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Compaq Flees the PC Price Wars

By Reuters
Published | Updated

NEW YORK – Compaq Computer Corp., in a further retrenchment in the face of a price war in personal computers, will carry out a restructuring and make acquisitions to expand its position in software and computer services, according to a memo sent to employees and obtained by Reuters on Monday.

In addition, Compaq, which recently lost its No. 1 position in personal computers to Dell Computer Corp., said on Monday it would also scale back computer lines based on chip technology developed in-house, as it bases more of its products on chips from Intel Corp.

``Reducing structural costs is absolutely necessary in order for us to price competitively and improve profitability,'' said the memo, which was written by Chairman and Chief Executive Michael Capellas and sent to employees earlier this month.

``Our goal is to reduce structural costs by $200 million per quarter from Q1,'' the memo said. ``This includes a 20 percent reduction in indirect manufacturing costs by the end of the year.''

A Compaq spokesman said this means the company needs to reduce costs by $800 million per year -- more than it had said it sought in April. In its first-quarter earnings report Compaq said the plan was to reduce structural costs by between $500 million and $600 million annually.

The memo spelled out an approach that includes a greater focus on services and software, not unlike computer giant International Business Machines Corp.

IBM has said it has sidestepped the brunt of the technology slowdown in part because of the strength of its large services business and its exit from consumer retails sales of personal computers over a year ago.

``In the United States, we will focus on acquiring a services company with core strengths in our targeted vertical markets,'' Capellas said. In countries where we have strong high-end share but no critical mass in services, we will look for opportunities to acquire enterprise services companies. We have allocated a total of $500 million worldwide for these acquisitions.