Why did Compaq fail?

Compaq was a high-flying PC brand in the 1980s and 1990s. It created the first successful and fully legal IBM PC clone, set records as a startup, usurped IBM as the standard bearer in the PC market, and made highly regarded desktop PCs and servers. But today it’s just a trademark that HP owns and doesn’t use. Why did Compaq fail?

There were several reasons why Compaq failed, but one stands taller than the others.

Why did Compaq fail? The ill-fated DEC merger

why did Compaq fail?
Compaq had a storied life that included 15 years at the top of the PC industry, but its fall came swiftly in 2001. Why did Compaq fail? Because it got distracted.

The beginning of the end came for Compaq when it merged with Digital Equipment Corporation, or DEC. Compaq was thriving while IBM faltered. Compaq figured that if it could acquire a services business, which was the biggest thing that kept IBM afloat in the early 1990s, it could thrive even more. DEC was a legendary company with a thriving services business. On some level, it looked like a good match.

The problem was, DEC had a whole bunch of stuff Compaq didn’t want. DEC made computer chips. Compaq was happy to invest in chipmakers to lessen its dependence on Intel, and occasionally use CPUs from AMD and even Cyrix, but Compaq didn’t want to make chips itself. And DEC’s chips weren’t Intel x86-compatible, so they weren’t useful for Compaq’s existing businesses. DEC also made minicomputers. Compaq made its name by getting people to buy Intel-based servers instead of minicomputers. DEC also made refrigerator-sized Unix systems. Compaq pushed people to buy Intel-based systems running Windows NT instead of Unix. The minicomputer and Unix business represented a change of direction.

Compaq spent $9.6 billion to acquire DEC in 1998. The acquisition helped Compaq jump from number 42 in the Fortune 500 index to number 28, putting it a few spots ahead of Intel.

Trouble in paradise

Compaq divested some parts of DEC it didn’t want. Intel agreed to buy the remainder of the chipmaking business. Compaq sold the Altavista search engine for $2.3 billion, recouping nearly 1/4 of its $9.6 billion investment.

A series of scandals forced various executives out in 1999. CFO Earl Mason disclosed financial results to some analysts but not others, and he resigned under fire. CEO Eckhard Pfeiffer soon followed.

The biggest problem was Compaq’s computer sales dropped in 1999 while sales at Dell, Gateway, HP, and even the fading IBM increased. Thanks to the Y2K issue, companies were buying a lot of computer equipment. But Compaq failed to capitalize. It recognized a need to sell direct to compete with Dell, but its efforts to build a direct-order business were lackluster at best.

In 2001, Dell passed Compaq to lead the industry in PC sales.

The dot-com bust

The rapid demise of a large number of Internet startups, often known as the dot-com bubble and burst, hurt Compaq in two ways. The dot-coms were buying large amounts of equipment as they spent their venture capital and IPO money. Their demise meant Compaq lost a large number of big customers. Their liquidations also flooded the market with a lot of surplus equipment, some of which had never been used. Compaq had to compete with its own product until the market absorbed the surplus.

By 2002, Compaq’s stock was trading at about 1/4 what it had been trading for at the time of the DEC acquisition. HP acquired Compaq that year for $24.2 billion, a big fall from its $43 billion market capitalization at the end of 1999.

Analysts expected big things from the Compaq-HP tie-up, but it, too, proved largely disappointing. Analysts point to the Compaq acquisition as the start of HP’s own struggles, which eventually lead to HP splitting itself.

It likely would have gone better for both companies if HP had acquired DEC, since the services division was a big motivator for HP as well. HP could have bought DEC for much less than it paid for Compaq. Compaq likely could have survived the decade on its own, much like Dell did. Compaq could have gone it alone or acquired Gateway, which would have helped it to compete with Dell’s direct-order business. Compaq did attempt to buy Gateway for $7 billion in 1997 and was turned down. After failing to buy high on Gateway, it’s easy to see how a buy-low on DEC looked attractive. But a Compaq-Gateway tie-up likely would have been better for both companies.

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