Compaq in PC war retreat

Compaq: Pushed off the top spot by Dell

Compaq Computer has signalled its retreat from the front line of the PC sales war with plans for a refocusing of its business on software and computer services.

News of the restructuring was contained in a memo sent to employees earlier this month and obtained by Reuters news agency on Monday.

In it, chairman and chief executive Michael Capellas said it was "absolutely necessary" to cut costs if profits were to be increased.

In a statement on Monday, Compaq also said it was phasing out its own microprocessors and would instead drive its high-powered computers with chips built by Intel.

Losing out to Dell

Compaq has been under heavy pressure in recent months, partly because of a sharp slowdown in PC sales in the United States.

The Houston, Texas-based company has also lost its place as the world's number one PC maker to Dell Computer.

In April, Compaq announced plans to shed more than 9,000 full and part-time jobs and reduce structural costs by $500m-600m annually.

In the memo, Mr Capellas said he now wanted to go beyond this.

"Our goal is to reduce structural costs by $200m per quarter," he said. "This includes a 20% reduction in indirect manufacturing costs by the end of the year."

Following IBM

Mr Capellas said Compaq would focus on acquiring a services company - having set aside $500m for the purchase - and lessening dependence on hardware sales.

Analysts said the aim was to expand higher-margin businesses and escape cut-throat competition in the hardware market, where margins had been shaved ever thinner.

They said the approach was similar to the path already taken by International Business Machines, which exited PC consumer retailing more than one year ago, avoiding the brunt of the technology spending slump.

Mr Capellas said he wanted to increase the contribution of services to one third of Compaq's revenue within four years from about one fifth now.

The memo said the company still aimed to lift its share of PC and PC-server sales by one or two percentage points in the second half of the year.