Compaq Computer Corp - Transition To A Diversified Computer Company

TRANSITION TO A DIVERSIFIED COMPUTER COMPANY

The Digital Equipment acquisition vaulted Compaq to the ranks of industry giants like IBM and Hewlett-Packard Co. Revenues jumped from roughly $25 billion in 1997 to $31 billion in 1998. More importantly, sales from computer services operations grew from $462 million to $3.7 billion over the same time period, reflecting Compaq's decreasing reliance on the increasingly competitive PC market. The deal also marked Compaq's first real Internet undertaking as it gave the company control of Internet search engine Alta Vista.

Although it didn't unveil an actual e-commerce plan until mid-1999, rather late in comparison to most competitors, Compaq did begin an e-commerce push in 1998. The firm reached an agreement to integrate its Proliant server with Microsoft's Site Server Commerce, Raptor Systems Inc.'s Firewall, and Inex Corp.'s merchant software to form various e-commerce "bundles." Compaq's Tandem unit also launched iTP security software.

When problems surfaced regarding the integration of Digital Equipment with Compaq—mainly culture clashes and an inventory glut—surfaced in 1999, the board replaced Pfeiffer with Chief Information and Operations Officer Michael Capellas in April. Recognizing that the sales and distribution model that had served the PC maker well was no longer serving the more diverse operations of Compaq, Capellas began developing a new focus for the firm with an eye toward the Internet. He reorganized the firm into three separate business units. Enterprise Solutions and Services offers e-commerce services, as well as business critical application servers, industry standard servers, and storage devices for very large systems. The two remaining units, Commercial Personal Computer Group and Consumer Group, oversee PC development for their respective markets, a key focus of both being Internet access. Flint Brenton was named vice-president of a newly formed e-commerce unit in August.

Several products emerged after the restructuring, the most popular being the iPAQ pocket PC, shipped in April of 2000. The handheld unit allows users to connect to the Internet or to a corporate network using wireless technology. Compaq also began working with CMGI on a business-to-employee Web-based marketplace called Freeup that will build Web sites for groups of employees such as information technology workers.

To further promote its new "Everything to the Internet" focus, in October of 2000 the firm launched a $300 million marketing program that "points to Compaq's latest technology, such as its Proliant servers and storage systems, and a new generation of wireless local-area network devices, such as the hand-held iPaq computers. Those products are at the fore-front of Compaq's efforts to be both at the heart of the Internet's infrastructure and at the edge of the growing wireless Web," stated the Houston Chronicle's Tom Fowler.

In 2000, PCs brought in less than half of Compaq's sales, which totaled roughly $42 billion. While the firm had succeeded in diversifying its operations, in 2001 analysts remained uncertain about what impact Compaq's decision to compete in so many different markets—including all sizes and shapes of PCs, networking devices, and e-commerce products and services—would eventually have on its bottom line. Talks began in spring of 2001 to discuss the acquisition of Compaq, by Hewlett-Packard, for $24 billion. As of late 2001 that deal was still pending.