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Pfeiffer is out at Compaq
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April 19, 1999: 4:37 p.m. ET
CEO departs as No. 1 PC maker struggles with strategy, profit shortfall
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NEW YORK (CNNfn) - In a stunning move, Compaq Computer Corp.'s board of directors ousted Chief Executive Officer Eckhard Pfeiffer, calling into question the company's strategy to stave off intense competition in the industry.
The move comes nine days after the company disclosed that first-quarter profit would be only half of what Wall Street analysts had been expecting.
Compaq (CPQ), which had closed at 30-7/8 before the announcement, has since dropped into the low 20s. The company's shares were down 11/16 at 22-3/16 in late Monday trade.
Compaq over the last three years
Pfeiffer left the company after Benjamin Rosen, Compaq's chairman and co-founder, advised him that the board had requested his resignation. The move marked the second time Rosen, widely regarded as the behind-the- scenes power broker for Compaq, has removed a chief executive officer. In 1991, Rosen ousted Joseph Canion, the man who helped design the first Compaq computer on a restaurant place mat.
Wall Street analysts weren't surprised by Sunday's developments, noting that the Houston-based company has had trouble streamlining its distribution model well enough to compete with such companies as Dell Computer Corp. (DELL).
Analysts speculated that the company's main priority will be to find a leader to get Compaq's operations under control.
"They need somebody to unravel their distribution problems, especially in the mid-section of their product line," said Lou Mazzucchelli, an analyst at Gerard Klauer Mattison.
Art Russell, an analyst at Edward Jones, said Compaq will be best served by finding an outsider with strong managerial skills, rather than an industry visionary.
"I think they're looking for someone with operations expertise, someone who can handle issues relating to supply-chain management, inventory management and reseller partners," Russell said.
A Compaq spokesman said the company has retained recruiting firm Heidrick & Struggle and a second, unidentified firm to search for a new chief executive.
Rosen, Compaq's chairman, said the company is conducting a worldwide search "for the best available candidates," indicating that the company would consider candidates both from outside and within Compaq.
Tech firm CEO's on the short list
Among the potential candidates, according to published reports, include Richard Belluzo, Silicon Graphics Inc. (SGI) CEO; Richard Notebaert, Ameritech Corp. (AIT) CEO; and John Thompson and Sam Palmisano, two senior executives at IBM Corp. (IBM).
But Russell noted that a computer industry insider shouldn't be a prerequisite.
"Bringing in good management is important no matter what industry the CEO comes from," Russell said, noting that IBM's CEO Louis Gerstner joined the company from RJR Nabisco (RN).
Rosen said the CEO search was expected to take several months, and that the CEO-designate would be consulted by the board before hiring a new chief financial officer, "so that they are compatible."
Removal was in the works
Even before Compaq issued its earnings warning earlier this month, the company's board was considering Pfeiffer's removal. Rosen said the board met at the end of March and discussed whether Pfeiffer should continue as chief executive.
Rosen questioned Pfeiffer's decision making, telling CNNfn it had not been "as crisp as it might have been."
The board met again with Pfeiffer Saturday; he submitted his resignation Sunday.
In announcing the developments, the company chose to emphasize its new leadership lineup -- the establishment of a new "office of the chief executive" to oversee day-to-day operations until the selection of a new CEO.
The office of the CEO will involve a triumvirate of corporate directors -- Rosen, a co-founder of Compaq, and vice chairmen Frank P. Doyle and Robert Ted Enloe III.
Analysts not surprised
Wall Street analysts took the developments in stride.
"I am not surprised," said Vadim Zlotnikov, computer analyst at Sanford C. Bernstein. "Anytime a quarter produces upheavals like this last one did for Compaq, there is a chance there will be some blood on the floor."
Dan Niles, an analyst at BancBoston Robertson Stephens, warned not to expect a quick fix for the company's problems.
"The board of directors, unlike most boards that are out there, is taking some decisive action to try to fix the problem… and they've given it over a year now and it hasn't gotten fixed," Niles said.
Earnings warning was final straw
Compaq issued its earnings warning on a Friday night after the markets had closed, saying it would report profit of about 15 cents per share rather than the 31-cent consensus of analysts polled by First Call.
Pfeiffer insisted that overall weakness in the personal computer business was responsible for his company's earnings disappointment.
But analysts questioned that argument, noting the continuing success of competitors such as Dell and Gateway Inc. (GTW) indicated that Compaq's problems appeared to be company-specific.
"Laying the problem on the doorstep of an industry slowdown was the final straw, because it was hard to find the data to support that claim," Mazzucchelli said.
Distribution problems
Analysts blamed Compaq's earnings shortfall in part on its failure to adopt successful direct-sales and e-commerce models, which have propelled the sales of competitors such as Dell and Gateway.
Analysts noted that Compaq's insistence on selling certain PC lines through multiple venues merely add more complexity and costs to its distribution model.
"They've been slower than their competitors to take the costs out of the distribution model," said Richard Gardner, an analyst at Salomon Smith Barney. "They went into the first quarter at a disadvantage from a cost perspective."
Compaq seemed to have solved problems surrounding backlog in its channel inventory, particularly when it reported better-than-expected fourth-quarter earnings.
But Gardner noted that while Compaq has gotten its inventory issues largely under control, its efforts haven't been nearly enough compared with the rest of the industry.
"They have below four weeks of inventory," he said. "The problem is their competitors have two weeks of inventory, and Dell has zero weeks. That means you can't afford to have any kind of cost disadvantage."
Meanwhile, companies like Dell have been taking customers away from its mid-level PC products. But Mazzucchelli noted Compaq still needs to retain its hybrid model of selling computers direct from the company and through a channel of resellers because of its high-end product offerings.
"They have to have a hybrid model because of their products on the high end," Mazzucchelli said. "But they need more direct selling in their desktop PCs and notebooks."
Compaq has also had difficulty digesting the large acquisition of Digital Equipment Corp. and its AltaVista Web portal. Gardner said Wall Street won't know for a few weeks how well the Digital unit has performed. But Mazzucchelli said the Digital deal had nothing to do with Pfeiffer's exit.
"The Digital merger was a great strategic move because Compaq wants to position itself in the worldwide information technology market," Mazzucchelli said. "This solely has to do with what Dell is doing to the mid-section of Compaq's product line."
$6 million man
Although Pfeiffer leaves Compaq suddenly, he does exit with a sizable amount of cash.
According to Compaq's proxy statement, which the company filed last month with the Securities and Exchange Commission, Pfeiffer stands to receive approximately $6 million in severance pay.
Pfeiffer will also be able to exercise about 13.4 million stock options, which were worth about $410 million when the proxy was filed.
Under conditions set in Pfeiffer's contract, he is allowed to receive his severance package upon "his resignation following his removal as Chief Executive Officer or a change of control of Compaq."
Financial chief also resigns
Mason, who is also a senior vice president, indicated he will become chief executive officer of a company in an unrelated industry, Compaq said. Ben Wells, Compaq's treasurer, has been named acting CFO while the company searches for someone to occupy that office permanently.
Compaq is expected to report its first-quarter results Wednesday. It's annual meeting of shareholders is planned for Thursday. 
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Compaq
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