell, Pfeiffer's long-time nemesis, was turning the industry inside out with his build-to-order/near-zero-inventory, direct-sales model. Then, when Pfeiffer caught on that PCs sitting in the inventory and distribution pipelines lost value every day -- and when he saw real-world PC selling prices in the marketplace plummeting -- he finally decided Compaq would sell direct, too.

Unfortunately for Compaq stockholders, the company's move toward a parallel direct-channel operation was hobbled by the three eternal verities of direct PC sales:

  • You can't maintain a viable single price structure across simultaneous direct and retail-store distribution.
  • Dragging the retailing mentality around in a sack on your back while you try to build a direct channel is self-defeating: You are destined to fail if you worry about what all those distributors and retailers are going to think.
  • Inventory is death in the fast-changing PC business: Customers' preferences, popular and up-to-date system configurations, and component prices are constantly changing. But making fast changes in all three areas, when you have to cope with an inventory of prebuilt machines, is like pushing a very long string: It just doesn't work.

Vide, Eckhard.

For now, the company will be run by a temporary triumvirate of Chairman Rosen, and Vice Chairmen Frank Doyle and Robert Ted Enloe III. Ben Wells, Compaq's present treasurer, will add acting CFO duties during the interim.

Look for this interregnum to be a brief one: Ben Rosen doesn't want to be Steve Jobs,

Apple's

(AAPL) - Get Report

permanent interim chairman, when he grows up. Though Compaq's Sunday announcement said Rosen, et al, will be on-site on the lush Compaq campus north of Houston on a daily basis, Rosen is eager to get back to California and his semiretirement activities with his VC shop

, Sevin-Rosen

, and his other directorships. Doyle, a

retired General Electric

(GE) - Get Report

veep, is no doubt similarly eager to get home.

Compaq has to find a high-profile, well-regarded leader, who will bring major changes to what has been a soporific company for the past two years. Perhaps they can persuade Rich Belluzo, late of

Hewlett-Packard

(HWP)

and now running

Silicon Graphics

(SGI)

, to jump once more -- a good choice, if unfortunately an unlikely one. There will be few appropriate candidates for this tough job, yet the Compaq board must move quickly to assure the Street that it understands the depths of Compaq's problems -- hardly all of Pfeiffer's making -- and are willing to make big changes down the line.

Compaq's price may move up Monday, as a frustrated and sometimes angry Wall Street celebrates Pfeiffer's departure. But the stock won't be able to hold on to gains absent early, decisive and encouraging action from Compaq's executive search.

With the departure of Pfeiffer, another chapter has closed, if a little too late, in the history of the PC business. Compaq's momentum from here on is a worrying question, though the company has sufficient strength and market position that it's unlikely to lose its No. 1 slot as the world's largest PC maker.

Profits may be something else. As the PC business gets harder, prices fall even more and perceptions of needs change among both individual consumers and corporate PC buyers, Compaq looks more and more like a company dressed for success in the early 1990s, not in the early 2000s and beyond.

Then again, Compaq

does

have a tough, determined chairman.

Jim Seymour is president of Seymour Group, an information-strategies consulting firm working with corporate clients in the U.S., Europe and Asia, and a longtime columnist for PC Magazine. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. At time of publication, neither Seymour nor Seymour Group held positions in the companies discussed in this column, although positions can change at any time. Seymour does not write about companies that are consulting clients of Seymour Group, or have been in recent years. While Seymour cannot provide investment advice or recommendations, he invites your feedback at

jseymour@thestreet.com.