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Pfeiffer to get at least $6 million severance

Compaq's ousted chief executive will receive a huge parting package, not to mention his enormous stock holdings, according to documents filed with the SEC.

Ousted Compaq chief executive Eckhard Pfeiffer will receive at least $6 million in severance pay and walk away with close to $70 million worth of stock options that vest as a result of his forced resignation, according to the company's proxy.

On top of this, Pfeiffer holds 9.5 million exercisable options, which carry a value of nearly $340 million, according to the proxy. These options have vested, but Pfeiffer has yet to cash them. This tidy sum is in addition to his severance package.

The severance-package issue comes as a result of the stunning reversal in the career of an individual who, until recently, was one of the most powerful and feared executives in the high-tech industry.

A little over a year ago, analysts and others touted Pfeiffer as a strong leader seemingly on track to transform the PC maker into a large, full-service computing powerhouse. A few disappointing financial quarters later, he is now often viewed as a fairly aloof figure who failed to manage the direction of the $30 billion operation.

Under his employment contract, Pfeiffer is entitled to receive a severance payment equal to four times his base pay, minus bonuses, and will be able to vest all of his outstanding stock options in the event he resigns after being removed from office, according to the company's proxy.

Last year, Pfeiffer's base salary was nearly $1.5 million--giving him $6 million in salary under his severance package, according to the company's proxy.

And the former CEO was sitting on slightly more than 3.9 million options that had not yet vested, as of December 31, 1998, according to the proxy. Those options were valued at $70.4 million, based on the company's projections.

But as with many CEOs who are ousted, executives sometimes walk away with renegotiated severance terms that are sweeter than the original deal.

Other executives to receive severance packages of late include Kim Edwards, former CEO of portable drive maker Iomega and Ed McCracken, former CEO of SGI.

Edwards, who resigned last year, received nearly $800,000 in severance, although the company lost $54 million during that time, according to SEC filings. The payout came with $500,000 in cash and 40,000 options valued at $295,000.

Meanwhile, McCracken, who stepped down early last year after a new CEO came aboard, received $3.25 million in severance and a $2.05 million bonus under his severance agreement, according to SGI's proxy.

These packages, however, fall short of the agreement that Pfeiffer received.

The turnaround in Pfeiffer's career largely began on March 6, 1998, when Compaq announced that the company would report lower than expected earnings and revenues for first quarter. Compaq, it turned out, had been saddled with excess inventory from the fourth quarter of 1997. Net income fell 96 percent to $16 million, or 1 cent per share, compared with a net income of $414 million, or 27 cents per share on a diluted basis, for the first quarter of 1998. The excess inventory helped inflame a price war which lead to depressed earnings and revenues for a number of PC companies in the first half.

Earnings and sales improved in the second half. Compaq in fact beat estimates both times. Nonetheless, Compaq seemed to be taking its time with both integrating Digital into its operations as well as improving its back-end operations to better compete with Dell. Compaq talked up both initiatives, but progress seemed to be scant.

"They communicate with a lot of bravado," said Daniel Kunstler, computer analyst with J.P. Morgan Securities. "They tired for over a year to re-engineer their distribution strategy and it still has not happened."

The final straw came on April 9 when Compaq warned of lower than expected earnings for the first quarter of 1999. Compaq blamed the loss on industrywide trends although many said that their problems were also due to Compaq itself. Pfeiffer's attitude opened a credibility gap between Pfeiffer and the investment community, according to Kurt King, an analyst at NationsBanc Montgomery Securities. The forced resignation soon followed.

Since then, many in the industry, although mostly anonymously, have come to voice their dour opinions of his recent tenure. One analyst described him as "totally supercilious." A former Compaq executive said that he was an isolated figure at Compaq with few close allies, the result of continuous changes in management often ordered by Pfeiffer. "The Microsoft of the South," is the term used by Tom King, president of the Computalk Radio Network to described Pfeiffer's Compaq.

"Rather than attribute blame for the shortfall on internal culprits, Pfeiffer chose to shift the blame to the industry and was quickly proven the fool," said a report from Technology Business Research.

Nonetheless, although Pfeiffer had lost his credibility, King described his early years at Compaq's helm as "brilliant."

Ben Heskett contributed to this report.