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Compaq's CEO choice gets mixed reaction

The consensus is that Michael Capellas, formerly the firm's chief operating officer, will be pressed to prove himself quickly.

Compaq's appointment yesterday of Michael Capellas as chief executive is getting a mixed response on Wall Street today as questions continue to swirl about the new man in charge of the PC maker's future.

Though most financial analysts remained bullish on Compaq, the consensus is that Capellas, formerly the firm's chief operating officer, will be pressed to prove himself quickly.

Questions also remain about who will really be running the company--chairman Ben Rosen or

Capellas's message to the troops
Compaq's new CEO Michael Capellas wasted no time in marshaling the troops today. In a memo to Compaq employees acquired by CNET News.com, he emphasized the importance of the Internet and e-commerce.

"I'm sure you have seen articles suggesting that Compaq is late to the Internet," wrote Capellas. "It is true that we have not moved at Internet speed. But e-business is still in its early stages. The technology is evolving, and in many cases it is still immature. For every Amazon.com or Schwab, there are scores of companies that are still struggling with their e-business strategies."

He also pledged to continue discussions about where Compaq is headed around the world.

-- Joe Wilcox

Capellas--and about the profitability of important parts of Compaq's business. The company's stock opened slightly lower this morning.

Potentially debilitating problems abound. Compaq may be sitting on an excessive amount of inventory, according to one analyst, which other PC makers have resolved over the last few quarters. Other issues include lackluster earnings in its Alpha computer business (acquired in the Digital Equipment buyout), concerns that the company has no clear strategy to meet its goal of quickly lifting direct sales to 40 percent, and reports of defections of major customers.

"The appointment of a leader from within will eliminate the learning curve," wrote Richard Gardner, analyst with Salomon Smith Barney, in a bulletin. "Moreover, Capellas possesses valuable experience in supply-chain management and as a former [chief information officer] should know what Compaq Enterprise customers want. Near-term, however, we continue to believe that Compaq is under increasing competition in the large-accounts area, where Dell has aggressively moved to take advantage of Compaq's turmoil and high cost-structure. It will take Capellas several quarters to change Compaq's fortunes."

Gardner remained neutral on Compaq but looked long-term favorably on Capellas.

Similarly, Merrill Lynch analyst Steve Milunovich remained neutral on Compaq's stock and cautious on Capellas.

Milunovich noted the uncertainty about Capellas might be due to his unknown qualities. The former Compaq chief information officer only took over as acting COO two months ago, and few investors or financial analysts have seen him in action.

But Milunovich added that he "was surprisingly articulate and passionate during his speech [yesterday]...He handled the Q&A like an old pro, answering questions intelligently, fully, and directly."

That directness, particularly about the extent of Compaq's direct sales plans, wooed Milunovich and other analysts. Capellas, 44, said that Compaq intends to have 25 percent of all sales be direct by the end of the year compared to 15 percent now. The ultimate goal is 40 percent. How that will occur, however, has yet to be fleshed out.

"I think the most important thing that came out of yesterday's event is that he is a very different kind of personality than [former CEO] Eckhard Pfeiffer. He's more down-to-earth, no-nonsense, and will be straight with industry and Wall Street analysts," said Lindy Lesperance, an analyst with Technology Business Research.

James Gruener, analyst with the Aberdeen Group, said that while he remained cautious on Capellas, he thought it was "important to give the guy a chance."

But giving the new CEO time to prove himself is not a luxury right now, and the next 90 days may determine whether Capellas has the muster to revive Compaq. As Rosen noted yesterday, Capellas has been managing day-to-day operations for about two months.

Capellas' first test will be a planned August 15 reorganization that will try to make more sense out of Compaq's product lines. Analysts note overlap of products acquired from Tandem Computers and Digital Equipment has created confusion with Compaq's sales force and its customers.

"Tandem, Digital, Compaq have been autonomous subsidiaries," said Richard Partridge, an analyst at D.H. Brown Associates. He said this puts customers off when they're looking for seamless strategies from Compaq.

Ashok Kumar, an analyst at US Bancorp Piper Jaffray, also wondered about Compaq's pick of an unknown from the inside. "Gut reaction is negative. Compaq was crashing the bottom of the barrel of [CEO] quality outside of Compaq" so they had to go with an insider, he said.

Questions also linger about the role of Rosen, the hands-on chairman responsible for the ouster of Pfeiffer and his predecessor, Compaq cofounder Rod Canion. While Rosen yesterday disbanded the Office of Chief Executive he shared with two other board members, he said, "as members of the board, we shall continue to work closely with [Capellas]."

Some wondered today what Rosen's role will be. A source at a top-five PC maker summed up Capellas's appointment this way: "This guy's a puppet for Ben Rosen. This looks and smells like somebody will try to run things while Rosen gets in and futzes around."

He also suggested that a heavy-hitter such as IBM CEO Lou Gerstner, "would come in and clash with Rosen."

By contrast, Gillian Munson, technology analyst at Morgan Stanley, upgraded Compaq from neutral to outperform, partly on the command that Capellas has of the issues.

Michael Capellas "We fundamentally like Capellas, because in his first press conference he demonstrated that he thinks about Compaq the way we have always wanted management at Compaq to think about the company," Munson wrote. "To paraphrase what we think he was saying yesterday...Compaq has great technology, but their go-to-market strategy has been flawed on a number of fronts."

Nimish Mehta, president and CEO of Impresse, who worked with Capellas at Oracle, called him "the quintessential big-company guy.

"I beleive he has the ability to function in a large complex political environment. What's less clear is if his management style will translate to the number of people he is now managing," Mehta said. "He understands complexity, but I'm not sure he has proven yet that he can function in a multiple-channel environment," Mehta said. Bad news ahead?
More bad news lies ahead, when Compaq announces second-quarter earnings on Wednesday and an expected loss of 11 cents a share, according to a consensus by First Call.

One issue Compaq will have to address is inventory. Compaq had for several quarters claimed inventory levels remained between three and four weeks. But Kumar suggested Compaq may now have four weeks sitting internally and another four on dealer shelves for a total of eight weeks.

Other analysts were skeptical about an inventory problem of that scale, which would be problematic if it in fact exists. Excess inventory means PCs being made now may not be sold for a while, which can take a hit on earnings.

Compaq will also have to contend with the issue of customer losses. Competitors claim they have replaced Compaq installations on some pretty big accounts: Hewlett-Packard on Coca Cola, Media One, and Skil-Bosch Power Tool; Sun Microsystems on The Sharper Image; and IBM on Home Depot.