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Compaq's Latest Shakeup Generates Little Enthusiasm

The chairman promises $2 billion in savings, but some observers want more change.

Compaq

(CPQ)

investors must be wondering what Chairman Ben Rosen will do for an encore.

Thursday morning Compaq warned for the second consecutive quarter that it would miss analysts' earnings expectations by a wide margin. The Houston-based PC maker forecast a loss of up to 15 cents a share for its second quarter; consensus expectations had Compaq earning 20 cents a share, according to

First Call

. Compaq said second-quarter revenue and gross margins would be flat to lower compared with first-quarter levels of $9.4 billion and 24.7%, respectively.

The announcement wasn't well received by Compaq followers. "It's catastrophic, that's what this news is," says Paul Schupf, a money manager who had a short position but covered it before Thursday's announcement. "This news has nothing to do with Pfeiffer and all that personnel turnover. It's basically a dysfunctional company."

But Compaq stock, which has been trading near its 52-week low as

bad news piles up, was fractionally higher at midday, up 1/16 at 22 5/16.

Rosen has been trying to turn Compaq around since his April

ouster of CEO Eckhard Pfeiffer, but progress has been hard-won. Pfeiffer's departure came shortly after the boxmaker disclosed it would miss first-quarter earnings estimates, setting off a run of management turmoil at the onetime highflier. Financial chief Earl Mason departed the same day as Pfeiffer and a handful of other top-tier managers have since followed. The stock slipped into the low 20s from the low 30s around the time of Pfeiffer's departure and hasn't recovered.

Rosen's next step, outlined in Compaq's Thursday morning press release, involves a realignment aimed at eliminating $2 billion in operating costs. Compaq said it will take a substantial restructuring charge in its third quarter to cover the costs of the plan. The company also set up three internal divisions: enterprise solutions and services, to be headed by Enrico Pesatori; personal computer, to be run by Mike Winkler; and consumer, to be led by Mike Larson.

Merrill Lynch

analyst Steve Milunovich was unimpressed, reducing his rating to accumulate from buy and slashing his 1999 earnings estimate to a dime from $1.03 a share. "There continues to be a lack of leadership and we believe

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is taking share from Compaq," said Milunovich, whose firm has done no Compaq underwriting.

Schupf says Rosen -- who's also the company's acting chief executive -- needs to install a new board of directors. Currently, Rosen heads a three-man office of the chief executive that includes Frank Doyle and Robert Ted Enloe III. But make no mistake, say Compaq watchers, Rosen is in charge, just as he was when he dumped former CEO and co-founder Rod Canion in 1991 and inserted Pfeiffer into the top slot.

Compaq also established a dedicated organization to manage e-commerce activities, though it still hasn't decided when it will spin its

AltaVista

unit into an initial public offering. "That's about all Rosen's got left to use," says one money manager who requested anonymity and who has no position in Compaq.

Acting Chief Operating Officer Mike Capellas stressed in a morning conference call that the PC sector will continue to change and that Compaq "will rethink the way it thinks about personal computers." Capellas said this will provide Compaq room to grow in PCs and in its struggling services division.

Capellas said the PC transformation will offer Compaq an opportunity through selling peripherals and Internet access. Compaq recently announced Compaq.NET, an Internet service that costs $9.99 a month for Compaq PC buyers. Dell and

Gateway

(GTW)

already offer Internet service to customers.

"The steps we are taking will make Compaq a much stronger company for the new CEO, and we are very pleased with the list of candidates we have lined up," said Rosen, who didn't disclose when a new CEO would be selected. Compaq further said the second half of the year could be challenging as it sees "slackening demand in Western Europe and fierce pricing pressure, although our consumer products remain very strong," said Capellas.

What other steps can Compaq take to turn things around?

Job cuts

Free Internet access

AltaVista IPO

Spinoff or sale of Digital Equipment

Hire Michael Dell