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Compaq picks new CEO
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July 22, 1999: 6:32 p.m. ET
Compaq chief operating officer Capellas chosen to head company
By Staff Writer Randall J. Schultz
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NEW YORK (CNNfn) - Compaq Computer Corp. stuck with one of its own, choosing current chief operating officer Michael Capellas on Thursday, ending a three-month search for a new leader for the troubled firm.
Capellas replaces Eckhard Pfeiffer, who was ousted by Compaq, the world's second-largest computer maker, in April after earnings fell far short of Wall Street expectations. In the interim, the company has been run by Chairman Benjamin Rosen, who remains with the company in that capacity.
"We set out to find the ideal CEO and we discovered him right here at Compaq, hard at work," said Rosen.
At a New York press conference, Capellas stressed the fact that Compaq continues to have a strong business but acknowledged the need for improvement.
"Clearly, we have some challenges in front of us," said Capellas.
While Capellas is an insider, he is hardly a veteran  of Compaq. He joined the company less than a year ago as chief information officer and was named chief operating officer June 2. Previously, he had stints at network computer company Oracle (ORCL) and software firm SAP America.
"Capellas is in some ways an outsider there," said Kurtis King, technology analyst at NationsBanc Montgomery Securities.
"He's not behind the problems of the past couple of years. I've heard good things about him and in the short time he's been there he's actually contributed positively to the company."
The company took more than three months to find a successor to Pfeiffer. Capellas will be in charge of rescuing the company's earnings and restoring investor confidence in its stock, which has fallen more than 50 percent since its all-time high in January.
The choice of an insider was somewhat of a surprise to Wall Street, which had expected former TRW Inc. executive Peter Hellman to be named the company's new CEO.
However, Compaq Chairman Rosen was adamant that no one turned down the job first and Capellas was the man he wanted.
"I want to emphasize that there was only one choice. This was the only offer that we made," said Rosen.
Starting with the fundamentals
Capellas takes over a company which needs a complete overhaul, not a tweaking of a division or two, according to King, who said he will have to fix the company's basic approach to its fundamentals.
The Houston-based company has battled weakening consumer demand for its personal computers and narrowing profit margins as overall PC prices have fallen.
In its last quarter, the company posted earnings that were less than half of what Wall Street analysts had been expecting.
In addition, the company warned in June that its upcoming quarterly earnings report, which is due to be released Wednesday, will show it lost 15 cents per share. Compaq hadn't registered a loss since 1991.
During this tumult, Compaq announced a restructuring plan to divide its company into three divisions, each focused on a particular market segment.
Capellas was put in charge of the restructuring process and it was during this time that he apparently caught the eye of Rosen as a possible CEO candidate.
While all computer makers have struggled with ever-shrinking profit margins as a result of falling prices, Compaq has had particular problems dealing with a changing landscape.
Where Compaq once stood head and shoulders above the PC world, it has seen its market share eroded by nimble competitors like Gateway (GTW) and Dell Computer (DELL).
Companies like these have found they can sell computers directly to customers over the Internet or via catalog, utilizing a build-to-order strategy which eliminates much of the excess inventory and unwanted models.
Compaq, say analysts, has continued to rely on a channel of resellers, basically middlemen who sell its computers but add to the overall cost structure of its production.
Compaq has tried to adopt some of the direct sales models that have been so successful for competitors like Dell, only to retreat in the face of criticism from resellers, who stand to lose business if customers buy directly from the company.
Still, Capellas fired a warning shot at resellers, saying he would make increasing direct sales a priority. Currently, Compaq sells 16 percent of its computers in this manner. Capellas hopes to increase that to 25 percent by the end of the year and up to 40 percent in the long term.
However, he felt the role of the reseller channels was still important. "We will continue to use our channel to add value. Some of our smaller customers want the value-added service that channels provide."
In addition, the company has managed to reduce some of its inventory problems, but still lags competitors. If Compaq has four weeks of inventory, Dell, which builds to order, has none, resulting in lower production costs and a generally stronger bottom line.
As Compaq has worked to cut inventory, it has cut staff as well. The company set a target of 17,000 job reductions, 15,200 of which have already taken place. However, Capellas said he was planning no additional cuts above that 17,000 figure.
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