Victim of Circumstance?

It took just a few quarters of lackluster sales before CompaqCEO and president Eckhard Pfeiffer left his post over the weekend in an apparent forced resignation, but tough times call for desperate measures.

The hardware industry is grappling with dropping revenue and profits in the competitive PC market while it tries to prepare for a potential drop in hardware sales related to year 2000 issues.

"We're moving into a very tough period [for hardware vendors]," said Jonathan Ross, a financial analyst with ABN Amro, in San Francisco. "When it comes to Y2K expenditures, there's a strong suspicion that hardware may be sacrificed in favor of software."

To be sure, there are issues unique to Compaq that led toPfeiffer's ousting, said analysts. For one, chairman Benjamin Rosen is known for having a low tolerance for perceived management blunders. Evidence of this was his rapid firing of former CEO and president Rod Canion nearly 10 years ago after a poor financial quarter, at which time Pfeiffer was appointed the new CEO.

Also, there are some indications that Compaq's integration of its Digital Equipment and Tandem acquisitions has not gone smoothly. For example, Compaq sold fewer Alpha servers last year than were sold in 1997, when Digital was a stand-alone company, according to analyst reports. And Houston-based Compaq was late to the game with a strategy for helping customers build Internet-based IT infrastructures, which Pfeiffer described at Compaq's biennial user conference last week.

Compaq, which ships more PCs worldwide than any other company, could also be losing PC market share to competitors. Ed Ellett, vice president of PC products in North America, said last week both revenue and shipments were down for the company's commercial PC business in the first quarter.

"The first quarter was a little slower than it has been historically," Ellett said. He said Compaq determined the slowdown was related to customer hesitation related to the delivery of Windows 2000 and the Pentium III chip, as well as the impact of year 2000-related IT issues, but added Compaq believes other hardware vendors faced the same issues.

However, analysts said Compaq's problems may relate to a larger industry problem, such as a drop in the number of PC units sold to business customers. Pfeiffer may have left because Compaq's board didn't feel he had done enough to prepare the company for an even tougher hardware industry later this year, ABN Amro's Ross said.

It's unclear whether a majority of vendors are experiencing lower unit sales in addition torevenue drops, and San Jose, Calif.-based researcher Dataquest won't know what's happening with PC unit sales until it completes its study of the first quarter next month, said analyst Kimball Brown.