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Technology Stocks : Compaq

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To: J. Plesha who wrote (61895)5/21/1999 7:33:00 PM
From: Elwood P. Dowd  Read Replies (3) of 97611
How palace intrigue felled Compaq

PC Week

By Lisa DiCarlo, ZDNet

Publicly, 1996 was a banner year for Compaq Computer Corp. The company
surpassed $20 billion in sales, nearly seven times its revenues in 1991, the year
Eckhard Pfeiffer took over as CEO.

Hailed as a hard-driving, no-nonsense leader, Pfeiffer was well on the way toward his goal of creating a
$40 billion enterprise systems company by the year 2000.

But on the eighth floor of Building 11 on Compaq's Houston campus, which housed the offices of Pfeiffer
and his senior executives, things were imploding.

What once had been an open and productive atmosphere that cultivated teamwork was deteriorating
under the strains of political infighting, cronyism and allegations of sexual harassment.

At the center of the storm was Hans Gutsch, Compaq's senior vice president of human resources.
Gutsch and Pfeiffer, both natives of Germany, worked together in the late 1980s at Compaq's European
operations before Pfeiffer came to Houston in 1991. Three years later, Gutsch followed.

HR chief linked to sexual harassment
By 1996, Gutsch was using his relationship with Pfeiffer to influence business decisions, according to
several executives who were with Compaq (NYSE:CPQ - news) at the time.

"[Pfeiffer] is the most tenacious executive I've ever worked with," said Robert Stearns, a former senior
vice president and chief technology officer who left Compaq in June 1998. "No one will convince me he's
not a good executive. But he was getting bad advice and accepting it."

Gutsch, many observers believe, also leveraged his ties to discreetly resolve at least two allegations of
sexual harassment against him, sources close to the situation said. Both women received financial
payments as part of an internal settlement, sources said.

A Compaq spokesman in Houston said company officials and board members would not comment for
this story. Several calls to Gutsch requesting comment were not returned.

Pfeiffer, when asked about the sexual harassment complaints against Gutsch, said: "People make
things up. [There's] no way of knowing. [People] spread rumors."

Strained relationship leads to rift
The incidents further strained relations between Pfeiffer and the rest of the senior executive team. Flush
with the hubris of running the world's leading PC maker, Pfeiffer had begun relying heavily on three
senior executives -- Gutsch, Senior Vice President John Rose and Chief Financial Officer Earl Mason,
who called themselves the "A team" -- for advice.

The rest of the team felt increasingly alienated. Over a nearly three-year period beginning in mid-1996,
11 top executives left the company. Then came the kicker: The forced resignations of Pfeiffer and
Mason last month. Rose and Gutsch remain with the company.

"There was a turning point in the culture [in early 1996] that resulted from the bizarre dynamics between
Eckhard and Hans. To this day, it is inexplicable to me," said Bill Fargo, a 12-year Compaq veteran who
retired as Compaq's general counsel in December 1996. "Eckhard empowered him to do things way
beyond his role in HR."

For example, Fargo said, Gutsch had significant influence on changing the organizational structure of
the company, determining what divisions ought to sell into what markets, including which products
should be sold through various groups.

Gutsch also took steps to drive a wedge between senior executives, strengthening his position with
Pfeiffer while fomenting a communications breakdown among top managers.

In one instance, Gutsch told a senior vice president about fellow executives whose jobs, Gutsch
contended, were in jeopardy because they were not pulling their weight.

"I was surprised by this," said the executive, who left Compaq in 1998. "So I told [one of the executives
in question] about what Hans said, and he said, 'Gee, that's funny, he told me the same thing about
you.' "

Other former executives related similar stories.

Gutsch would often talk to Fargo about what he considered the sub-par performance of at least a
half-dozen senior executives.

"Hans had a list of people [whom] he would constantly campaign against," Fargo said. "He was
advocating organizational changes to lower their profile in the organization or get rid of them. I don't
know if Eckhard shared those views or not, [but] most aren't there anymore."

"[Gutsch] was instrumental in deciding which people to bring in and which were no longer acceptable in
the company," added Darryl White, the former CFO who left Compaq in June 1996.

Pfeiffer's reliance on Gutsch baffled, and angered, other product and sales executives.

"Hans was very close to Eckhard, and he certainly had an impact on the business, [which] really
surprised me," said Jim Schraith, former vice president of Compaq's North America operations, who left
in January 1998, just 18 months after joining the company. "Most HR professionals usually don't play
that kind of a role. If anything, they try to bring the team together. But all I saw was divisiveness."

Gutsch emerges as power
Instead of working together to fine-tune a coherent growth strategy, Compaq's senior executive team
became disjointed and increasingly detached from the rest of the company.

Two Gutsch-led initiatives drove home this point. The HR executive oversaw the planning of a
multimillion-dollar on-campus cafeteria, built in the fall of last year, that included reserved underground
parking for senior executives. Prior to that facility, executives shared parking space with the rest of the
company's employees.

Gutsch also pushed through increased security on the eighth floor of Building 11, even though other
executives objected to the idea, arguing that it created a hierarchical environment not conducive to a
free exchange of ideas with subordinates.

"Hans was at the center of every bit of chaos that existed at the company," said one former executive
who requested anonymity. "He bred discontent, infighting and instability. I will never forgive Eckhard for
letting him get away with it."

Pfeiffer denies that Gutsch had undue influence.

"Every executive had the same access [to me]," Pfeiffer said. "I have always had an across-the-board
relationship with everybody. I always maintained a high degree of equality. There was no favoritism."

Pfeiffer also maintains that Gutsch had "very good relations with just about everybody." Anyone who
says otherwise, Pfeiffer added, must "have an ax to grind."

