Compaq is vulnerable
If you accept the proposition that the stock market is an accurate appreciation of a company's prospects, then Compaq is the lamest of lame ducks. The company's stock ended the week at $27.63, a far cry from its 52-week high of $39.78.
The cry is about to turn into a shriek: After the stock market closed Friday, Compaq warned that first-quarter sales will fall below Wall Street's expectations. Sales are going to be flat with last year and earnings will break even.
Had the same news emanated from some weak-sister computer maker, it wouldn't have been all that bad. But considering that the announcement came from Compaq, a company that has reported little but good news since 1991, this is an unmitigated disaster.
CEO Eckhard Pfeiffer, who has some explaining to do, gets an "A" in creative writing by laying the blame on "stiff competition" in the company's North America commercial business. Left unsaid was the embarrassing admission that Compaq's vaunted forecasting system had blown a gasket and failed to accurately gauge demand.
To make matters worse, Compaq's resellers are sitting on a pile of aging computer inventory -- a fact disputed by a company deep in denial.
"We're not asking our resellers to commit unnatural acts," says one Compaq executive. "Resellers are in lockstep with us. There's inventory in the channel but there's a reason for that ... they're taking product because they want it."
Interesting spin, but I don't believe it -- and neither does the stock market. In after-hours trading, shares of Compaq were down a couple of bucks as investors braced for a wild ride Monday morning. The truth is that vendors such as Compaq are handing out all kinds of marketing inducements to their channel partners, but the tactic is not bearing fruit. Just like Intel, which on Thursday warned about slowing sales, Compaq has to wait until its distribution channel works through an inventory imbalance.
Apres moi, le deluge?
None of this means Chairman Ben Rosen's about to hand Pfeiffer a one-way ticket to unemployment land. But for the first time in a long time, Compaq is scrambling to catch up.
The company will soon close its upcoming $9.6 billion acquisition of Digital. Beyond the obvious benefits of picking up a first-class enterprise sales and service organization, the deal should prove to be a huge boon because there's little overlap in the composition of the two companies' customers.
Compaq hopes the deal will open doors to many new enterprise accounts where it battles Hewlett-Packard and IBM. Indeed, analysts say the addition of Digital could prove to be a boon as it competes for business in large accounts employing 250 or more people
But the competition is doing its best to rattle Digital's customers. Last month, Digital's lawyers forced HP to withdraw a biting advertisement that raised a red flag about the wisdom of the merger. Now if Digital (or Compaq) could only get its lawyers to convince nervous IT managers that everything would be fine.
"On paper, this looks like it could be a winner but I've still got a lot of questions. And no one's done a good job explaining what's going to remain in the product line and what's going to go," said an IT director with one Fortune 500 company. "Meanwhile, I've got Sun, IBM, and HP calling me every other day, just dying to get in here."
Given Compaq's underwhelming embrace of Digital's Alpha, that's a good hardball business pitch. If you were an IT director about to plunk down tens of millions of dollars, would you stick with Digital? More than any temporary inventory imbalance, the DEC dilemma is a challenge that will test Compaq's management as never before.
And if the brass can't come up with an effective answer, the beating to be handed out to the company's stock next week will be the first of many.