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Compaq-Gateway deal off

The PC maker pulls out of the deal with the direct marketer, but questions over its competitive strategy remain.

Compaq Computer (CPQ) has reportedly stepped away from a deal with Gateway 2000 (GATE), but questions remain over what the PC maker will do as it feels the heat from fast-rising competitor Dell Computer (DELL).

The leading personal computer manufacturer and the direct marketer reportedly dropped their merger deal after disagreements over Gateway executives reporting to Compaq officers, according to an article in Time magazine.

The issue of Compaq seeking a direct-marketing acquisition stems, to a large extent, from Dell competition in corporate business.

Dell, for example, has claimed the No. 4 spot in worldwide sales with five percent of the market in the first quarter of this year. Dell also sells servers and over the last several years has made it increasingly easy for corporations to buy equipment over its Web site.

That formidable challenge has raised questions surrounding Compaq's efforts to jump into the more cost-efficient direct-marketing route. Compaq does offer some direct sales through its DirectPlus line of Deskpro PCs, but this has remained a relatively low-profile effort.

"They're interested in the efficiencies of the direct model," according to Bruce Stephen, an analyst at International Data Corp. (IDC). Compaq is trying to create a more efficient pipeline into the small-business, home, and government markets, said Stephen.

Moreover, Compaq is aggressively seeking out buy-out opportunities since it's cash rich right now, Stephen added.

But the remaining field of any acquisition candidates is few. Micron, another direct marketer, said in April it had some earlier discussions with Compaq, though it denied to characterize them as merger talks.

And there are companies such as Winbook, a direct marketer of notebooks, and Insight Direct, a direct reseller of computer systems. But, for various reasons, direct marketers such as these are not very compelling merger candidates.

Moreover, some analysts doubt that Compaq would alienate current distribution channels, its lifeline for revenues. The company has recently held talks with its resellers at high levels to ease any concerns about the subject, said Stephen Dube, an analyst with Wasserstein Perella Securities. "It would be a mistake for them to buy a direct-marketing company," Dube said.

Nora Hahn, a Compaq spokeswoman, declined to comment on speculation about merger or acquisition talks. She pointed, however, to the Channel 2000 program, designed to work with resellers on a build-to-order program. The company also has operated Direct Plus, a direct-marketing service geared mainly towards businesses. Hahn said there are no plans to enlarge such programs.

As acquisition rumors continued to swirl, three senior executives at Compaq sold all the stock from the options they exercised in late April, while a fourth sold the vast majority of shares from his exercised options that month. In addition, chairman Benjamin Rosen sold a sizable chunk of shares after exercising options, while another director sold a smaller stake of his holdings, according to filings with the Securities and Exchange Commission on Friday.

Given the activity of executives and board members selling shares, one securities analyst said the trading would be unusual if the company were involved in merger talks at the time.

"Insiders usually slow down their activity when there are [merger] talks on," said Bob Gabele, editor of CDA Insiders' Chronicle. "Especially if they are material to something that's going on."

He said sale may simply reflect profit-taking. Many of the trades took place in a late April window allowed for Compaq's officers.

Compaq's stock closed at 74-3/4 on April 1 and continued to ramp up to 80-1/8 a share at its closing on April 24. Since then, the stock has soared to 94-7/8 at its close Friday.

John Rose, senior vice president and group general manager of enterprise computing, exercised options on 30,000 shares for between $16.50 to $19.58 on April 22. He then sold those shares for between $75.12 to $75.25 a share on that same day.

Meanwhile, John White, vice president and chief information officer, exercised options for 16,000 shares, ranging in price of $32.96 to $68.88 a share on April 28. He sold those shares that same day for $80.12 each.

Robert Stearns, senior vice president of technology and corporate development, also sold stock, exercising options on 22,312 shares on April 29 at prices ranging from $15.46 to $35.38. He then sold the shares for $81.50 that day.

Michael Heil, senior vice president of the consumer products division, sold most of the options he exercised. He exercised options on 6,167 shares for prices ranging from $49.38 to $62.88 between April 23 to 29, then sold those shares for between $76.62 to $83 during that period.

Heil, however, also exercised his options on 2,000 shares for $62.88 on April 30.

Rosen sold 160,131 shares of his exercised options April 29 for prices varying between $80.50 to $81.50 after exercising options at prices ranging from $4.23 to $16.31. Rosen still holds more than 1.2 million shares in Compaq.

Board member George Kinnear sold 8,000 shares of his holdings for $78.62 on April 23. He did not exercise any shares in April.