Many former executives said they were reluctant to complain to Pfeiffer about Gutsch because Pfeiffer
took personal offense, as if he were being criticized, and because they feared winding up on Gutsch's

The erosion of the executive team couldn't have come at a worse time for Compaq, which by 1996 was
fighting a war on multiple fronts.

Dell Computer Corp. (Nasdaq:DELL - news) was starting to grab big chunks of PC market share, proving
the viability of the direct-sales model. While attempting to figure out its own build-to-order strategy --
including a failed attempt to purchase Dell rival Gateway Inc. (NYSE:GTW - news) -- Compaq also was
embarking on an ill-fated networking push and two massive acquisitions: Tandem Computers Inc. in
1997 and Digital Equipment Corp. in 1998.

"As people left, the performance of the company started to degrade," Stearns said.

Weak response to Dell's ad-vance
When Pfeiffer replaced Rod Canion as CEO in October 1991, his aggressive price-cutting initiatives
reversed Compaq's fortunes and led the company to the top of the PC market. But this time, with Dell
encroaching on Compaq's turf, Pfeiffer was much less decisive.

"He was paralyzed by the speed with which the market was changing, and he couldn't make the difficult
decisions," said one former executive.

Internally, Compaq had been working on streamlining distribution for about two years, but it didn't
announce a formal plan until July 1997.

Called the Optimized Distribution Model, the strategy was a hybrid build-to-order/configure-to-order
initiative designed to improve distribution efficiencies without alienating Compaq's loyal channel partners.

By then, the tide already had begun to turn. Dell was claiming that it was selling $2 million worth of
products per day over the Web. In the second quarter of 1997, Dell surpassed Compaq in desktop PC
sales to U.S. businesses for the first time, according to International Data Corp., in Framingham, Mass.

The Round Rock, Texas, direct marketer was still No. 2 in overall sales of PCs, notebooks and servers
but was closing rapidly on Compaq.

To oversee the new distribution strategy, Pfeiffer turned to then-CFO Mason, even though Schraith was
the primary liaison between Compaq and its channel partners.

Executing on the strategy "was frustrating," Schraith said, "because I was the interface to our top
channel partners, and I was put in a position of having to defend positions I didn't necessarily agree

Dissatisfaction with Mason's role
Even though he was the primary channel executive, Schraith said he was sometimes left out of the loop
on important channel decisions.

"Mason wasn't the right person [for the job]. In that, we lost Schraith, another guy we couldn't afford to
lose," Stearns said.

Under Mason, the Optimized Distribution Model fizzled. Compaq has yet to significantly reduce
distribution and manufacturing costs or boost PC revenues. Huge oversupplies of inventory adversely
affected Compaq -- as well as its main competitors in the indirect market -- for most of 1998. While
Dell's unit shipments for PCs, notebooks and servers grew 55 percent from the first quarter of last year
to the first quarter of this year, Compaq's business grew by just 11 percent over the same period,
according to IDC.

In this year's first quarter, Compaq's stock lost almost half its value, and the company's first-quarter
earnings fell far short of analysts' estimates. Last month, Compaq's board ousted both Pfeiffer and

Pfeiffer defended the timing of the distribution shift as well as his decision to put Mason in charge of it.

"Compaq moved as rapidly as made sense," he said. "We were working very responsibly with our
reseller base. We had a responsibility [to them]."

As for Mason's role, "It was clearly a corporate program that required [the attention of] a senior manager
reporting to me," Pfeiffer said. "It was a cost reduction [plan], and the CFO is ultimately the individual
executive to [implement] major financial programs. It also takes somebody who can cut across whole

Mason, now president and CEO of Allied Foods Inc., declined to be interviewed.

Before it resolved its own distribution problems, Compaq compounded matters with the purchases of
Tandem and Digital, two mammoth organizations.

With Digital, there were signs of trouble before the deal was even announced.

When the idea of purchasing Digital first came up in 1996, several executives argued that the struggling
systems company would be a huge drag on Compaq.

But when Pfeiffer revisited the deal in January 1998, only the "A-team" -- Rose, Mason and Gutsch --
were involved in the negotiations and the recommendation to the board. Other senior executives found
out about the deal the day before it was announced publicly.

Integrating Digital made an unsteady management team even more unstable. Pfeiffer immediately
replaced two senior vice presidents -- general counsel David Cabello and Stearns, the CTO -- with Digital

"Digital just introduced more malaise and bureaucracy into the organization," said one source. "We
were told to embrace them, but there was a lot of infighting among the rank and file and managers over
who runs the business and who was taking subservient roles. What was left was a stalled engine with a
very expensive head count."

"Buying Digital played into Eckhard's fantasy, but it's turning out to be a beast that's consuming the
company," said one former executive who left before the acquisition.

Pfeiffer counters that cutting some of his own people was inevitable after the merger.

"Should I have had everyone stay on? Two management teams?" he asked. "This is a complex process.
What's unusual about it?"

Pfeiffer deflects some of the criticism directed at him as bitterness by former executives who were
replaced after the Digital acquisition.

"I know it's hard for people being affected in a negative way," he said. "You search for all kinds of
reasons, [and there can be a] backlash against the company. It's understandable."

Despite the criticism, Pfeiffer remains as even-keeled and stoic as he is when delivering a keynote
speech. While he initially lashed out at the board after his departure last month, during a recent
interview he would neither accept nor directly place blame.

"I'm dealing with my own situation very objectively," Pfeiffer said. "That's why I'm not bitter and have no
intention or need to say anything bad about the company or any individuals."

See Also:
Compaq Slashes Its Partner Ranks
Pfeiffer out as Compaq CEO
Pfeiffer's Dell obsession led him astray
Pfeiffer lashes out at Compaq board

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