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Merger caps short, turbulent Compaq history

The endgame began this summer, when Carly Fiorina and Michael Capellas began talking merger. While they've settled on a plan, the payoff is uncertain.

Compaq Computer lived the Hank Williams life. It ran hard, got famous and died before its time.

The PC giant, like many others in the technology industry, started small. Compaq's three principals--Rod Canion, Jim Harris and Bill Murto--drew out their first product design on a restaurant placemat, and each later put up $1,000 to start the company.

Their idea: create a new kind of computer, a portable IBM-compatible PC. The device came to be known as the "luggable," and it caught the public's fancy. Compaq sold about 53,000 luggables in its first year. The company joined the desktop PC fray in 1984 and three years later had sold a million PCs. By 1994, it overtook IBM to become the biggest PC maker in the world.

By 1997, Compaq was seen by some as an unstoppable PC juggernaut and was often the PC company that Microsoft and Intel turned to when launching new initiatives.

Then, in late January 1998, Compaq revealed even grander ambitions by acquiring Digital Equipment for $9.6 billion in cash and stock. The Digital deal brought high-end servers, operating systems, chip technology and a worldwide service organization into Compaq's product portfolio.

Despite the public show of strength, things weren't going perfectly behind the scenes. For years, Compaq had discussed plans to sell more computers directly to customers and build PCs to order, like rival Dell Computer. Despite several initiatives, the efforts weren't paying dividends.

In addition, Digital proved to be a difficult company to digest. Digital's services division, the crown jewel of the acquisition, was flat. Compaq also prolonged its decision on what to do about its Alpha server chip.

A year later, Compaq was still grappling with the Digital acquisition when it announced that it was holding excess inventory. In a move that angered financial analysts, Compaq disclosed this information to a few analysts first and the larger community later.

After some finger pointing, CEO Eckhard Pfeiffer was ousted April 18, 1999, just one day after Compaq's Innovate99 customer conference, which the company used to detail its then-new e-business server strategy. Several executives followed Pfeiffer, while others revealed the state of the services merger, which wasn't going as smoothly as expected due to clashing cultures.

"The real story with Compaq was not Digital--it was with Pfeiffer," IDC analyst Roger Kay said. "They basically gave him the keys to the kingdom and never again went back and asked him if he was doing the right thing."

The company "ran in a rudderless fashion for about four years," Kay said.

After a three-month search, during which Chairman Ben Rosen ran the company though a three-man office of the CEO, Compaq promoted acting Chief Operating Officer Michael Capellas to CEO.

As the new chief executive, Capellas quickly began re-engineering the company. He sought to simplify product lines and distribution. He emphasized connecting PC and handheld products to the Internet. Compaq slimmed down its desktop PC offerings and later launched the popular iPaq Pocket PC handheld computer. He also placed a heavier emphasis on services.

"It wasn't until Capellas came in that (Compaq) really began leveraging the services division," said John Madden, industry analyst with Summit Strategies in Boston.

Capellas' efforts were starting to bear fruit when the high-tech industry in general, and PCs in particular, entered a prolonged slump late last year. Earlier this year, Compaq announced plans to eliminate as many as 8,500 jobs this year.

The endgame began this summer, when Capellas and HP head Carly Fiorina began to talk merger. While they've settled on a plan, the payoff is uncertain.

"If you put those together, are they going to have an effective strategy? It's a little unclear," Madden said. But, cultural issues aside, "I think services for both of these companies have been at the center of the bull's-eye."