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Compaq filing shows firm on sticky wicket

Share price down to $26 but company now undervalued

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Analysis The share price of Compaq closed at $26 on Wall Street last night, reflecting the concern of the markets about its overall position. The nature of the problems it faces in the future were outlined in some detail in the 10-Q form it filed with the US Securities and Equities Commission (SEC) earlier this week. One of the problems Compaq now faces is making its acquisition of Digital (and to a lesser extent Tandem), work properly. According to the filing, while Compaq believes Digital will improve its operating results, nevertheless it has had to recognise that combining product lines -- and sales teams -- is not easy. The filing says: "Compaq confronts challenges in synchronizing diverse product roadmaps and business processes and integrating logistics, marketing, product development, services and manufacturing operations to achieve efficiencies. Timing of these decisions is a critical element in Compaq's success. Taking the necessary steps may lead to gaps in short-term performance; delaying action will reduce Compaq's ability to compete effectively because resources and people will be too dispersed to achieve acceptable rates of return. Compaq's high-end business in particular has been affected by integration issues involving customer perception, overlapping product lines and the need to implement appropriate sales force training and incentive plans." All of this is significant. As we have reported here earlier, there are two separate sales teams with two separate product lines at the mid to high end attempting to sell two separate chip platforms to the same customer. This begs the question of how far Compaq will push its Alpha microprocessor technology, and how much it will invest in that platform in the future. And while many independent analysts believe that the Alpha microprocessor is a fine and advanced chip, the question still remains how far Compaq, on its own, can pursue this technology, faced with competition from Sun, HP and even its former close partner, Intel. The filing also warns that a search for a new CEO could cause uncertainty and difficulty in retaining staff. Here, in the UK, we have seen many of our long standing and good contacts at Compaq leave, to join other firms including former bitter rivals such as Dell and Hewlett Packard. On the PC end, Compaq has alienated many of its channel partners by taking a "me-too" approach, essentially attempting to clone Dell's successful direct model at the expense of distributors and in some cases corporate resellers. Nevertheless, Compaq is now a giant of a company, and although we may see its share price drop lower than yesterday's $26, this, to us shows that its stock is undervalued. None of the problems outlined in SEC filing are terminal, and the ability of Compaq to recover should not be underestimated. ®

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