Compaq’s business plan was sketched on placemat

Jeff Franks

HOUSTON: Compaq Computer Corp. began as a sketch on a placemat at a Houston

restaurant, rose to become the world's leading computer maker and now it is

gone, or soon will be, all in less than two decades.

The announcement on Monday that the pioneering computer firm would be taken

over by rival Hewlett-Packard Co. in a $25 billion stock deal brings an end to

one of the great stories of the computer age.

It is the tale of a good idea brought to reality by daring entrepreneurship,

enhanced by innovation and finally felled by failure to meet the challenge of

change.

Compaq began as an idea by three former Texas Instruments engineers - Rod

Canion, Jim Harris and Bill Murto - to build a portable version of the IBM

personal computer. In 1982, they met venture capitalist Ben Rosen at the House

of Pies restaurant in Houston where they sketched their idea on a paper

placemat.

Rosen agreed to take a chance and Compaq was born, with Canion as its chief

executive and Rosen as chairman. Its first product was a suitcase-size portable

computer that became an instant favorite among business types.

In 1983, Compaq went public and quickly became the youngest publicly owned

company to reach the Fortune 500 and $1 billion in revenues. Its shares soared

in value, making it a darling on Wall Street.

Mass commodity



But Canion was ousted in 1991 when he was slow to recognize that computers had
gone from being high-priced luxury items to mass-market commodities in an

increasingly competitive industry. He was replaced by Eckhard Pfeiffer who cut

prices to increase sales volume, which led Compaq to become the world's number

one computer maker.

But even as Compaq ascended, the seeds of its destruction were being sown. In

Austin, Texas, in 1988, Michael Dell went public with Dell Computer Corp., which

sold built-to-order computers directly to consumers.

The direct sales model provided cost savings and higher margins that Compaq

could not match with its more traditional build-and-they-will-come approach and

its dependence on profit-cutting middlemen to sell its products.

In 1997, Compaq said it would begin selling directly to consumers, too, but

try to keep its middlemen happy by continuing to sell through them. The attempt

produced mixed results at best. By April of this year, Compaq said it was

selling 43 per cent of its computers directly, up from 20 per cent the year

before. But it also had fallen out of first place in worldwide computer sales,

losing the title of number one computer maker to Dell.

Compaq's other critical moment came in 1998 when it spent $9.6 billion to buy

struggling computer firm Digital Equipment Co. The merger proved difficult, and

its benefits slow to materialize.

Michael Dell told reporters a year ago that deal was "the best thing

that ever happened" to his company because it caused Compaq management to

take their eyes off the ball, which gave Dell a giant market opening.

In April 1999, with profits dwindling and Wall Street clamoring for his head,

Pfeiffer resigned. Current Compaq chief executive Michael Capellas was named to

replace him nine months later. Capellas, eternally upbeat, predicted to the

bitter end that Compaq would not only survive, but prevail in the PC industry.

Under his guidance, the company was moving away from dependence on computer

sales and in the direction of becoming a "full-service" computer

company, not unlike IBM.

But after thousands of layoffs this year and with the company's stock price

languishing in the low teens, an end that had been a long time coming finally

arrived with the Hewlett-Packard buyout.

At a ceremony in October marking his retirement, Rosen paid what now seems a

fitting final tribute to Compaq. From a single idea sprang an industry giant

with a history of innovations that included, among other things, the portable PC

and the PC server, he said.

"These are great achievements - to create 65,000 jobs, $40 billion in

sales and $40 billion in market value, all starting with a sketch and a

dream," Rosen said, choking back tears.

(C) Reuters Limited 2001.