PC David and Goliath

Remember Compaq?

Photo: Tiziano Garuti. Source: Wikipedia

The PC maker was founded in 1982. It went from start-up to $1 billion in sales in only five years. It tripled that number in four more years, becoming the third-largest PC-maker – a leading producer of a revolutionary product.

Compaq made a “luggable” computer – a PC that weighed 25 pounds or so. You could “lug” it from place to place, unlike desktops, which needed a lot more time to set up. It was one of the first PC clones, running Microsoft Windows and fully compatible with IBM’s flagship product.

The CEO (and one of the founders), Rod Canion, was very popular. He had an open, engaging management style, and he emphasized quality as well as growth. But the PC market changed in the ‘90s, as inexpensive imported machines began to flood the market in the US and Europe. Canion was ousted in a management shuffle, and the company moved into high-end servers and business services, acquiring Digital Equipment in 1998. The future seemed bright.

But they had difficulty integrating their corporate culture. Their goals – to grow to $50 billion in sales, or to beat IBM, sounded great, but had nothing to do with customers. Digital had twice as many employees as Compaq but only half the revenue. The merger required a lot of layoffs. Compaq struggled with their dealer network, while rivals sold made-to-order machines directly to consumers, undercutting their prices. After the dot-com bubble popped, sales of servers and high-end machines took a dive as well. By 2002, when HP offered to acquire Compaq, the company seemed eager to throw in the towel.

Compaq price chart. Source: Bloomberg

Compaq’s stunning rise and fall provides a number of signal lessons. First, it’s possible to take on a giant, if you focus on the right areas. PCs were revolutionary in the early ‘80s, but IBM had several vulnerabilities. But, second, it’s hard to maintain that focus when the market is rapidly changing – with new suppliers, new capabilities, and rapid technological deflation. Finally, management matters. The skills to start up a giant-killer don’t necessarily work when you’re trying to stay on top, especially when mergers and integration are a major part of the picture.

Compaq went from David slaying Goliath with innovation and scrappiness to being Goliath itself, losing its focus and stumbling. Shareholders were taken for quite a ride. Today’s tech investors should be aware of the opportunities – and risks – that a dynamic market presents.

Douglas R. Tengdin, CFA

By | 2017-07-17T16:47:00+00:00 July 7th, 2017|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. –
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